PwC Hotels Forecast update

According to PwC’s latest UK Hotels Forecast Update, the outlook for hotel deals in the UK this year remains flat as a surge in room supply, slowing global and UK economic growth and ongoing uncertainty relating to Brexit is expected to provide a challenging environment for performance growth.

Hotels in London are expected to maintain high occupancy levels, but supply growth is poised to  limit occupancy growth this year to a “marginal” 0.3 percent.

PwC expects average daily rate (ADR) to keep growing with an uplift of 1.4 percent in London for the next two years, taking ADR up £2 to £151 in 2019 and £153 in 2020. Gains in ADR will drive revenue per available room (RevPAR) growth by 1.7 percent in 2019, taking RevPAR to £126. In 2020, growth is anticipated to see a further  1.4 percent rise, taking RevPAR to £128.

“London saw stronger-than-expected demand in the last three months of 2018 which transformed the year for the capital,” said David Trunkfield, head of hospitality and leisure at PwC. “Early signs in 2019 are that January has continued to see some good growth, with record occupancy levels and ADR gains driving RevPAR growth to over 5 percent. Weekend demand remains strong  and the weak pound continues to support tourism and hotels; however, there are worries tourists, especially from the EU, may adapt a ‘wait-and-see’ attitude toward visiting the UK in 2019.”

New supply grew by 2 percent in 2018, and Trunkfield expected new supply to increase by a further 4 percent in London this year. “With uncertain demand, weaker corporate travel trends and no blockbuster events scheduled this year, this could dampen hotel performance,” he said.

Outlook for the regions

January data from STR indicates the regions already are seeing softer demand and it expects this to continue this year, as high supply additions in many cities continue to affect hotel trading.

PwC’s latest forecast predicts a marginal decline in occupancy of -0.1 percent. As supply squeezes occupancy,  ADR is expected to see only around 0.5 percent growth, taking regional ADR to £73.

PwC expects RevPAR to edge up 0.4 percent to £55.1. In 2020, RevPAR will follow a similar pattern as weak occupancy (-0.1 percent) and ADR growth of 0.8 percent lifts ADR to £73 and buoys RevPAR by 0.8 percent, taking it  to £55.5, according to PwC.

“The regions have enjoyed solid RevPAR growth in recent years but 2019 is looking more difficult as domestic economic growth slows and high levels of new supply dampen hotel trading,” said Trunkfield. “While demand should be supported by festivals, exhibitions and events around the country, such as the ICC Cricket World Cup, the increase in new rooms remains a concern in many cities. A 3 percent increase in supply is expected in the UK as a whole this year. Edinburgh has seen around 3,000 new rooms open over the past five years and is expected to see a further 2,000 rooms open over the next two years. If trading weakens as we expect it will become harder to fill all the new rooms around the country.”

Outlook for deals in the hotel sector

Total deal volume for 2018 reached about £6.6 billion, a 36 percent increase on the previous year, making it the second highest ever year in terms of deal volume behind 2015, which saw a high of about £9.3 billion. Looking ahead, PwC forecasts for deal activity to decrease by around 10 percent to £6 billion.

“Deal activity for 2018 was a tale of two halves,” said Sam Ward, UK hotels leader at PwC. “The first half was dominated by portfolio transactions with the second half dominated by single-asset deals. Despite the continued uncertainty in the market caused by Brexit, this did not deter investors and deal volume reached near record highs.

“Investor appetite has remained strong so far this year with some portfolio deals having already taken place; however, the current uncertainty surrounding conclusion of the Brexit deal will likely overshadow the expectation for the same levels of continued inward investment from Europe and the Far East, despite the low value of the pound.”

The full forecast can be viewed online: https://www.pwc.co.uk/industries/hospitality-leisure/insights/uk-hotels-forecast-update-for-2019-and-2020.html