Incoming supply could dampen London's meteoric performance


London is on the rise, but is it close to its peak?

The first quarter saw London post its highest revenue per available room for any first quarter on record, according to STR. Growth was driven by the rise in visitors, attracted by the weak pound, but that boosted demand may be challenged by the 13,000 rooms in the capital’s pipeline.

STR reported that the market’s absolute RevPAR level of £101.50 was an 11.3-percent increase on the year, with occupancy reaching 76.1 percent—up 4.8 percent, which was the highest Q1 absolute value in the metric since 2010. Average daily rate was up 6.2 percent to £133.38.

STR analysts attributed the strong performance to a 7.7-percent spike in demand, likely driven by the devaluation of the British pound, alongside the shift in timing of Easter.

"After the struggles of early 2016, we’ve seen consistent performance growth in London," said James Parsons, head of business development for STR. "What remains to be seen is how the market will react to an influx of new supply set to come online in the near future. London is clearly the development hotspot of Europe, with more than 13,000 rooms in the pipeline.”

Why Worry

Others, like Marc Finney, head of hotels & resorts consulting for Colliers International, are convinced that new supply will not blunt London's strong performance numbers. 

“I’m not worried at all about supply in London; I think there’s a massive shortage of supply," he said. "Occupancies are always really high and if you’re full that means there’s a lot of displacement. There’s a lot of pent-up demand which will fill those rooms as and when they get built and open.

“Places like Canary Wharf could get a little over-supplied and there are certain categories, such as the £500-plus per night rooms where I would be worried about supply.”

Responding to the fall in the value of the pound, which regained some ground against the Euro following Emmanuel Macron’s election as French president, Finney said: “Actually very little is being driven by the weak pound. I don’t think it’s hugely influential, but it helps at the margin. In terms of foreigners coming to London for leisure it has some impact, but for business it’s not having an impact. The corporate market is not going to base a decision on whether it’s £20 cheaper. In terms of the domestic market, people coming to London are coming to do a specific thing or to see specific people. They are not going to go to Paris as an alternative.”

The comments came as AlixPartners reported that hotel transactions values for the wider UK had not been driven up by strong demand metrics—transactions for the period totalled £500 million. While this marks an improvement compared with the same quarter last year, which saw GBP300m of transactions take place, transaction values remain significantly below the £1.5-billion-plus quarterly levels seen in previous years.  

“Despite continuing, widespread RevPAR growth in the UK hotel market, transaction levels are still behind previous benchmarks," said Graeme Smith, managing director of AlixPartners. "In addition to political uncertainty, a valuation expectation gap has emerged between buyers and sellers. Buyers are holding out for prices that reflect recent profitability growth, whereas sellers are conscious of paying over the odds, particularly with cost challenges on the horizon.”

Commenting on London, Finney said: “The drop in residential pricing in London is starting to make some sites almost work for hotels. What we have to remember is that the first half of last year was really poor, but these results are encouraging all the same.

“What we’re seeing is that there are not as many deals happening, particularly in London. There are not a lot of people selling who have to sell, so there is a bit of a frenzy for product. I think pricing is still at slightly scary levels, it’s still very full. There are a short list of sellers but a very long list of potential buyers.” 

Katherine Doggrell is an editor at Hotel Analyst, the U.K.-based news analysis service for hotel investors.