The hospitality sector in the UK has recently experienced stronger than anticipated trading performance driving a peak growth in occupancy and visitor rates. Hotels across the country have benefited from the weaker pound following Brexit poll and the influx of foreign travel, yet the shaky economic environment poses barriers to the growth of the industry.
The never-ending spring in the hospitality industry
In 2018 the British hospitality industry and particularly the London one is enjoying high performance and in many cases, record occupancies compared to previous years. We have recently observed a boom in overseas leisure travel influenced by the surge of North American visitors at a time when the Sterling is at its lowest against the dollar in 30 years. The yearly occupancy growth for London is expected at 2.3%, a significant increase from the same forecasts last year being the largest growth peak since 2012 when London hosted the Olympic Games.
The comparison between the average daily rates (ADR) and the occupancy rates in London and provinces (Fig. 1) shows that the correlation between the two metrics is not directly observed. This discrepancy indicates that other factors should be taken into account when determining the short- and medium-term development of the industry, making uncertainty a key driver of unsustainable growth.
Key risk factors
These results are impressive given the backdrop of corporate and consumer intent, terrorist attacks in recent years, and the high number of new supply openings. Nevertheless, uncertainty in the industry is due to increase as a result of slower GDP growth in the UK and the lack of direction surrounding the leave of the UK from the European Union. Even if this uncertainty is expected to give the industry a boost from the weak pound, this outlook seems to be unsustainable. The main factors that increase the overall risk for the sector come from the low increase in new hotel room openings and increased customer focus on more budget-friendly options.
The pie chart below (Fig.2) shows the accommodation under construction and expected to open during 2017 and 2018. The alternative accommodation providers, such as hostels, aparthotels, and shared economy services are beginning to attract not only leisure but also business travelers. They are also the key developments in the supply pipeline of the sector covering over than 50% of the active construction projects.
Overall, the historical data in the past decade and the forecasts for the coming years position the developments in the industry on a positive trend, given the boost in long-haul visitors and the favorable economic conditions. Conversely, the industry should also be cautious of largely depending on international travelers and the weak British pound and instead focus on a long-term perspective following the leave from the European Union.
Learn more about the impact of Brexit in our article “Brexit and what it means for British Small and Medium Business owners” .
Sources: PwC, BDO, Knight Frank