London hotels set for tough year

Hotels in London could be set for a rollercoaster ride as they face the worst economic conditions in 15 years, according to the PricewaterhouseCoopers LLP report. It also predicts RevPAR could be set to fall by almost 12 per cent in 2009 as occupancies tumble.  Largely driven by London, UK hotels have seen a boom period of unprecedented revenue growth and investment over the past five years. This means that as London stares down the barrel of a recession, they are at least in good shape. However the economic slide will take London’s RevPAR (the industry’s benchmark) from £94.28 in 2008 to £82.92 in 2009 as companies cut costs and travel budgets, alongside squeezed consumer income.

The descent began in September of this year, and despite following a fifth successive year of room rate growth, the Autumn is seeing a demand slowdown in London hotels with occupancies falling and room rates set to follow.

Robert Milburn, UK Hospitality & Leisure Leader (H&L), PricewaterhouseCoopers LLP, said:

        “The ricochet from continuing turmoil in the financial markets, the sharp global economic slowdown, and the negative consumer and corporate sentiment means that the outlook for travel and hotel demand has deteriorated significantly in recent weeks. But the outlook for 2009 is even more worrying.”

        “Occupancy in London looks set to drop to 70 per cent next year. The capital has not seen a decline on this scale since 9/11, and before that as far back as 1991, when they fell as low as 65 per cent.”

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        “Room rates are not safe either and even if hotels manage to keep maintain room rate levels in 2009 this will represent a real reduction of some four per cent when inflation is taken into account,” he added.


Downside scenario

PwC’s main scenario is based on a 0.5% decline in GDP (despite the recent interest rate cut) next year, and as a result the UK hotel industry should see a 4.3 per cent RevPAR decline as room rates fall for the first time since 2003.

However, should the UK face a harsher recession (a 1.9% decline in GDP in 2009) then the outlook for hotels is even starker. In this instance UK RevPAR could fall by nearly 10 per cent and room rates in London could plummet to give a RevPAR drop of 23 per cent.

Banking crisis hits London hotels

City hotels in London (the home of the World’s most prominent financial services centre) will suffer at the hands of the banking crisis and the low confidence in the City, resulting from major events such as the collapse of Lehman Brothers. Whilst there is still a large workforce in Canary Wharf much of the travelling business community will be staying at home.

Hotels will now be hit quickly as corporates and consumers turn off the travel tap. Companies are already tightening travel budgets meaning fewer conferences and meetings, and will trade down, seeking cost reduction and no-frills conference packages and training. Whilst a fall in conference and consumer spend will be immediate, corporate cost cutting may take longer to feed through as new corporate rate negotiations are agreed.
Liz Hall, head of H&L research, PricewaterhouseCoopers said:

        “This blitz on corporate travel spend, rising job losses and the whole confidence issue, means that although London has been the powerhouse of UK growth and has seen the biggest boom, it will likely see the biggest fall as well.”


This recession differs from the very UK-specific 90s downturn. The current economic problems are of a global nature, with travel to the UK from abroad more likely to suffer. As a result the UK hotel industry and particularly London will contract in the short term.

        “In an effort to persuade consumers to venture out we can expect many more deals in 2009 - especially in January. Hotels will be hit hard as consumers paying from their own pocket may choose to defer spending plans on weekend breaks. Hospitality is a late cycle sector and as yet the real pain has not been felt,” she added.


The “Aldi” effect

In general, hotels have seen very good trading in recent years and many go into this recession from a relatively strong position. Intuitively, well managed groups with attractive products and brands and properties in prime locations will have a good chance of continuing to win market share over the next 18 months.

Liz explained:

        “Despite tougher times ahead there has been no shortage of new brands coming to town, keen to get a foothold in one of the most profitable hotel markets in the world. Budget, luxury, lifestyle and upscale operators are all keen to be active as the Olympics approach.”

        “Budget hotels have been the most resilient segment of the hotel sector and will benefit from the trading down effect. While no one is immune to the effect of a recession, those who offer attractive value for money products will appeal to cash strapped businesses and consumers. If the experience justifies the expense, many travellers may stick with these brands after the frost of the recession melts away.”
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