UK hotel market hits its peak

Hotel prices in the UK have fallen for the first time in four years adding further fuel to the suggestion that the peak of the hotel property market may have been reached, new figures show. 

A reliable investment, hotels produce constant and predictable returns. They represent an alternative to investing in traditional property markets, such as the residential sector, but many hoteliers are currently being forced to lower their prices following a fall in demand for hotel accommodation. 

The latest Hotel Bulletin: Q1 2016, published by HVS, AlixPartners and AM:PM reveals that the UK’s hotel market saw its first decline in average RevPAR (rooms revenue per available room) in four years during the first three months of 2016. 

The report suggests that many investors are currently delaying decisions due to various economic factors, including the fact that performance growth is now being driven by rates rather than occupancy which means that if rates are then cut to stimulate demand, hotel values could start to soften.

Hotels in Aberdeen saw the sharpest decline in RevPAR, down 37% year-on-year, skewing overall results across the 12 cities analysed. But even excluding Aberdeen’s results, the overall market grew by only 1%, its lowest increase since Q1 2012.

Unsurprisingly, hotels in London continue to attract the greatest level of investment. But the Index shows that the RevPAR fell by 2% in Q1 2016, their fifth consecutive quarter of flat or declining figures. 

“These figures give us a strong indication that the peak of the UK’s hotel occupancy market has been reached and the growth we are seeing now is rate driven rather than occupancy driven,” said HVS chairman Russell Kett. “For the moment there continues to be strong interest in hotel investment in most parts of the UK, which could continue into 2017, but investors are currently delaying decisions because of uncertainty fuelled by a combination of terrorism concerns, the forthcoming Brexit vote, China’s economic situation and the US elections.” 

Kett believes that there is a “risk” that some operators will cut rates in an attempt to stimulate demand, forcing competitors to follow suit. 

“Once room rates fall across the hotel sector the likelihood is that values will soften. This is a big concern for London’s hoteliers, particularly with the large number of bedrooms due to open in the next 12 months unless demand starts to pick up again,” he added. 

Cardiff was the best perfuming city in Q1, with an average RevPAR increase of 8%, largely due to the World Half Marathon Championships in March. The fact that demand has not been constrained by new supply means that Cardiff has been in the top three best performing cities for the past four quarters. Since December 2011 only 18 new bedrooms have opened in the city. 

Birmingham was the second best performing city in Q1, with RevPAR growth of 7%, despite supply growing by nearly 800 bedrooms over the past two years. Investment in Birmingham airport means that this trend is likely to continue as new flight routes come on stream.