Market Reports

Is the UK hotel industry set for a recovery? - by Robert Barnard

While dramatic headlines, of terror, war and contagion, sell newspapers, they do not help when it comes to filling bedrooms. Thus hotels across the UK have seen performance fall heavily in the wake of events on the domestic and international stage from foot and mouth to 9/11 to war in Iraq.

PKF There has been much speculation about how soon and how quickly the sector might recover from this latest downturn. Despite signs of optimism at the end of 2002, it turned out to be a false dawn as events on the international stage once again conspired to stamp out signs of improvement. As the clouds of war gathered over Iraq so tourism suffered in the climate of uncertainty and when the storm broke in March 2003 the hotel sector took another battering. London, as an international gateway city with a high proportion of overseas visitors, continued to bear the brunt of this downturn. March saw rooms yield in the capital fall by 13.1% to 59.92 and in April, as the fighting dragged on, by almost a quarter to 52.

Even though the war in Iraq proved mercifully short, the damage had been done. The first half of the year was another one best forgotten and, although performance picked up in the second half, it was a case of too little too late. The year ended with rooms yield for the whole of Britain down 2.4% to 51.44.

London suffered most. Occupancy, despite experiencing an upturn in 2002, once again headed south. It was down 1.2% to 73.6%. Average rate posted its third straight annual fall, losing 3.3% to 95.73. This left rooms yield 4.5% the worse for wear in 2003 at 70.46, a far cry from the level of 91.45 posted during the millennium.

In the regions, more sensitive to the state of the domestic economy than events on the international stage, the level of decline was less severe. Occupancy and average rate moved in opposite directions, though in both cases by under 1%, to leave rooms yield marginally down at 42.58.

New arrivals

Despite this ongoing assault on occupancy and average rate, the UK has continued to see a steady stream of new hotel openings. These are spread throughout the land, although the greatest number inevitably are in London. The capital continues also to be the main breeding ground for new hotel concepts. This reflects a range of factors: it is the by far the UK's largest marketplace, able to support a host of branded and niche concepts; it is seen by any aspiring international hotel company as a must-have destination; and, with few new-build sites available, developers in the capital are forced to be more creative in their ideas and locations.

Radisson Edwardian has demonstrably put its faith in the inherent vitality of London's hotel market with a rash of activity during 2003. The 101-room Savoy Court Hotel near Selfridges was transformed by an 8m refurbishment in June 2003 into the new-look Sussex Hotel. Money is also being lavished on upgrading the Berkshire Hotel from four to five stars and in renovating its Heathrow property.

In September 2003 the company put another feather in its cap with the purchase of the historic May Fair Hotel from InterContinental Hotels Group (IHG) for 115m. The sale was prompted by IHG's desire, in the wake of its demerger from Six Continents, to realise shareholder value by selling assets where appropriate. The acquisition brings the company's London tally to 11 hotels with 2,300 rooms.

To make up for this loss, other IHG brands continued their expansion. Debuts included the 130-room Holiday Inn London Camden Lock, which architects Moren Greenhalgh have ensured challenges any preconceptions that the brand is visually uninteresting, and the 203-room Crowne Plaza London The City. The former opened in August 2003, while the latter, as it just squeaks inside the boundaries of the City, was formally opened by the Lord Mayor in February 2004.

Another international heavyweight, Marriott, has been expanding aggressively in the capital. It added the Marriott London Park Lane to its portfolio at the end of 2002 and the Marriott London Kensington in July 2003. This July saw the unveiling of the Marriott London West India Quay, located opposite Canary Wharf. This two-for-one offering provides a choice between a 301-room, full-service Marriott hotel and a 47-unit Marriott Executive Apartments.

The idea of offering a choice between two brands from the same stable on one site is clearly flavour of the month at hotel HQs. Accor's take on this trend can be seen at the ExCeL exhibition centre. February 2004 saw the opening of a four-star, 257-room Novotel, complete with 12 meeting rooms, next to a 278-room Ibis. This duo brings the total number of hotel rooms at the once-derelict ExCeL site to just over 1,500 and rounds up a year of frantic expansion. It saw the opening of a 210-room Holiday Inn, a 202-room Travel Inn and a 224-room Ramada.

While the big hotel groups continue to consolidate their presence in the capital, smaller companies and independents are also getting a share of the action. The Bentley, a 64-room hotel contained inside a row of elegant houses in west London, was originally to have marked Kempinski's arrival in the capital. It opened in November 2003 as an independent, but with the same level of amenities and gilded luxury. Weighing in at a similar size is the Baglioni Hotel, which opened in west London in March 2004. It offers 66 rooms decked with unmistakably Italian panache in black and gold.

Another March opening this year was The Zetter, a 59-room property, including seven rooftop studios and a restaurant, on Clerkenwell Road. While its decor and ambience have already placed it on the list of hip hangouts, its location has pushed the frontiers of London's hotel map into new areas and further broken down the accepted notions of what and where is possible.

After a couple of years in which the capital has been bombarded with more openings than most cities could expect to see in a decade, a relative calm is set to fall upon the marketplace next year. There are only two notable openings the arrival of Scottish group Apex Hotels and the unveiling of the 472-room Riverbank Park Plaza firmly in the books.

The damaging events of 9/11 and the resulting downturn in hotel performance produced an inevitable reduction in the reservoir of hotel investment. Now that the hotels that were already in the pipeline before 9/11 have been seen through to completion, the impact of 9/11 on hotel openings is starting to show. But London never stands still and a pause to draw breath will be welcomed by all the new hotels that are seeking to establish their place in the market. In the background the search carries on for new ways to establish a presence in this world city and eyes are ever vigilant for unexplored places where a hotel can take root.

Nor has the range of niche markets been exhausted. The easyGroup, for example, is now extending its brand into the hotel arena. A property to be the first easyHotel has been acquired in west London and plans to open late this year with a new take on the budget concept. West London has also seen the advent of another new concept Guesthouse West. A 'buy to let' scheme for hotel rooms which offered the hotel's 20 rooms at 235,000 each for a 99-year lease.

Regional developments

In the regions it is noticeable that what was once a novelty in London is steadily spreading across the land. Boutique hotels are a case in point. Hotel du Vin, which hasn't got closer to the capital than Tunbridge Wells, has been at the vanguard of bringing hotels with dash and designer decor to the regions. Hot on the heels of its 40-room opening in Brighton in 2002 was the arrival of a 43-room property in the spa town of Harrogate in September 2003. The company has already lined up its next debut with the acquisition of the former Brakspear Brewery in Henley-on-Thames.

Another flag bearer for the boutique concept is the 14-strong portfolio of Hand Picked Hotels, which officially launched its brand in October 2003. The properties are dotted across Britain's countryside, bringing a modern designer's eye to the traditional country retreat.

Not everything, however, flows outwards from the capital. Malmaison has established an enviable reputation for its brand of designer elegance since it first set up shop in Edinburgh and Glasgow in 1994. Following the opening of a property in Birmingham in October 2002, the brand finally unfurled its flag in the capital in November 2003. The location was as distinct as the property the conversion of a former nurse's hostel on Charterhouse Square and bore all the hallmarks that have become associated with the brand. This momentum is expected to be continued with plans for up to 15 properties in the UK by 2008.

After a period out of the limelight, the brand's founder, Ken McCulloch, returned to the UK in June 2004 with a new hotel brand called Dakota. Tagged as offering 'budget luxury', the first Dakota touched down on the M1 near Nottingham with 92 rooms, all featuring 32 inch plasma TV screens. Work is already under way on the next Dakota, a 132-bedroom property at South Queensferry near Edinburgh, with Aberdeen, Leeds, Newcastle, Glasgow and Chester all been mentioned as possible targets for future openings.

Another regional group that has now made its mark in the capital is City Inn. The group had already established its reputation with outings in Bristol, Glasgow and Birmingham before planting its flag near the Tate Britain art gallery in September 2003. The 460-room City Inn Westminster, upon opening, was trumpeted as the largest new-build property in London for 30 years.

Budget hotels established themselves first in the regions, at major road junctions in out-of-city locations where land was cheaper. Their numbers have expanded relentlessly in the last decade and this growth shows no signs of abating. However, with opportunities on green-field sites dwindling, there has been a switch to urban locations, with London's defences now well-and-truly breached.

In March 2003 Travel Inn celebrated its 300th UK opening with the arrival of a 590-room property at Heathrow. It headed closer into the centre of the capital in June with the unveiling of a 202-room unit at ExCeL in Docklands. Another of the budget industry's giants, Travelodge, has also been busy. It opened the 140-room London Kings Cross Travelodge in December 2003. This was joined in June 2004 by two more properties in the vicinity: London Islington and London Farringdon. In a break from the prevailing budget model, where city hotels occupy converted office buildings, these two new additions were reflagged Thistle hotels that had been acquired in a 55m deal.

Looking forward

At the start of the 1990s the UK hotel industry also found itself in the midst of a serious performance downturn. At that time many companies went to the wall. It therefore speaks volumes about the current resilience of the hotel sector that it has survived the recent turmoils so well. The fittest survived the last downturn leaner and better equipped to deal with the industry's ups and downs. However, this difference also reflects the fact that the previous downturn came at a time of general UK economic malaise and was set against a backdrop of relatively high inflation and interest rates.

Looking forward, there is definitely reason to be optimistic about the future. Despite some recent false starts, there are clear signs that the situation is, at last, taking a turn for the better. Rooms yield in the first half of 2004 improved both in London and the regions, although it must be remembered that much of this simply represents the recouping of last year's large losses. More, steady progress can be expected in the second half of the year.

There is clearly still a long way to go, but hotel Britain is back on the right track. In the regions the state of the domestic economy still holds the key and, with a general election due next year, the Chancellor is unlikely to do anything to rock the boat. London has a steeper road to climb, but the potential is there to return to the levels of the last cyclical peak. Now that would be a headline worth printing.

Robert Barnard
Partner of PKF's hotel consultancy services



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