UK regional hotel investment growth set to continue

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2014 proved to be a positive year for the UK regional hotel market with 9.2% in RevPAR (revenue per available room) gain which was driven by strong occupancy and growth, according to the latest data from CBRE Hotels.

The current report suggests that there is plentiful headroom left for growth across all hotel revenue streams this year.

Regional UK hotel performance, due to its largely domestic nature, shows close correlation with that of the UK economy and is reflecting the continued economic recovery with Britain’s GDP ahead of any other G7 counterpart in terms of 2014 growth.

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Notably, the Services sector, including hotels, is the only sector so far to exceed pre-crisis output levels and emanates with news that the tourism industry in Britain could double in value to £257bn by 2025.

Hotels are amongst the few consumer-driven real-estate sectors and socioeconomic factors correlate strongly with trading performance and asset capital values. Unemployment in the UK continues to head in the right direction with the jobless rate falling to 5.8%; levels only seen prior to the global recession. Inflation remains low at 0.5% and as a result household spending has heightened towards the end of 2014.

CBRE Hotels believes that although occupancy sits almost 5 percentage points ahead of its pre-recession peak (despite a 25% increase in room supply since 2008); rate is some 3% behind suggesting that there is considerable headroom for continued growth in rate and RevPAR.

Robert Seabrook, executive director, CBRE Hotels, commented: “From an occupancy base of over 75% and apparent headroom across other metrics, provincial hotel operators have an opportunity for unconstrained performance growth with improvement in rate which will markedly boost total revenue and fall through to the bottom line.”

With a shortage of strong investment opportunities in other mainstream asset classes, it came as little surprise that the strong regional hotel performance has been noticed by investors and hotel transaction volumes for the regions surged to over £4 billion for 2014, up 250% year-on-year.

Given the health of the UK economy, growing consumer confidence and scope for further enhancement of hotel trading performance, the demand from developers to add new supply is inevitable. As a result, many prime locations, alongside an increasing number of secondary locations, have confirmed projects in the construction pipeline; however based on the completion of all developments, the regional UK supply increase will be nominal at +2.1% for 2015 and +1.5% for 2016.

Considering both closures and openings across the country reveals that, throughout the course of 2013 and 2014, the number of new rooms entering the regional UK hotel market was almost evenly matched by the number of rooms closed. This was largely due to a result of old stock and the potential for alternative development.

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