The big story on the operational side has been the speed of recovery in Revenue per Available Room (RevPAR), driven by a strong uplift in average daily rates (ADR). The UK regions led the initial recovery, fuelled by strong ‘staycation’ performance in 2021 and 2022. The upward trend in ADR has continued into 2023, and London has seen its performance accelerate as international arrivals return. London Hotel RevPAR for the first five months of 2023 was 21.6% above the equivalent period in 2019, driven by a 28.0% increase in ADR.
Overall, we believe that ADR’s have reached a new normal and it is becoming much less likely there will be a correction to pre-Covid levels. The current levels are being underpinned by the strength of demand, which has accelerated post pandemic, despite the squeeze placed on real disposable incomes. This is because households are prioritising holiday (experience) spend, supported in part by excess savings.
Operating costs and profit margins have been under pressure since post pandemic reopening due to the difficulty in attracting, and the rising cost of, available staff. These cost pressures have been amplified with significant increases in energy costs. With lenders scrutinising profitability more than ever to ensure appropriate Interest Cover Ratio’s (ICR’s) in the face of rising debt costs, protecting and even driving margins has become the focus. Where they can, operators have mitigated the impact of rising costs by delivering efficiencies, whether this be through improved operation or offering reduced service. Investment in enhanced sustainability standards is an option many are exploring which can deliver long term savings.
Notwithstanding differences between operators, there are some segments that are fundamentally more resilient to cost pressures. Economy hotels, serviced apartments and hostels are all segments where the limited service offering has insulated them (to some extent) from the recent upward pressures on costs.
Hotels have not been immune to the headwinds facing the wider real estate investment market. The rising cost of borrowing to finance acquisition has resulted in a mismatch between seller and buyer expectations which has significantly reduced deal activity year to date, with estimated volumes for H1 2023 totalling £825 million, some 66% below the 10 year H1 average.
As we saw over H2 2023, activity continues to be dominated by private investors, who are taking advantage of reduced buyer competition. As a group, their decisions are less debt driven, with wealth preservation and the inflation hedge offered by Hotels being key drivers. The active buyer pool beyond these private investors is thin, but there is a willingness to do deals where the specifics stack up, as demonstrated by Dalata’s recent acquisition of the Apex London Wall Hotel, which they have subsequently rebranded as Clayton Hotel London Wall.
Ultimately, the fundamental drivers of demand for UK hotels remain unchanged, and many of them have even accelerated post-pandemic. Hotels have one of the best growth stories across the real estate spectrum, offering the flexibility to drive income and profit, whether through changing manager, brand or operational structure. This flexibility, alongside its credentials as an inflation hedge, are moving the Hotels sector up the target list for a wide variety of global investors.