PwC's 2018 UK hotels forecast has a lot in common with a 1997 Jack Nicholson film, of which he won an Academy Award for. "As Good As It Gets" follows the misanthropic and obsessive-compulsive Melvin, played by Nicholson, and his journey toward self-realization. And while Nicholson's character reaches a place of betterment, PwC's outlook for the UK hotel sector, while still favorable, may just not get any better than where it is right now.
Maybe that's why their forecast asks the question at the top: "As good as it gets?"
"We don't expect the growth in 2018 to match 2017, even though the outlook is broadly positive for the UK hotels sector," wrote authors David Trunkfield, UK Hospitality & Leisure Leader, and Dr. Andrew Sentance, senior economic adviser, PwC.
UK's hotels this year have seen a bump due to two main factors, PwC contends: a recovery in the broader global economy, which is helping spur more overseas travel, a win for cities like London, and the fall in the value of the pound since the Brexit vote, which makes visiting the UK that much cheaper.
PwC's latest view is for UK GDP growth to slow from around 1.5 percent in 2017 to 1.4 percent in 2018, as the impact of the weaker pound on inflation and continued Brexit-related uncertainty move through.
PwC predicts year-over-year occupancy growth in London of 2.3 percent and a RevPAR gain of almost 6 percent. That solid growth will not be repeated in 2018, PwC forecasts. For 2018, the expectations for London is occupancy growth of 0.2 percent, taking occupancy up two percentage points to 83 percent; ADR to increase by 2.2 percent, taking it to £148; and a RevPAR gain less than 2017 at 2.4 percent reaching £123.
Growth, yes, but modulated growth. PwC backs up its number based on the presumption that inbound travel based on the weak pound, especially holiday inbound travel, will soften and, perhaps more concrete, a spike in new room supply—about 7,000 new rooms—coming online.
According to PwC, there are 13 new four-star properties with almost 2,000 rooms to open, including the 125-room Park Regis Shoreditch and 192-room Hoxton Southwark. In the luxury segment, new openings include Steigenberger’s 233-room Great Scotland Yard due to open at the end of March and the Westin London Queensbridge at Monument.
Next year will see a large influx of room openings at Heathrow Airport, approaching 3,000 altogether, including a 437-room Moxy; a 450-room Holiday Inn Express T4; a 64- room Heathrow T2; a 190-room Staybridge Suites; a 433-room Holiday Inn Heathrow; a 244-Courtyard by Marriott and an independent 298-room three-star hotel at T2.
Its UK Provinces forecast for 2017 was edged down to RevPAR growth of 2.5 percent. The 2018 forecast is marginally stronger than expected in March, and is now anticipated a further 2.3 percent RevPAR growth. Propitious news: The terrorist attacks in London and Manchester appear to have had a limited impact on visitation levels, the report writes. In the first weeks following the Manchester Arena bombing attack, which took place May 22, hotel GMs in the city’s hotel association reported enervated room demand, but that has now reportedly picked up.
The pipeline in regional room openings is also forecast to be above average with 2.1-percent growth expected in 2017 and 2.4 percent in 2018 compared to an average between 2011 and 2016 of 1.1 percent. In 2017, Provincial new supply is forecast to increase by another 10,400 rooms and an additional 12,000 rooms by 2018. In terms of segmets, it's the budget/economy sector leading the charge, accounting for more than 40 percent of the UK active pipeline.
On the transactions side, PwC forecasts both overseas inbound and domestic investment into the hotel sector to continue into 2018, with investment appetite steered toward institutional and mainstream real estate investors. "It will be interesting to see the outcome of the current portfolio deals to see whether vendor price expectations are achieved, and the impact this may have on the strategy for any future portfolio deals running into 2018," the authors wrote. "It also remains to be seen the longer term effect of the drive by China to limit foreign investment, once any of the larger portfolio deals do return."
Globally, hotel transactions hit an apex in 2015, with UK hotel deal volume reaching £9.3 billion that year. 2016 saw a 60-percent pullback in deal volume to £3.7 billion. After the Brexit vote, the only large portfolio deal in the second half of 2016 was the 55 Travelodge freeholds (around £196 million). Single-asset deal activity was focused in London, including the DoubleTree by Hilton, Tower of London (£300 million) and a 50-percent stake in the Peninsula Hotel development for around £108 million.
Single-asset deals led 2017 with total deal volume in the seven month period ending July 2017 at approximately £2.3 billion. Stunted growth in portfolio deals, meanwhile, has been credited to the ongoing Brexit process, PwC writes. In the first seven months of 2017, single-asset deals made up more than 91 percent of all deal activity at approximately £2.1 billion. Some of these larger transactions included the Grosvenor House Hotel for £600 million, Doubletree by Hilton Westminster for around £190 million and the Park Plaza Waterloo for approximately £160 million.
Outside London, some of the larger single deals included, in Manchester, the Holiday Inn City Centre and Lowry Hotel, for around £54 million and £53 million, respectively.
This time last year, 2017 was forecast to be a softer year in terms of deal volume and RevPAR growth compared to 2016, writes PwC. However, stronger RevPAR growth in 2017 combined with deals that were expected to close in 2016 carrying over into 2017, PwC forecasts total 2017 deal volumes to be around 43-percent higher than 2016.
"It will be interesting to see the outcome of the current portfolio deals and whether vendor price expectations are achieved, and the impact this may have on the strategy for any future portfolio deals running into 2018," the authors write. They also cite the longer-term impact of the push by China to limit outbound capital, which was so prevalent in the global hotel industry over the past few years.
Based on these factors, coupled with forecast slower RevPAR growth across the UK, overall PwC expects 2018 deal volumes to reach levels approximately 10-percent lower than the current year at around £4.8 billion.