Marginal revenue growth in 2019
Our forecast for UK hotels in 2019 anticipates slower growth reflecting uncertainty, softer economic and demand trends, and the impact of high levels of new hotel room additions, particularly in London but also in other UK cities.
While the weak pound continues to support inbound leisure travel, protracted negotiations around Brexit are not helping business travel.
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London hotels remain at the top of their game
We forecast a marginal occupancy gain in 2018 of 0.1% and a 0.5% fall in 2019 as new supply additions continues to bite and political uncertainty dents corporate demand. But London continues to operate at a globally high level.
We predict Average Daily Rate (ADR) will manage 0.2% growth this year and 0.8% in 2019. This will drive a 0.3% gain in revenue per available room (RevPAR) this year with an additional 0.3% growth in 2019, keeping RevPAR very high at £122 in 2019.
Growth hangs in there for hotels in the provinces
Provincial hotels have enjoyed monthly ADR growth since April 2013 and we forecast further growth in 2018 (1.3%) and 2019 (1.2%), albeit at a slower pace than in recent times. Leisure travel continues to be supported by the weaker pound but slowing economic growth and high levels of new supply in many cities are likely to dampen performance.
Overall occupancies are at a record high at 76%. In 2019 occupancy is forecast to remain flat but we anticipate that ADR could see further modest growth to £73 (in nominal terms), helping to push up RevPAR by 1.2% to £55.
Uncertainty has dampened business investment growth and this may continue, but the weaker pound has been helpful to tourism. Our latest view is for UK GDP growth to remain moderate at around 1.3% in 2018 and 1.6% in 2019.
Consumer spending growth is expected to moderate to only around 1% in 2018, but may pick up slightly next year as real wages recover. The stronger global economy should continue to have some offsetting benefits for net exports this year, although there are downside risks in 2019 and beyond if US tariff policy changes were to escalate into a wider international trade war.
Economic growth combined with the strong dollar and euro relative to sterling continues to be good news for hoteliers.
International tourism trends remain buoyant and record numbers of visitors are coming to the UK: 41.7m visits are forecast for 2018 according to official data*. The weak pound will also help but the impact is unlikely to see a return to H1 2017’s exceptional inbound leisure tourism levels.
Economic growth should continue to underpin travel growth and demand for accommodation. Business travel, a vital and profitable sector for hotels, has shown mixed trends which are expected to continue as the Brexit negotiations continue.
The consumer income squeeze suggests that domestic short breaks are unlikely to see robust growth this year, although the sizzling summer and a weak pound may help.
*www.visitbritain.org 16 July 2018 forecast
People want to travel and the hotel sector continues to evolve to meet their needs. New supply provides travellers with shiny new accommodation products and brands, but without stronger demand, current levels of new supply are likely to dampen trading performance in some London locations as well as some regional cities where the demand / supply equation becomes unbalanced.
The accommodation pool for travellers continues to widen and other accommodation providers are also upping their game; serviced apartments, hostels and home share products are all evolving. Some hoteliers have started to embrace the shared home market.
Could AI help solve cost and productivity issues?
Five years ago artificial intelligence (AI) sounded like science fiction*. Today, some of the ways hotels can use AI include personalising the customer experience through AI and related technologies; supplementing the pace and efficiency of back office processes and robotic process automation (RPA) augmented by AI; improving workforce productivity through better allocation of staff and predicting customer churn.
Realising the opportunities presented by AI is all the more important at a time when - as our forecast shows - the hotel sector faces slowing RevPAR growth and substantial headwinds from a wide variety of sources, ranging from Brexit to shifts in consumer confidence. While AI certainly doesn’t present a panacea for these challenges, it’s one of the major tools at hotels’ disposal to counter the headwinds and drive efficiencies and a recovery in margins.
*Yuval Noah Harari, 21 lessons for the 21st Century
Deal talk
UK hotel deal volume totalled c. £3.8bn in the first half of 2018, up over 80% from the volume experienced in the first six months of 2017. By year end 2018, we forecast total hotel deal volume to be c. £6.8bn, nearly a 40% increase on the total deal volume experienced in 2017, and the second highest volume of investment in the UK after the record levels of £9.3bn in 2015.
What to expect for 2019?
While we anticipate continued strong inward investment from European and Far Eastern investors, we expect a slowdown in portfolio deal activity during 2019. This is due to a recent wave of new longer-term investors entering the UK hotel market compared to the previous generation of US Funds with a typical 5 to 7 year investment horizon.
For those few US funds still holding UK hotel portfolios, we have also seen a tranche of refinancing over the last 12-18 months, taking advantage of the favourable low-cost debt terms currently available. As a result of these factors, together with forecast investor uncertainty around the UK’s upcoming departure from the European Union at the end of March 2019, we forecast 2019 deal activity levels to fall by around 34% to c. £4.5bn.
Contact us
David Trunkfield
UK Hospitality & Leisure Leader, PwC United Kingdom
Tel: +44 (0)7764 235 446
Email
Samantha Ward
Hotels Sector Leader, PwC United Kingdom
Tel: +44 (0)7923 289 644
Email
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