PwC says UK operators and owners need to adopt a 'stringent' approach

London Photo credit: Getty/Stewart Marsden (In order to break into the sharing economy, Marriott is entering into a six-month trial with Hostmaker, a London-based homestay property management company.)

PwC’s Hotels Forecast 2019 suggests hotel trading growth in the UK is set to flatten in 2019 due to economic uncertainty, weak business-travel demand and an influx of new rooms scheduled to open across the country. The outlook for London has leveled out with year-over-year occupancy growth of only 0.1 percent and a marginal decrease of -0.5 percent forecast for 2019, which will see occupancy levels drop one percentage point to 81 percent in 2019.

PwC expects ADR to improve slightly over the next year with 0.2 percent growth for 2018 taking ADR up £1 to £149 and 0.8 percent for 2019 taking the average rate up another £1 to £150. RevPAR growth will remain static with 0.3 percent forecast for both 2018 and 2019, a big contrast to the 4.6 percent growth in 2017. 

Overall, PWC expects RevPAR to remain at £122 for 2018 and 2019.

However, according to research from STR, a potential 5,000 new rooms could open in London in 2018 with a further 4,300 in 2019. This is on top of the 38,000 rooms added in the previous five years.

“[The year] 2017 was a hard act to follow for hotel trading, in terms of growth and 2018 has been held back by uncertainty, slower economic growth, significant supply additions and reported stuttering business travel,” said Liz Hall, head of hospitality and leisure research at PwC, in a statement. “This is despite the weak pound buoying leisure travel, the Royal Wedding and the International Farnborough Air Show effect. However, trading in absolute terms remains extremely high by historic and global standards for London and by 2019 we forecast both ADR and RevPAR to reach new records in nominal terms.

“For a sector heavily reliant on people to deliver its products and services, the shortfall in availability of EU nationals remains a concern for hotels and the weak pound has pushed up the costs of retaining staff and importing goods within the sector," she continued.

“Following a number of years of strong revenue growth when there was not the imperative to focus on costs, prudent operators and owners need to adopt a stringent approach to operating costs growth in 2019 to preserve profitability.”

Regional Outlook 

Occupancy levels in the regions have been averaging 76 percent since 2015 and PwC expects these levels to hold steady for the next year albeit with a -0.3 percent decline in 2018 and no growth forecast for 2019.

ADR growth is forecast to slow compared to 2017, with an anticipated 1.3 percent increase for 2018 taking ADR to £72 and a further 1.2 percent uptick in 2019 lifting rates to £73. RevPAR is forecast to see a 1 percent increase and a further 1.2 percent in 2019 taking it to £55, up from £54 in 2017.

“Our forecast shows RevPAR in the regions to end 2019 23 percent ahead of pre-recession peaks in nominal terms but lagging in real terms by 7 percent. Demand continues to be driven by inbound tourism, domestic holidays and events,” Hall said. “The ICC Cricket World Cup is being held across 11 locations in England and Wales, which could help regional hotels in 2019.

“Occupancy rates have been creeping up from 66 percent in 2009 to an average of 76 percent in 2015. We forecast rates to remain at this level despite [more than] 40,000 rooms to be added in the regions in 2018 and 2019. A continuing structural supply shift towards a greater proportion of budget rooms will sustain occupancy levels.”

Deal Volume

Total deal volume for 2017 reached £4.9 billion, up 34 percent on the year prior, driven by a series of large portfolio deals. In the first half of 2018 the UK already has seen £3.8 billion worth of deal activity, an 80-percent rise on first-half 2017. PwC forecasts total deal volume to reach approximately £6.8 billion by the end of the year, a 40 percent increase on last year and the second highest volume of hotel investment in the UK after record levels of £9.3 billion in 2015.

For 2019, deal activity is forecast to slow down with activity to fall by around 34 percent from 2018 to around £4.5 billion.

“The UK hotel market has generally shown deal volumes closely tracking RevPAR growth over the past decade,” said Sam Ward, UK hotels leader at PwC. “However, with a swath of significant portfolio deals completed in the first half of this year and with more in progress, deal volume for 2018 is set to buck this trend. This will mark only the second year deal volumes are expected to exceed RevPAR growth.”

As such, PwC anticipates a slowdown in portfolio deal activity next year due to a combination of longer term investors entering the UK hotel market, U.S. funds refinancing their hotel portfolios to take advantage of the favorable debt terms currently available and uncertainty around leaving the European Union in March, Ward added.