STR: What the Brexit Referendum could mean for hotels

LONDON -- The United Kingdom's hotel industry is in the midst of 30 consecutive months of moving average revenue-per-available-room (RevPAR) growth. However, the industry could face strong headwinds for future growth if voters approve a measure to exit the European Union on 23 June, according to STR.

While is it impossible to quantify the exact extent of the proposed Brexit, it most likely would have some impact on current hotel performance in the U.K. London and Regional U.K. hotels have experienced the longest 12-month moving average period of RevPAR growth since January 2007, albeit growth has slowed recently. Figures for May 2016 show that while London's monthly performance has been positive, its year-to-date May RevPAR was down 3.0% to GBP99.88, driven by a 2.7% decline in occupancy levels. On the other hand, Regional U.K. witnessed an increase in RevPAR of 2.2% to GBP46.87, as a 2.9% increase in average daily rate (ADR) offset the 0.6% decline in occupancy.

STR and forecast partner, Tourism Economics, believe the recent fluctuation of the British pound on the currency market exchange is an early indicator of the overall impact that Brexit could have on the overall economy—which would filter down to the hotel industry. Most of the impact is likely to be on travel confidence, especially business travel, which is likely to derive from the uncertain environment. STR forecasts for the U.K. and London market are produced in partnership with Tourism Economics, an Oxford Economics company.

Short-term impact

STR concurs with Oxford Economics' belief that one possible Brexit scenario would be negative for London's hotel industry, although the depth of the negativity is difficult to gauge. Weaker domestic hotel demand, in line with weaker GDP, consumer spend and higher unemployment can be expected should Britain vote to leave the EU. Larger falls would be expected in capital investment, including hotel investment, because of the ensuing uncertain business environment of Brexit. That would affect business travel, which is a large component of the London hotel market.

On the other hand, the sharp drop in currency exchange rates expected by Oxford Economics following a Brexit would make London more affordable to some extent. It is possible that this would be enough to offset the negative impact from weaker domestic demand. Market sentiment will play some role and could accentuate any negative effects if a vote to leave is followed by a souring of relations with the remaining EU countries. By contrast, a smooth transition and a continued perception of London as a positive place to visit and do business could accentuate positive price effects.

Long-term impact

While Oxford Economics predicts that the longer term impact on overall domestic economic activity will be negative, there is a potential positive impact for the hotel industry, due to increased affordability of the U.K. and London as a destination, derived from a weaker exchange rate. However, some uncertainty is likely to remain, not least from the potential long-run impact of lower investment, which would continue to affect business-travel decisions.