U.K. hotels are amid a post-pandemic recovery, a Knight Frank study reveals.
Hotels in London recorded occupancy of 82% in June, up 3.2 percentage points YOY, while hotels elsewhere saw growth of 4 percentage points to nearly 81% occupancy compared to last year.
Strong seasonal demand and continuing high inflation have resulted in many hotel operators pursuing a strategy of rate maximization in place of recovery of full occupancy, posting 8.5% and 7.6% ADR growth, respectively, in June.
“London’s performance during the first half of the year has seen ADR growth continue to trend upwards, and along with much-improved occupancy levels, this strong occupational performance is supporting profit margins and GOPPAR growth. This is a welcome counterbalance to the softening of yields that has resulted from the increasing cost of debt, and with hotels acting as an inflation hedge, investor appetite for the sector remains strong,” said Karen Callahan, head of hotel valuation and partner at Knight Frank.
The country’s hotel sector has proved to be a good hedge against inflation in returning to pre-pandemic levels amid a challenging operating environment. Hotels in London and the regions saw ADR rising by 23% in the first half of the year compared to the same period in 2019. With a less price-sensitive clientele, luxury hotels in London saw ADR grow 38% in H1 2023, while good leisure demand helped regional golf and spa hotels improve ADR by 40% in the same period.
A rising influx of international visitors is also aiding the hotel market recovery. London’s Heathrow Airport registered a record 5.2% month-on-month rise in international arrivals, driven by a 13.5% lift in passengers from Asia Pacific and a 4.3% increase in arrivals from the U.S. At 6.68 million, the total international arrivals were merely 1.9% less than that of June 2019.
Despite increasing costs, the robust increase in revenue has been resilient concerning departmental operating income. In the first half of the year, London recorded 37% growth relative to H1 2022, while the regions saw 17% growth compared to H1 2022. Hotels in London and regions saw department operating income higher than in H1 2019, rising by 7% and 12%, respectively.
This robust top-line performance has helped facilitate profit margins, which have been marginally below 2019 performance while seeing strong growth in actual GOPPAR performance. In H1 2023, GOPPAR in London and regions jumped 42% and 16%, respectively, compared to H1 2022.
Some hotel classes were better positioned to enjoy the benefits of the strong growth in revenue in a high inflationary environment. Some hotels, which benefited from leaner cost models, were able to absorb cost pressures easily.
GOPPAR made a full recovery in London and regions compared to H1 2019. Regions stayed ahead of London and registered a 3% rise compared to London’s 2%. London’s GOPPAR in the first half of the year was £82 ($104.58), while regional U.K. secured a GOPPAR of £29 ($36.98).
Considering the trading results, it is not surprising that inflation levels, despite their downward trajectory, continue to be elevated by services particularly in hotels and travel spending, said Philippa Goldstein, senior analyst, hotels & leisure at Knight Frank.
“Whilst the second half of 2023 will see ADR growth more stimulated by demand than inflationary pressures, the pace of ADR growth is likely to remain strong over the next quarter. RevPAR growth will be further underpinned by strengthening occupancy performance. London is set to benefit from the continued uplift in overseas arrivals, whilst revenue growth for the regions will come from a well-balanced mix of demand drivers and the focus on channeling a high-yielding segmentation mix,” Goldstein said.
HOTEL TRANSACTIONS
Hotel transaction volumes in the U.K. remained resilient in H1 2023, despite market headwinds, helped by the private markets (with sub-ÂŁ15 million/ $19.13 million ticket sizes) and opportunities, said Cushman & Wakefield in its latest report.
Additional volumes have been supported by office conversions, the study added.
According to Cushman & Wakefield predictions, an uptick in activity towards the end of the year is expected, with several key trades in Q3 and Q4 likely to be closed, and many major assets will be brought to market.