At AHC, pall of Brexit a thorn in hotel operators' sides

The State of the Nation "Operator's View" panel at the AHC. From left: Katherine Le Quense, Ecole hoteliere de Lausanne; David Taylor, Principal Hotels; Serena von der Heyde, Georgian House Hotel; and Nicholas Northam, Interstate Hotels and Resorts. (AHC panel)

MANCHESTER, UK — The Brexit has been anything but a smooth process. With the UK set to leave the European Union in March 2019, questions remain and progress has been slow. Nowhere is this more evident than with regard to labor—its movement and cost. 

This was one of the themes of discussion at The Annual Hotel Conference, which drew an audience of more than 800 delegates here at the Hilton Deansgate. 

Nicholas Northam, managing director of Interstate Hotels and Resorts in the UK, called Brexit "a double-edged sword," where the devaluation of the pound has helped spur more international travel, but has led to both labor and product supply issues. (Trevor Williams of TW Consultancy made the case that travel is one industry that has benefitted from Brexit.) He cited "the people from Eastern Europe whom we relied on"… "now we are starting to hear stories from housekeeping provider outsourcers of the real challenge encouraging people to come and work here."

Freedom of movement is set to end after the UK leaves the EU, but signs point to migration controlled by a mix of work permits, visas and employer sponsorship. 

And while some, such as Serena von der Heyde, who owns the Georgian House Hotel in the Victoria section of London, said that the UK will have to prepare for wage inflation, studies have suggested the opposite—that ending free movement and curtailing immigration "may not have the positive effect on wages and conditions many eurosceptics hope—because it would leave migrant workers more vulnerable to exploitation and thus drive down wages."

Blaming the labor issue on Brexit, however, is not fair, added Northam. "We can use it as an excuse, but labor has always been a headwind," he said, adding it's more about how the hotel industry first attracts talent, then retains it.

David Taylor, COO of Principal Hotels, said that when Starwood Capital bought Principal Hayley, "before sketching out the brand, the first thing we did was decide our people message," he said. "The labor issue is not new, but what are the values we want our employees to live by?"

von der Heyde said, "We have to change how we staff," citing a net reduction in immigration. "We have to attract more people now," she said, adding that also means understanding the change in which people today want to work. "We need to be more flexible," she said. "People don’t like to work shifts and like to work in different ways."

Taylor suggested that today's younger workforce "want to be part of something more," what he referred to as active involvement. "We are now competing with places like a low-cost supermarket down the road. We have to show people how hospitality can be a career."

The UK Backdrop

Brexit is happening amid a time when the UK hotel industry is popping. "Regional UK performance has gone platinum," said David Bailey, senior director at CBRE Hotels, which reported that provincial occupancy has climbed to 77 percent year to date. "Hoteliers have converted continued demand growth into rate and RevPAR uplifts of 3.4 percent and 5.6 percent, respectively," Bailey said.

Edinburgh has been the star when it comes to RevPAR growth, increasing 17.2 percent YTD. Belfast (16.8 percent), Cardiff (10.2 percent), Liverpool (8.4 percent) and Manchester (7.1 percent) round out the top five. On the other side of the spectrum, both Brighton and Aberdeen had negative RevPAR growth of -2.8 percent and -6.8 percent, respectively.

The UK, however, is not immune to supply concerns. According to CBRE, in the four years to 2017, regional UK net room supply grew at a mean annual rate of 0.8 percent. Predictions are that this will change dramatically in 2017 and 2018, at a rate of 2.3 percent and 2.5 percent, respectively.

Percent increases on existing UK hotel supply. Source: CBRE Hotels

In 2018, 6,086 budget rooms will open and 3,199 four-star rooms will come online. City specific, increased supply will be most pronounced in Belfast, which is set for a supply increase of a prodigious 33 percent. It's followed by Edinburgh (15 percent), Glasgow (12 percent), Aberdeen (12 percent) and Cardiff (10 percent).

London has its own story. Occupancy year-to-date is 81 percent and, according to CBRE, coupled with a depreciated pound have proved "the perfect growth formula" for rate (+7.1 percent) and RevPAR (+9.3 percent). Total revenue increased 7.4 percent and GOP PAR up 10.5 percent.

On the transactions front, the overall feeling is that liquidity has returned to the UK. As of Q3, £4 billion of hotels have transacted, +47 percent year-on-year and £1 billion ahead of the five-year rolling average, CBRE reported. 

Fifty-five percent of total hotel investment has been in the regions, where single-asset sales have accounted for 52 percent of capital deployed.

"Yields for unencumbered, upscale hotels in London are in the region of 4.5 percent with a circa +175bps premium (6.25 percent) when considering prime regional locations," said Robert Chess, head of UK hotel valuations at CBRE Hotels. 

With regard to buyers, the pervasive sentiment is that as Beijing has set more austere monetary controls, Chinese outbound investment will slow. The expectation is that buyers from Japan, Korea and Malaysia could fill the void. "They are confident and capitalized enough to pursue outbound investments," CBRE said.

How any or all of this will be impacted by the full extent of Brexit remains to be seen. "Brexit is the long goodbye," Interstate's Northam said. "It’s there, but we have to move on. It’ll be what it’ll be."