Why the UK is seeing more economy hotels, and why Asia is investing

The Hotel Bulletin for the third quarter for 2015—published this week by HVS, business advisory firm AlixPartners and market intelligence company AM:PM—noted the growth of budget hotels in the UK. For the first time, budget guestrooms account for more than half the U.K.’s active hotel development pipeline, with more than 1,500 budget rooms added to the sector’s pipeline in Q3 2015 alone…and, the report notes, the sector showing no signs of slowing.

During the quarter, local hotel operator Whitbread added more than 500 guestrooms to its Premier Inn brand, bringing the total to more than 60,000 rooms throughout the kingdom. The company is "well on the way" to reaching its goal of 85,000 guestrooms by 2020, the report noted. 

Competitor Travelodge opened three hotels during the same period with an estimated 260 guestrooms, while budget hotel group Tune hotels opened its eighth U.K. hotel, the 100-guestroom Tune Hotel Liverpool City Centre. Tune recently confirmed an expansion plan worth £200 million investment for the U.K. market, with an ultimate goal of opening 25 new properties by 2020. Tune is backed by Queens Park Rangers FC chairman Tony Fernandes.


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Unbranded boutique properties are also seeing interest. In September, the 42-room Lace Market Hotel in Nottingham was purchased by two private investors from London after its former South Africa-based owners put it on the market for an estimated £3.8 million. 

“The low-cost budget sector continues to be popular with both leisure and corporate guests. With the development of sub-brands such as hub by Premier Inn, the budget offer is becoming even more pared down and cost-efficient,” HVS chairman Russell Kett said in a statement. “While the economy is now much stronger, cheaper hotel stays have become the new norm and guests are reluctant to go back to spending more. Budget hotels are popular with operators as they are cheaper to build and run. With the check-in and check-out function becoming increasingly automated, the cost of running a budget property is relatively low.

“More hotel supply in the market means that future growth will come in the form of achieved average room rates, rather than occupancy as we move forward. The change in the mix of hotel types with more emphasis on budget accommodation means we are unlikely to see high levels of growth in RevPAR,” Kett added.

Why Asia is looking to invest in the UK
Following from Q2 of this year, Q3's transaction market was "dominated" by Asian investors, Alix Partners noted, citing the acquisition of Kew Green Hotels by Chinese hotel group HK CTS Metropark Hotels.

This is likely due to two key factors for Chinese investors. First, a number of Chinese tour operators have acquired hotels to vertically integrate with tour operations. Second, the Chinese economy is experiencing a period of uncertainty, leading investors to focus on overseas markets such as the U.K., which are considered more stable.

There have been several acquisitions by Singaporean investors in the quarter, including CDL Hospitality Trusts acquiring the Cambridge City Hotel from London & Regional Properties for a reported £62 million. The U.K. market offers higher yields than Singapore. In addition, real estate valuation increases in Singapore are being restricted by government policy.

Top cities for hotels and investment
The Hotel Bulletin noted that that overall RevPAR growth has decelerated when compared with the same quarter 2014, with the average rate of growth now at 3 percent, the lowest since Q1 2013. Cardiff was top-of-list of the 12 cities reviewed, with RevPAR up 17 percent as the city benefitted from the Ashes test in July and the Rugby World Cup in September. 

The second-best performer was Birmingham, showing a 12-percent growth in RevPAR. The city also gained a boost from an Ashes test match as well as the doubling of charter flights between Beijing and Birmingham International boosting the number of visitors from China. Birmingham, Alix Partners noted, recorded the highest average demand growth over the past year (15 percent), making it an attractive prospect for investors. However, a very active pipeline (11 percent of current supply) may be a cause for concern for investors, given recent limited new supply (3 percent growth in the last two years).

In London, where RevPAR rose 6 percent during Q3, falling occupancy levels in July and August were mitigated by rising room rates and the impact of the Rugby World Cup in September.

Aberdeen was the U.K.’s worst-performing city, with a 22-percent fall in RevPAR due to strong new supply and lack of recovery in the oil industry, which is affecting demand.