A greater than anticipated boost in tourism has driven strong trading performance across the UK. According to a recent report from the UK's Knight Frank and HotStats, revenue per available room is forecast to grow by more than 7 percent for the full year 2017, driven by 7 percent average daily rate growth in London and record high occupancy rates in the UK provinces.
Occupancy, Average Room Rate & RevPAR
The UK hotel market witnessed an exceptionally robust trading performance in 2017 with record RevPAR levels achieving £89 for August YTD, up 7.4 percent compared to the same period in 2016. While both London and Regional UK markets recorded growth in occupancy, of 1.6 percent and 1.8 percent, respectively, for August YTD, London outperformed provincial markets with a 9.1-percent surge in RevPAR growth achieved through a strong uplift in the average room rate to £161.
Following a weaker performance in 2016, London has benefitted from the weak pound, incentivizing overseas visitors to the capital city, with strong growth recorded for long-haul markets. Overseas visitor numbers from North America in particular, who typically stay longer and spend more, had the highest growth. To date, the trend in the key top line UK hotel metrics mirrors the 2017 growth forecasts announced by Visit Britain, of 6-percent increase in inbound visits and 14-percent growth in spending, which have facilitated hotel occupancy rates throughout the UK.
This performance is particularly impressive when taking into consideration the new hotel supply entering the market. In 2017, 10,000 new guestrooms opened in the UK. Fifty percent of new hotels opened in London, while a further 7,000 new guestrooms have been planned to open throughout the UK in the final quarter of 2017.
However, Knight Frank’s data shows that during the 12-month period September to August 2016/17, UK regional hotels of less than 150 guestrooms achieved RevPAR growth of 4 percent, below the Regional UK average growth of 5.1 percent. In contrast, UK Regional hotels with more than 250 guestrooms achieved strong growth of 7 percent, well above the average Regional UK performance.
“The strong RevPAR growth in London, largely driven by growth in the average room rate, combined with healthy levels of trading in Regional UK has filtered down to GOP. A a result, GOPPAR saw strong growth (10.1 percent and 4.8 percent, respectively, as at August YTD 2017). Nevertheless, the headwinds of rising costs in both expenses and payroll highlight the challenges ahead for the industry, at a time of heightened concern over the free movement of labour post Brexit,” Phiippa Goldstein, hotel analyst at Knight Frank, said in a statement.
Rising payroll drives down RevPAR
The depreciation of the pound has caused expenses to increase across all hotel operating departments. Payroll costs form the largest proportion of costs for a hotel. According to the report, average wage costs, as of August YTD 2017, equated to 25 percent of total revenue for London hotels, increasing to 31 percent in Regional UK hotels.
Contributing factors to the increase in payroll include the migration of the workforce leaving the UK, a rise in the national living wage and demand for a staffing increase to operate the new hotels that have recently opened.
Payroll costs have increased by 4.7 percent in London for the 12-month period to August 2017, with costs shown to have continued to spiral upwards in 2017. Meanwhile, Regional UK hotels have witnessed an increase in payroll costs of 3.3 percent for the12-month period to August 2017 and have continued rising at this same level for the period to August YTD 2017.
UK hotels’ 2018 outlook
Knight Frank has forecasted that 2017 year-end occupancy rates will reach 82 percent for London and a record high 77-percent occupancy for the UK provinces. However, in 2018, the market predicted this rate of growth will begin to slowly decline.
“Nevertheless, the weakened pound is expected to continue to attract overseas leisure visitors, which combined with strong growth in demand from continental Europe and resilience in the domestic ‘staycation’ market, should provide further growth potential for the UK hotel market,” Philippa Goldstein, hotel analyst at Knight Frank, said in a statement.
Despite a tougher trading environment and the volume of new stock entering the market, Knight Frank has forecasted that both RevPAR and GOPPAR growth will continue into 2018.