HVS: Iceland is hot for hotel development

Over the last seven years, Iceland’s tourism scene has seen “unprecedented growth,” and the country’s hotel supply is struggling to keep up with demand, making it ideal for new development. 

According to a new report from hotel consultancy firm HVS, Keflavik International Airport has seen double-digit growth with arrivals and departures up 16 percent in 2011, 19 percent in 2014, and almost 25 percent in 2015. In the year-to-October 2016, growth was 34 percent over the same period in 2015, with more passengers than the previous year as a whole.

Before 2010, Iceland’s hotel sector struggled to reach annual occupancies of 50 percent. Achieved occupancies have increased 36 percent between 2010 and 2015, with those in the capital and outlying areas up 42 percent. In 2015, the capital region achieved an overall occupancy of 79 percent, up from 55 percent in 2010, while the whole of Iceland saw an average occupancy of 64 percent, up from 47 percent in 2010.

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Accommodated Hotel Bednights in Iceland 2006-16

According to data provided by Benchmarking Alliance, the country’s capital Reykjavik is rapidly becoming one of the strongest-performing cities in the Nordics with the highest occupancy in 2016 Q1, the strongest rate in Q2, and outperforming other Nordic capitals in Q3. 

Room supply increased 11 percent between 2010 and 2015, and by an annual 6 percent in Reykjavik. “In any other market this may have appeared to be somewhat alarming, but in Iceland it falls far below the the growth in demand, as seen in airport passenger growth and the visitation statistics in the following section,” the report claimed.

Room Supply by Region

Estimates as to the number of rooms in the pipeline vary from 1,200 to over 2,000, with the majority of these rooms due in 2018 to 2019. Notable projects include two Curio Collection by Hilton hotels and the Rekjavik Edition, which will be next to the Harpa Convention Centre and will be the country’s first five-star hotel. 

Beyond the capital region, the Southwest (also known as the Southern Peninsula) is the fastest-growing region, with a compound annual growth rate of 27 percent between 2010 and 2015. Still, this region only represents 5 percent of accommodated bednights.

Potential Challenges

The report warned, however, that the growing appeal of the sharing economy combined with the simultaneous growth in hotel development pipeline could pose a threat to the hotel market, particularly if tourism growth were to slow, or even decline, forcing the hotel sector and the sharing economy to compete head-on. This would result in a fall in hotel occupancies and average rates.

“The growth of Airbnb in Iceland hasn’t affected hotel occupancies yet, but it has created a low-cost alternative which can limit their ability to drive average rates during peak seasons, despite high occupancies,” report author Stephen Collins, senior associate, HVS London, said in a statement. “Once hotel room supply begins to catch up with demand, it will prove to be an interesting to see whether hotels are able to reclaim the unaccommodated demand that had previously been forced into alternative accommodations when hotels were full.” 
 

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