PwC Reports: UK hotels to start healing process late 2010

Early signs indicate the UK hotel industry is over the worst, the PricewaterhouseCoopers LLP (PwC) UK hotel forecast reveals today.

With RevPAR1 teetering around the £50 mark, growth rates are expected to deteriorate further before Christmas but entering the New Year the speed of decline should begin to slow.

The report (UK hotels forecast: Not out of the woods yet) predicts a RevPAR fall of 12.1% overall this year, which will slow to a 2.4% decline in 2010.

Robert Milburn, UK hospitality & leisure leader, PricewaterhouseCoopers LLP, said:

“While domestic and overseas leisure tourism has been a tonic for UK hotels, the stark absence of corporate travel has left the sector severely weakened. Overseas visits are down nine per cent2 and air travel is expected to contract further, making the return of the business and conference markets critical for a full recovery.”

We last saw a room rate fall of this magnitude (8.1% in 2009) in 2002 when rates fell almost six per cent. While rate declines will slow at last, economic and travel fundamentals remain weak and despite accelerating cost cutting programmes, the evidence points to more savage trading at the end of the year. Rate declines will ease in 2010 but we foresee no RevPAR growth in any quarter over the year.”

London loses pricing power but stays busy

Despite gloomy forecasts based on City job cuts and corporate belt tightening, London’s bust has not been as spectacular as the preceding boom.

Occupancy is expected to remain high at around 79% for this year and next, a drop of only 200bps from the peak in 2007. Room rate declines will halve next year while occupancy returns to growth after two years.

Robert explained:

“Despite the spending cutbacks in both the corporate and leisure sectors, London remains a must-see destination for both UK and global travellers.”

Previously perceived an expensive option, London hotels have tempted travellers away from the provinces with keenly-priced leisure deals, often encompassing theatre or sporting events.

“Visitors are keen to take advantage of this lower priced London as the City slid from second to 22nd in the league table of the World’s most expensive destinations3. But it remains to be seen how long these hotels can afford to offer such attractive rates.” he added.

Liz Hall, head of hotels research, PwC, explained:

“Average room rates in London have been rising for five consecutive years. Now a room will cost £10 less than in 2008 and could cost £20 less by the end of next year. This might be good news for visitors but not for hotelier profits as London saw RevPAR slide by nine per cent in the first half of this year, compared with the same period in 2008.”

Consumers and hoteliers get smarter

Budget hotels have found it hard to swim upstream as three and four star operators retain custom through value for money deals.

“Midscale customers have been able to negotiate discounts at their usual locations rather than switching to a cheaper option,” Liz added.

We are also seeing a selected reduction in brand standards among some chains as hotels seek to contain costs. Indeed some four and five star hotels are looking to reduce their star ratings in order to cut unnecessary expenditure in areas not valued by guests.”

Are hotels fit for the future?

In a PwC summer survey4 of leading hoteliers three quarters of those polled felt more optimistic than they did six months before, however nearly 40% confirmed they had seen no signs of green shoots so far.

Robert said:

“The weak pound has been a lifeline this summer but can not be relied upon. If quarterly declines in RevPAR continue as predicted we may well see more hotels needing to restructure their balance sheets.”

Rooms rates have become the sacrificial lamb in the battle for occupancy, and keeping rates low will continue to make it easier to attract last minute custom. It is a delicate balance and we are not out of the woods yet but, as the economy starts to stabilise, the path has at least become clearer.” he concluded.

Notes to Editors:

• 1. Revenue per available room (RevPAR) is a key performance metric for the hotel industry. Also known as yield, it can be calculated by multiplying the average achieved room rate by the average annual room occupancy rate.
• 2. Office of National Statistics research
• 3. So you think London’s expensive? It isn’t anymore – the Times, 20 August 2009
• 4. PwC survey carried out in August 2009 of 60 leading players in the hotel sector, representing over 100,000 rooms.