At the upcoming Annual Hotel Conference, Oct. 12-13 in Deansgate, Manchester, David Bailey, senior director EMEA for CBRE Hotels, will present an overview of key UK hotel markets. "Analyzing the relationship between demand and supply, Bailey leverages the expertise, data and analysis from within the CBRE Hotels team to drive transparency in the sector and spark debate among the operator and investment community alike."
In his session, Bailey will discuss such game-changers as the European referendum, the U.S. election and the new national living wage. Ahead of the conference, Bailey spoke with HOTEL MANAGEMENT about the state of the UK hotel industry, the Brexit and other concerns hoteliers should heed.
1) Characterize the UK hotel market: What are the opportunities and challenges right now?
Bailey: As a generalization, you've got two markets in the UK. You've got a provincial market and you've got a London hotel market, and they, together, comprise the UK market. But if you're looking at it combined, then that will create an average that doesn't relate to you the provinces or London. Again, in simple terms, the provinces are generally reliant on domestic demand, and they are very sensitive to movement in UK GDP, and the general vitality of the UK PLC as a generalization.
London, on the other hand—while influenced by [the fact] that it's a very attractive business destination with the financial markets, commerce and trade that goes on there, as well as being a very very attractive leisure destination—remains a very appealing destination and we're fortunate that it is. What you tend to find is that London operates at a pretty high tempo in terms of occupancy...I think it was Marty Kendrick at Blackstone some years ago that described London and New York as two high velocity hotel markets. That's quite a good way of describing them.
You tend to have sustained high-occupancy. It probably averages to high 70s in the long term—we're talking a 35-year term. In the recent years, London's pretty consistently been around the 82-percent mark and really has shown phenomenal growth when you consider the supply addition that's come into the city. Therefore, you tend to find that high occupancy gives an opportunity to yield, manage, and drive high rates and with a consequence, London is one of the few vacations where you can find genuine five star up scale type inventory and from an investment point of view attract a very wide range of participants for reasons that probably go beyond the discussion now in terms of the UK being a safe haven, political stability, language and so forth. It's an attractive place to invest.
If we look to supply, London, at the moment, is laboring a little under the amounts of supply coming in. But it's a relevant term. It's a very, very strong market, but what we've seen in 2016 is the supply addition will probably turn out to be about 4-percent or 5-percent to existing supply in 2015. That's without the benefit of things like an Olympics or Royal Wedding, or whatever helps drive that. London is still fundamentally under-supplied, certainly with the budget stock. You could argue from the consumer point of view, at 82-percent, the market could wear more product, operating at a lower occupancy and increased choice, but you wouldn't hear many investors signing up to that.
2) What is the bulk of that 4 percent or 5 percent new supply that is coming in?
Bailey: It's a mix. There's a lot of budget supply coming and particularly when you move away from conventional high-call areas, let's say Westminster, as you move out east where we see a lot of development, then you'll see more mix there and more budget.
Because of London being such a high-occupancy, high-rated market, if you can deliver budget stock, then you're onto a winner. That market element—the part that is price-sensitive and particularly the leisure market—will naturally gravitate towards you. Equally in London, we've seen some great new contacts come before in the likes of Citizen Inns and their multiple sites having had a very strong first experience in the south part when they came to the city a couple of years ago. London is a phenomenal market and sometimes appears to defy gravity, but we are throwing a fair bit of supply London's way just now.
When you look at the provinces at the macro-level, the product and the supply coming in have been much more balanced relative to UK growth. With that said, I'm always cautious of using averages because it's often a number that nobody is doing. Across the provinces, you have supply hot-spots, and the market like Aberdeen—which has been through some real trauma as the results of the marked decrease in the price of oil—that still has something like the high teens supply-addition heading its way over the next two or three years. Of course, the hotel projects are committed to some years out, but when they arrive, they arrive as a fairly big lump. They're not drip-fed into market, so they can dislocate markets when they emerge, but generally, the provinces are in good health.
They've had a phenomenal volume recovery and now a good rate recovery having had a really difficult time throughout the recession. It really was difficult for a whole variety of reasons, not only in terms of contracting demand, but they have increasing utility costs, they have increasing fee inflation, and they had this real elephant in the room, like OTA intermediary third-party online commissions just eroding their margins which has been a real challenge. But they're in a better and improving place now.
3) Is Airbnb an issue in the UK?
Bailey: It's a very good question. I think it must be, but we're just not sure to what extent because it sits outside the data. It's there, but both the provinces and London are achieving impressive performance metrics, even with that. A challenge with Airbnb and understanding how much availability there is throughout the year—because one flat's available for one night as opposed to one being available for three, six, five nights. It's something that we've got to watch closely because I'm sure it will have an impact both in terms of competitive supply, but also in the way it makes a brand an operative have to respond.
4) What's a long-term impact of the EU referendum on the industry?
Bailey: The short answer is, we don't really know. All we can really talk about is what do people think would then happen in the immediate aftermath and will have happened? I think it was such a shock, if you like, or shift that was being proposed. It was something they were about to have a panic in the immediate aftermath. We saw that effect in the financial markets. There's a whole variety of reasons. There was a great deal of negativity and misinformation, probably on both sides, and I think because people would fault just how bad it would be if we came out and when the thing went the way it did, I think it was with some real fear.
What quickly became apparent was that wasn't the case and market relatively quickly stabilized. The fall in sterling from a hotel demand point of view is partly really good news. It's good for visitors to London, because becomes cheaper than it was, and people flock to visit it and price often puts them off. It's good because it stayed tensions in the UK and also [encouraged people to go to] Edinburgh, Bristol, Bath, Cambridge, attractive cities and York, and others. They will also benefit from this overseas travel. From a demand point of view, it's been really encouraging.
We haven't seen a collapse or a sudden curtailment of corporate travel. Where there is a question mark is the effect it has over longer-term investments—and that remains to be seen. We have aggressively revised our growth projections for the UK economy. Those have been consistently revised upwards. It doesn't change the fact that there's still a very wide variance of opinion as to how strong economic growth will be next year, and as I said, the provinces in particular are sensitive in a UK economic growth.
Where there is an area of concern undoubtedly is around the status of the 27-percent-odd EU nationals that work and support the hotel sector. My own belief is that they're not going to be kicked out, but the government has to play its cards very close to its chest, because their fortunes are completely aligned with the status and fortunes of the UK or Brits living in Spain, living in France, etc. The reasoned position would be that the statuses of both those groups are maintained. What I do think is quite interesting is when you think it might be 27 percent of the overall employees, when you think of in whose hands are the hotel brands trusting their promise and guest experience to deliver, these folk really are the sharp end of that.
Maybe 80 percent of them are doing that, but they're the waiters, they're the check-in clerks, they're the housemaids, they're the maintenance guys, they're the guys that are bumping into the guests and interacting with them on a daily basis. I think they are really important and no doubt the industry should be lobbying hard to ensure that their status is preserved. That's the immediate scenario, and the kaleidoscope has been shaped and things decided to fall in its place, now and we had a change of Prime Minister, we have new cabinets, all in a space of about four weeks, five weeks, and we've made gun shots or riots, so we achieved some political stability.
We know the exit will happen no later than March of 2019...but the big thing the business doesn't like is uncertainty. They need to know how to plan and move forward, but it is an unfolding story, the effects of which are going to be measured over decades, not in the immediate year or month. What we're talking about is something that might mean that the long-term growth is lower than where it might otherwise have been, but it's not the question of it forcing a recession and the kind of dislocation that we saw through the financial crisis in '08, '09 and beyond.