In the run up to London 2012, the supply of hotel accommodation increased by approximately 10%.

This amounted to about 11,000 additional bedrooms, many of which are in the luxury sector. The large supply spike at a time of recession and when many people’s travel plans are dwindling is likely to result in a significantly stronger competitive environment around the country, especially in London.

Hotels trading continues to suffer

The backdrop to trading in the UK regional market in 2012 is that hospitality and leisure businesses are continuing to suffer, with 332 ceasing to trade in the second quarter of 2012. While the sector figure is down 22% on the previous quarter, hotel insolvencies continue to rise (PWC).

However, hotels are fighting against rising costs and are driving demand through price reductions and third party websites. There are a number of positives that are evident in the year to date. UK regional market saw a positive demand boost from the Olympics in many locations, achieving a growth in RevPAR of 2.2% and 2.9% and increase in average room rate of 3.3% and 2.3% in July and August respectively (TRI). Areas to benefit included Weymouth, the football host cities of Cardiff, Glasgow, Newcastle, Manchester and Coventry, and other centres holding events such as Dorney Wood for rowing and Surrey for cycling. Businesses were boosted through hosting the Olympic teams and their entourages and families, as well as the media, sponsors and officials. Some areas also saw a small occupancy uplift from the Diamond Jubilee, Farnborough International Airshow and the trend for “staycations” (TRI).

Increased demand outside London has been identified by STR, at Aberdeen (mostly because of the booming oil industry), Derby, Cardiff, Liverpool and Manchester. One of the biggest tourism marketing campaigns to ever run began on 10 September, with the aim of encouraging 4 million extra visitors to the UK per annum and an additional £2bn in spending.

Commentators are of mixed opinions for the outlook for 2013, due to weak economic growth, oversupply in some cities and the tide of branded budget hotels, PWC forecast rates rising by 2.4% but occupancy falling marginally by -0.3%.

Subdued investment market 

Some recovery in the UK hotel transaction market was apparent in 2011, mainly in the second half of the year, and this has continued into 2012. Deloitte estimates that UK hotel transactions in the first half of 2012 were worth more than double those in the first half of 2011 at £1bn. The increase in trade was driven mostly by single-asset sales with London accounting for around 55% of the total investment value. Portfolio transactions made up around 30% of total deal activity during H1 2012, compared to 70% in 2011. 

Outside London it is a different story, with activity in the regions remaining slow. Bright spots include locations, such as the Lake District, the Cotswolds and other national parks, together with cities of Edinburgh, Oxford, Cambridge, Manchester, Birmingham and Bristol, where trading remains strong due to year round mixed leisure and commercial demand.

The market is anticipated to remain flat in 2013, continuing to favour cash buyers or those not totally reliant on bank financing to close a deal. Much is likely to depend on the actions taken by the banks. We may see more portfolio deals coming to market and certainly several possible transactions are being mooted.

Budget hotel development continues

The branded budget groups are looking to continue their aggressive roll out plans, in particular Premier Inn and Accor. Travelodge are planning to resume their roll out, allowing for a time lag post restructuring and CVA. The majority of their demand is expected to be in London and the South East. Motel One plans to open hotels in key UK cities outside London, the first being in Edinburgh later in 2012.

The branded full service groups such as Hilton, IHG, Marriott and Wyndham have made considerable progress in rolling out their brands throughout the UK, particularly through the franchise model route.

Factors hampering the transactions market

A combination of flat trading and uncertain economic conditions continue to hamper the transaction market. Issues remain a lack of readily accessible debt financing and the continued disparity between buyer and seller in terms of price expectation. Disposal processes are therefore likely to continue to be longer and more difficult to complete. The principal demand is likely to derive from high-net-worth individuals, property companies and trade buyers. Outside of the capital, distressed sales dominated the market.