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.
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.
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.
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
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.
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.