5 things to remember for UK hotel investment

Newcastle

While discussing the latest trends for Europe’s hotel market, Joe Stather, information and intelligence manager EMEA at CBRE Hotels, shared several issues—both positive and negative—facing the UK’s hospitality industry. Here, Stather outlines five factors that investors, developers and managers, alike, throughout the country need to keep in mind for the coming year.

1) The Brexit Referendum 

If the UK remains in the EU, we may have a surge in business confidence that’s been lost over the last few months. That might drive demand forward and we might have a second wave of growth across some of the markets that are starting to stagnate somewhat. If we decide to leave, there are a number of implications. Namely, the pound could drop in value against the euro and the dollar. The U.S. and Europe are two key source markets for demand, so a drop in value will result in greater inbound travel to the UK. We will also see residents of UK travel more domestically, because it will be expensive to travel abroad. It could be good as far as demand is concern.

Uncertainty will keep interest rates low, which has been a catalyst in driving consumer spending over the last few years, which has helped drive hotel demand. It’s the result that you would get from the subsequent fall in business confidence—again, that comes with the uncertainty if we were to leave, and how that will play out on the corporate segment and with corporate demand. Could be a bit of a negative impact. In the short term, if the UK wants to leave Europe, the impact on hotel revenue generation would not be so profound. In fact, it could have a positive impact as well as the negative ones. 

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2) The National Living Wage

[In the UK, the living wage is now set at £9.15 per hour in London and £7.85 per hour in the rest of the country.] Payroll is a big chunk of P&L, and we don’t have April’s data yet in terms of profitability, but when it comes through, it will be interesting to see what effect it had on P&L. We could see a decline in profitability and in the ability of hotels to convert from top-line to bottom-line because of the wage increase.

3) Regional Strengths 

Certain markets, like Liverpool and Newcastle, were set back in terms of recovery post-recession because of new supply. Now, those markets are seeing the most growth because they’re further behind in terms of recovery. Most markets in the UK have passed that high-water mark that they set in terms of performance in the last cycle. Therefore, they’re in uncharted territory. 

Supply is starting to grow in the UK regions. Over the last few years, we’ve seen benign supply risk in terms of new hotels coming onboard. Performance is better now, so there’s a greater availability of development finance and we see that translate into a greater pipeline and more hotels coming on board, which are diluting the demand for a number of markets in the UK and softening the growth we see in performance.

Last year was a turning point when Asian funds came in and bought portfolios. Whoever owns large platforms looks for single assets. As we get further along the cycle, the interest shifts to secondary markets. Further through the cycle, the strong performance growth in cities begins to ripple outward. 

4) Pipeline Trends

The pipeline has been fairly benign over the last few years. Even coming out of the last recession, we actually saw a significant amount of closures, especially in the independent sector. The net increases in supply coming through 2011-2013 were very low, indeed. Now, performance has seen a number of years of growth, and we’ve got back to a reasonable point in terms of the actual numbers hotels are able to produce from a revenue and profit perspective. Those numbers now stack up in terms of feasibility projects and the development of new hotels, and we’re seeing a greater number added to the pipeline.

The budget pipeline is usually strong, even in more difficult economic times, simply because the budget sector in the UK is where you see an abundance of lease agreements. There’s strong appetite, especially from institutional investors, to source fixed income stock. So it’s always a fairly safe bet, in terms of developing leased products, that there’s going to be somebody to sell to. 

5) Cost to Build

Construction prices are rising so rapidly, and land prices have gone up substantially as well in key UK locations. That’s working against developers, but we’re seeing many more projects planned than we have over the last few years. 

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