Hotel Update
An update and outlook on the UK hotel market
Operationally, Q3 has seen continued strong top-line performance in the UK hotel market, with average daily rates and RevPAR appearing to now stabilise and grow at a sustainable rate, following the rapid post-covid recovery seen in the previous couple of years.
According to Costar/STR data, London RevPar stands at £157 in the 12 months to September 2024, a modest increase of 1.7% year-on-year, whilst the UK market as a whole saw a strong increase in RevPar of 3.4% year-on-year to £94.
Edinburgh has performed particularly strongly, with RevPar in the Edinburgh Centre submarket up 14.3% year-on-year as of September 2024.
The cost of living pressures seen in 2023 and H1 2024 saw the sector characterised by consumers opting for budget hotels in order to lower costs, which caused the mid-market operations to feel the biggest squeeze. However, it does now appear that consumers are feeling these pressures easing and are now willing to spend their extra cash on a more premium hotel. Budget hotels have seen UK wide occupancy fall from 83% to 80% year-on-year, with this segment seeing a larger drop in London, falling from 86% to 80% year-on-year.
The luxury hotel market continues to perform well and was the least impacted segment of the hotel industry. This segment has been supported by large numbers of American visitors and a growing affluent middle-class in Asian economies (despite Chinese visitors having yet to return to pre-Covid levels), with this helping to fuel demand for the luxury market. This visitor type is anticipated to continue growing in numbers which should in turn support strong demand in popular tourist hot spots such as Edinburgh and London.
As per our last update, the sector is still being impacted by persistent cost pressures. Whilst inflation does appear to be under control, the sector is still grappling with higher levels of staffing and utilities costs, continuing to dent the bottom line. The strong top-line performance does still continue to outweigh the cost pressures facing hoteliers.
Moving into 2025, the issue of costs has been exacerbated following the recent budget, following the April 2025 increase in employer’s National Insurance Contributions and increase in National Minimum Wage. Whilst a number of hotel staff will be paid above the NMW, this has a knock-on effect, with higher paid staff bargaining for higher wages to reflect their skillset and responsibilities. UK Hospitality has estimated that the measures will result in a 10% rise in the cost of employment per person. Given the anticipated growth in demand, the stronger operators should be able to shallow much of this impact through higher RevPar figures.
There is additional concern around the generally gloomy feel on the economic outlook, with consumer confidence being impacted. If consumer confidence does drop, we may see a reverse in fortunes of the mid-market operations which have only just begun recovering, with consumers likely moving back towards more budget operations again.
In terms of the Capital Markets, investors continue to diversify away from traditional sectors into the living sectors, with hotels at the forefront. We continue to see strong investor appetite, particularly from institutions, with long-let franchises in established locations drawing strong interest owing to the index-linked reviews and covenant strength, in addition to the underlying strength of consumer demand for overnight accommodation.
Moving into 2025, we anticipate that investors will continue to be attracted to hotels owing to their strong performance and typically long leases for branded operations, and as such would expect a steady tightening in yields moving ahead, particularly for prime assets. It is of course possible however that investors may be wary of the impact of the budget on the sector, specifically regarding the increase in wage costs impacting profitability. We are watching for the budget’s impact on consumer confidence, however this could potentially see a reversal in recent fortunes between the economy and mid-market segments, with consumers once again tightening their purse strings and opting for a budget option over a premium hotel. This should further strengthen investor demand for well-located Travelodge and Premier Inn opportunities in particular.
Encouragingly, a recent survey has indicated that for the second consecutive year, London has been ranked by hospitality figures and investors as the most attractive European city for hotel investment in the year ahead, with around three quarters of respondents optimistic about the long-term future of the UK hotel market.