1 UK forecast 2017/2018

Times change. Ten years ago, hotels were on the 2017 was always going to be a hard year to follow brink of a sharp slump in demand as the financial as the weak pound effect reduced and comparisons crisis meant economic growth contracted and to the first half of 2017 have been challenging. businesses and consumers tightened their belts. We predict ADR in London will manage 0.2% For hotels, it was a tough trading environment growth this year and 0.8% in 2019 driving a 0.3% and there was considerable pressure on room rates gain in RevPAR this year with an additional 0.3% and discounting meant volume was salvaged at growth in 2019. the expense of rate. While London shrugged off The UK hospitality sector employs 2.9 million the recession after about 18 months, cushioned by a people and represents 10% of UK employment as weak pound, in the Provinces it was a more painful well as 6% of businesses (UKHospitality 2018). and slower recovery as the recession and public As hotels grapple with rising wage and operating sector cuts meant room rates struggled for closer costs, we look at whether Artificial intelligence to three years. could offer solutions for some of the productivity But, in recent times, sustained by the rise in demand and employment issues hotels face. from business and leisure travel, London and There is an expectation for continued strong regional hotels have prospered. Provincial hotels investment from Europe and the Middle East looking have enjoyed monthly ADR growth since April 2013 for good opportunities and strong returns, although and we are forecasting further growth in 2018 for a variety of reasons, including Brexit related and 2019 of 1.3% and 1.2% respectively, albeit at uncertainty, we expect 2019 to see deal activity a slower pace than of late. Leisure travel continues levels to fall by around 34% to c.£4.5bn. to be supported by the weaker pound but slowing economic growth and high levels of new supply What will the next ten years bring? After a long in many cities are likely to dampen performance. period of open and positive relationships around Occupancies are at record highs at 76% and we the world, the skies are now darkening in the trade can’t see much more growth in 2018 or 2019. arena, just as Britain seeks to find a way to forge new trade relationships with other countries after London continues to operate at a globally high Brexit. Andrew Sentance, writing in the Times, level and our lower growth forecast should be on 4 August 2018 warns that a new wave of global viewed against this backdrop. We are forecasting protectionism is probably the greatest threat to a marginal occupancy gain in 2018 of 0.1% economic prosperity here in the UK and across and a 0.5% fall in 2019 as new supply additions the world in the next five to ten years. continues to bite and political uncertainty dents corporate demand. David Trunkfield Head of Hospitality & Leisure, PwC Dr Andrew Sentance Senior Economic Adviser, PwC

6 UK Hotels forecast 2018/2019

Provinces: growth slows but year, although there are downside risks Supply: a balancing act hangs in there in 2019 and beyond if recent US tariff People want to travel and the sector While growth is forecast for both 2018 policy changes were to escalate into a continues to evolve to meet their needs. and 2019, the pace is a little weaker wider international trade war. Economic New supply provides travellers with than we predicted in our prior forecast growth combined with the strong dollar shiny new accommodation products and in March. A supply spike in 2019 could and euro relative to sterling continues to brands, but without stronger demand, weaken trading in some cities and a be good news for hoteliers. current levels of new supply are likely more restrained short breaks market What will drive travel demand? to dampen trading performance in is anticipated. Events such as the ICC some London locations as well as some Cricket World Cup to be held in England Globally, international tourism trends regional cities where the demand/ and Wales between the end of May and remain buoyant and record numbers of supply equation becomes unbalanced. mid-July may be beneficial. visitors are coming to the UK. The weak The accommodation pool for travellers pound will also help but the impact is continues to widen and deepen and Overall occupancies are high by historic unlikely to see a return to H1 2017’s other accommodation providers are also standards, realising 76% since 2015 exceptional inbound leisure tourism upping their game, serviced apartments, (they were 69% back in 2009). In 2019 levels. Economic growth should continue hostels and home share products are all occupancy is forecast to remain flat but to underpin travel growth and demand evolving. Some hoteliers have started we anticipate that ADR could see further for accommodation. Business travel, a to embrace the shared home market, modest growth to £73 (in nominal vital and profitable sector for hotels, has for example, Marriott’s Tribute brand, terms), helping to push up RevPAR shown mixed trends which are expected Hyatt’s Oasis, and Accor’s onefinestay. by 1.2%. to continue as the Brexit negotiations It’s a tough operating UK economic prospects: uncertainty continue. The consumer income squeeze environment: how can hoteliers has dampened business investment suggests that domestic short breaks are plan for the future? growth but weaker pound has unlikely to see robust growth this year, although the sizzling summer and a weak helped tourism In an industry where EU nationals pound may help. Civil Aviation Authority historically accounted for nearly a Uncertainty has dampened business data suggest robust passenger numbers at quarter of the workforce, the recent news investment growth and this may most UK airports in Q1 2018. from the ONS that the number of people continue, but the weaker pound has been moving to the UK from EU countries in helpful to tourism. Our latest view is for 2017 has fallen to the lowest level for four UK GDP growth to remain moderate at years, only serves to confirm the struggle around 1.3% in 2018 and 1.6% in 2019. that UK hoteliers have faced in retention Consumer spending growth is expected and recruitment. Almost 90,000 to moderate to only around 1% in 2018, vacancies were recorded each month but may pick up slightly next year as on average in the quarter to June 2018 real wages recover. The stronger global a position largely unchanged over the economy should continue to have some past year (UK Labour Market Survey, offsetting benefits for net exports this July 2018). 7

.3% 1RevPAR growth in 2018

For an industry that relies so heavily Brexit to shifts in consumer confidence on people to deliver its products and to trade wars. While AI certainly doesn’t services, the shortfall in availability of present a panacea for these challenges, EU nationals in 2018 has pushed up the it’s one of the major tools at hotels’ cost of attracting and retaining staff. disposal to counter the headwinds When combined with other operating and drive efficiencies and a recovery cost increases such as the weak pound in margins. pushing up the cost of imported goods Deal talk used by the industry, business rate increases and below inflation revenue UK hotel deal volume totalled c. £3.8bn growth, annual profit growth in 2018 in the first half of 2018, up over 80% and 2019 appears likely to be difficult from the volume experienced in the first to achieve. Following a number of six months of 2017. By year end 2018, years of strong revenue growth when we forecast total hotel deal volume to there was not the imperative to focus be c. £6.8bn, nearly a 40% increase on on costs, prudent operators and owners the total deal volume experienced in need to adopt a stringent approach 2017, and the second highest volume to operating costs growth in 2019 of investment in the UK after the record to preserve profitability. levels of £9.3bn in 2015 Could AI help solve cost and While we anticipate continued strong productivity issues? inward investment from European and Far Eastern investors, we expect Five years ago Artificial intelligence (AI) a slowdown in portfolio deal activity sounded like science fiction (Yuval Noah during 2019. This is due to a recent wave Harari, 21 lessons for the 21st Century). of new longer-term investors entering Today, some of the ways hotels can use the UK hotel market compared to the AI include personalising the customer previous generation of US Funds with a experience through AI and related typical 5 to 7 year investment horizon. technologies; supplementing the pace For those few US Funds still holding and efficiency of back office processes UK hotel portfolios, we have also seen and Robotic Process Automation (RPA) a tranche of refinancing over the last augmented by AI; improving workforce 12-18 months, taking advantage of productivity through better allocation the favourable low‑cost debt terms of staff and predicting customer churn. currently available. As a result of these Realising the opportunities presented factors, together with forecast investor by AI is all the more important at a time uncertainty around UK’s upcoming when – as PwC’s forecast shows – the departure from the European Union at hotel sector faces slowing RevPAR the end of March 2019, we are forecasting growth and substantial headwinds from 2019 deal activity levels to fall by around a wide variety of sources, ranging from 34% to c. £4.5bn.

12 UK Hotels forecast 2018/2019

What will support demand in the What else will support demand? location as not all areas of London have rest of 2018 and 2019? been impacted, for example the West End Clearly London has a wealth of theatres, appears to have been less impacted, One of the largest global hotel groups attractions and festivals attracting global according to a leading hotel operator. told us that in 2017, they (and the London visitors throughout the year. Demand for A shortage of hotel rooms should market) had benefited from increased international conferences and meetings not be a factor holding back tourism demand from financial institutions and corporate events is also strong and growth in the future. Tourism visits are and government as a result of Brexit should support demand. Still to come in already at record levels and forecast to activity, but that demand had now sport in 2018 is the Track Cycling World grow further. However, the increased slowed down. Ongoing economic and Cup at Lee Valley Velo Park and three competition is a headache for some political uncertainty could continue to American football games. In January hoteliers in the short term and serviced slow business travel in 2019. In addition, 2019, the NBA London Game returns apartments and a growing Airbnb the recent slowdown in the Eurozone to the O2 when the New York Knicks inventory add to the mix. economy (PwC Economic Outlook July and the Washington Wizards draw in 2018) and any escalation of international the crowds. In terms of major events, It’s a tough operating trade tensions may also mean less strong the Cricket World Cup is taking place environment: how can hoteliers business travel trends. Hoteliers we have in 2019 and will see games played in plan for the future? spoken to already report some resistance England and Wales. In London, there are According to the UK Labour Market to rate increases during the RFP process five games apiece at the Oval and Lords this year. Survey in July 2018, the hotel and with the final on 14 July at Lords. restaurant sector had the highest On the other hand, for holiday tourists Europe’s largest infrastructure project vacancy rate of any sector, with almost from our key inbound European markets, Crossrail is almost complete and is 90,000 vacancies recorded each month the weaker pound (by historic standards) now expected to open in 2019, further on average in the quarter to June 2018 means London remains affordable for linking‑up west, central and east London. a position largely unchanged over the many leisure groups and compares well The line could bring an extra 1.5 million past year. to competitor cities such as Paris, and people to within 45 minutes of central For an industry that relies so heavily this should support inbound tourism London and link and transform London’s and higher end tourist hotels. But, there on people to deliver its products and key employment, leisure, tourism and services, the shortfall in availability of EU will be no hotel uplift from the biennial business districts – Heathrow, West End, Farnborough International Airshow nationals in 2018 has pushed up the cost the City and Docklands. The impact will of attracting and retaining staff. in 2019. And while 2019 is the 75th enable further economic development, Anniversary of the D-Day Landing, which will support hotel demand in the In addition, the weak pound has events are expected to be more Caen future. adversely affected the cost of imported than London focused. goods used by the industry. Supply pluses and minuses “For the time being New supply additions are likely to be a challenge for 2019 performance. Around London’s magnetic 5,000 rooms will be added in total in attraction to 2018 and a further 4,300 rooms in 2019. This is on top of the 38,000 rooms added international tourism in the previous five years. appears to be immune” On the positive side, London has more modern, in some cases innovative Melvin Little, Crystal Holidays, July 2018 products, to help attract travellers from all price segments. It also depends on

17

.2%

1forecast RevPAR nominal growth in 2019

Further modest ADR growth growth in 2018 of 1.3% and a further terms. The gap was at its narrowest in forecast for 2018 and 2019 1.2% in 2019 (taking ADR to £72 in 2017 when RevPAR was only about 4% With average occupancy at 76% last 2018 and £73 in 2019). below in real terms. We forecast nominal growth of 1% in 2018 and 1.2% in 2019 year, Provincial hotels continue to be RevPAR growth each year but able to drive price. There still remains which nudges RevPAR from £54 in 2017 still remains 7% below 2007 in to £55 in 2018 and 2019. some scope for further recovery in real terms ADR in real terms as real ADR still lags (See Table 1, Figure 2 and Figure 3). pre‑recession peaks, however we forecast Provincial RevPAR is forecast to end slower growth overall, anticipating ADR 2019 23% ahead of pre-recession peaks in nominal terms but lags by 7% in real

Figure 2: Regions RevPAR Growth Rates (Nominal vs Real – Index=2007)

150

100

50

0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F

Nominal RevPAR (regions) Real RevPAR (regions)

Source: PwC

24

2.9 % economic growth in the UK Hotels forecast 2018/2019 US this year

Regional prospects The latest breakdown of the national US accounts shows a more detailed picture In contrast to previous years where The US economy has continued to of the sources of growth, which include: London has generally had one of the perform well into 2018, supported by strongest growth rates of any UK region, • Household consumption held up as steady inflation, low unemployment, our latest projections suggest London’s a key source of economic growth strong consumer spending and increasing growth rate may fall to only just above throughout the period, but there are wages. The latest figures for the second the UK average in 2018-19. This is partly signs that households remain cautious quarter of 2018 showed the economy due to the greater exposure of some in their spending habits. This was expanded at an annualised rate of London activities (e.g. the City) to reflected in the gradual uptick in the 4.1%, the strongest for four years. adverse effects from political uncertainty, savings ratio from 11.9% in the last Whilst wage growth has been slow to as well as growing constraints on the quarter of 2016 to about 12.2% in follow the overall economic pick up capital in terms of housing affordability the fourth quarter of 2017 – despite (wages were only 2.0% higher than and transport capacity. about a million jobs being created in a year ago) there are signs that the Most English Provinces, as well as Wales, the Eurozone since the first quarter buoyant economy and low employment are projected to expand at close to the of 2016. are starting to put pressure on wages. UK average of around 1.3% in 2018, • The contribution of gross fixed capital Overall we are projecting 2.9% although the North East, Scotland and formation (or investments) was the economic growth in the US this year. Northern Ireland are predicted to lag biggest driver of economic growth Combined with the strong dollar behind somewhat with growth of only in 2016. relative to sterling, this is continued around 1% this year before recovering good news for UK hoteliers. somewhat next year. • Other sources of growth like government consumption held Table 2: It is important to note that regional steady as austerity has eased and output data are published on a much government budgets are now growing Key economic projections less timely basis than national data. in line with economic performance. As a result, the margins of error around 2018 2019 these regional output projections are However, it is also becoming clear that even larger than for the national growth the Eurozone is increasingly reliant Real GDP projections, so they can only be taken as on external demand as a key source of 1.3% 1.6% growth illustrative of broad directional trends. GDP growth. This could make the bloc more susceptible to uncertainties in the Consumer Europe – key source markets international trade arena and could spending 1.1% 1.3% for tourism explain some of the softening of the growth Ten years on from the global financial survey data which came out recently. Inflation crisis of 2008, the Eurozone is exhibiting 2.5% 2.3% (CPI) signs of broad-based growth. Last year, for example, the bloc grew at an estimated 2.3% – the fastest rate of Source: PwC main scenario July 2018 growth recorded since the financial crisis.

28 UK Hotels forecast 2018/2019

Travel data for Q1 2018 data will be conclude that 2018 will follow a similar For 2018 overall, Visit Britain released by the Office for National trend. Q1 statistics certainly show most (the national tourism body) remain Statistics (ONS) on 5 September 2018 airports saw robust levels of passenger positive, suggesting data on flight until then we will not be sure if weaker traffic (although inbound and outbound). booking patterns as well as anecdotal trends from the end of last year continued feedback from the industry mean So far, demand in 2018 has been into Q1. We do know that air passenger that the second half of 2018 should see helped by the Royal Wedding, a strong statistics from the Civil Aviation growth on 2017. Furthermore, data Farnborough International Airshow Authority (CAA) show that passenger shows healthy growth in passenger and the RAF 100 celebrations, as well numbers at UK airports increased by numbers at most UK airports for the as many unique sporting and cultural over six per cent in 2017, and the number last 12 month. In total 41.7m visits are events around the country, including of actual flights increased by 37,000. forecast for 2018 according to official the European Sports Championships in They report that 265m passengers passed data (Visit Britain website 16 July 2018 Scotland and the Gymnastics World Cup through UK airports last year and they # 2018 Forecast). in Birmingham. Figure 4: Overseas visits to UK continue to grow

50,000

40,000

30,000 Visits (000s) Visits 20,000

10,000

0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: ONS 2018 29

Weaker pound continues to support Furthermore, separate holiday intentions and meetings in 2017 compared to 419 in inbound leisure tourism research from industry specialists, BDRC 2016, but the average size of the events The fall in the pound and euro helped concludes that most UK destinations will was 72 delegates compared to 67 in 2016. actually see fewer UK visitors this year, drive record visitor numbers in 2017, More encouragingly, recent data from as the proportion of Briton’s considering which benefitted hotels in London the Meetings Industry Association (MIA) a staycation holiday within the UK in and other major cities. While the reported that the UK meetings sector 2018 is set to decline. Fewer than seven in exchange rate ‘effect’ has now worn off had a strong start to 2018. Their data ten of those interviewed earlier in 2018, a bit, London still remains good value for enquiry levels, numbers of meetings intended to take a UK break – a fall from regarding hotel rates when compared and average rates for the first five the three-quarters that intended to do so with some other European destinations months of the year are all higher than in the last three years of their research. such as Paris. the corresponding period in 2017, The fall is driven by a fall in planned according to MIA’s quarterly update. High value business travel impacted short breaks. Balancing this they predict The average number of meetings held that holidays of four or more nights are Strong global and European economic between January and May of 2018 were set to increase, supporting the WTTC growth should support business travel 10% higher than the same period in research suggesting Britons are trading but inbound international business 2017 and 25% higher than 2016, while their overseas breaks for a domestic visits to the UK saw year-on-year growth the average daily delegate rate (DDR) holiday and taking a longer holiday in declines in 2017, falling by 4% to 8.8m. has also grown steadily by 10% over the process (Jon Young BDRC in the due possibly to uncertainty over Brexit, the last three years to £43.50. continued cost conscious corporate Tourism Society Journal, Summer 2018). policies as well as difficult comps No mega events in 2019 Meetings and events sector with 2016. It’s a high value segment continues to recover slowly While there are a variety of events for hotels and it’s estimated that the scheduled for the UK (and we discuss Meetings and conferences are a key overseas business traveller spends up some of these in the London and element of hotel demand but are often the to three times as much as a domestic Provinces demand sections) apart last demand segment to recover. Demand business traveller. from the ICC Cricket World Cup, was badly impacted by the recession and there are no mega events planned for Less buoyant outlook for domestic recent years have seen the sector struggle 2019. Also, the biennial Farnborough short breaks expected to find ways to maximize revenues. International Airshow, will not return While research from the World Travel The latest UK Conference and Meetings until 2010. The Show alternates with & Tourism Council (WTTC) together Survey 2018 (UKCAMS) shows 2017 was the Paris Air Show, which is held in with Oxford Economics, suggests more another difficult year. In 2017, there were odd numbered years. people are opting to take staycations 1.29m overall conferences and meetings instead of travelling abroad on holidays held in the UK, an almost 11% decline on recently (Travel Weekly, 22 March 2016’s 1.45m. UKCAMS shows that the 2018), this does not necessarily benefit number of conferences was almost on a hotels and increasingly holiday villages, par with the average over the last decade caravans and home share are popular of 1.31m. In terms of events, venues accommodation choices. hosted an average of 373 conferences

31

People continue to travel and the hotel increase by around 9,500 rooms in sector continues to evolve to meet their 2018 and 2019 bringing London’s supply needs. New supply additions provide to around 160,000 rooms by the end of travellers with shiny new accommodation 2019. In addition serviced apartments products, but current levels of new supply and shared accommodation adds to are likely to dampen trading performance consumer choice. in some cities where the demand/supply Outside London, new supply pressures equation becomes unbalanced. are also building in a number of cities. For the brands it’s all about market share Overall, we could see over 40k rooms and having a full range of products in added in 2018 and 2019. Cities with large their portfolios so customers never have pipelines include Manchester, Belfast, to leave their brand site. To do so they Edinburgh and Liverpool. are acquiring, building, extending and Budget hotels, for so long one of the rebranding. For example, IHG’s Kimpton most dynamic segments of the UK and Voco brands are coming to the UK; hotel market, continue to build and add and Marriott has launched its Tribute extensions. In 2018 and 2019 around home share brand. 15k rooms opened/will open. Brands London, in particular remains a focus opening new rooms include; Premier for developers and continues to contend Inn, hub by , Travelodge, , with high levels of new supply and this HI Express, Hampton, Moxy, Sleeperz, is set to continue into 2019. The total Tune, Yotel, easyHotel, Z, and number of hotel rooms in London will Marston’s Inns.

34 UK Hotels forecast 2018/2019

If you can’t beat them: hotels In terms of the segments developers However it’s not really that simple embrace the home share space are focusing on, the capital is seeing anymore. Individual travellers as well as The supply landscape is increasingly more upscale developments with corporate buyers are seeking out longer more crowded and competitive as 4 star hotels dominating the rooms stay accommodation products. Airbnb’s hotels vie with each other, as well as pipeline (34% of all rooms), followed by inventory continues to grow by as much with serviced apartments and shared 3 star hotels (21%) and budget (20%). as 30-35% in London as well as across accommodation providers like Airbnb. Serviced apartments account for around the regional cities. And, unsurprisingly, This is true across the UK and not just 11% of the pipeline. some hotel groups have entered the home share space too. in London. (See Figure 7). and Hostmaker recently debuted the home-sharing platform Tribute Portfolio Figure 7: Homes adding some 200 home offerings Four star hotels dominate London’s room pipeline across the London area. In addition there is Hyatt’s Oasis, Accor’s onefinestay, Stay One Degree, Homestay, Homestayin and 4,000 Love Home Swap. But, on a cautious note, Bjorn Hanson (Professor at NY’s Tisch 3,000 Center for Hospitality & Tourism and ex global PwC Hospitality & Leisure Leader) recently pointed out in Hotels Magazine, 2,000 that it’s challenging for hotels to find an economic model that works in the sharing economy. 1,000 Members only clubs further widen consumer choice, for example, White City Soho House is set to open in the former 0 BBC headquarters in White City later this 5 star 4 star 3 star 2 star Budget Apartments month, featuring a cinema, rooftop pool and bar, screening room, gym, club space Source: PwC analysis/STR as well as 45 bedrooms. 35

Provinces

A geographically diverse area, but in Change through rebranding general new hotel development activity Intercontinental Hotels Group (IHG) “Hotels are extending remains strong across the Provinces, has revealed the debut UK locations for its which is not surprising given the portfolios so they can boutique Kimpton Hotels and Restaurants sustained stronger trading we are seeing and upscale Voco Hotels brands following win the traveller loyalty in many cities. Some cities are taking the a deal made with Covivio in May. brunt of the new supply. Hoteliers we Covivio (formerly known as Fonciere across their entire speak to report supply concerns across des Provinces). IHG agreed with Covivio a number of markets. hotel lifecycle –moving to rebrand and operate 12 existing hotels Around the country, cities are seeing and one in the pipeline. Now, IHG has from economy, select significant room additions. For example, revealed which brands the hotels will service, long stay, home Belfast will see upwards of a 1,000 new operate under. rooms available during 2018, a 25% The flagship Principal London in Russell share, and boutique to increase in the city’s capacity over 2017 Square will become the capital’s first (BBC News 6 Jan. 2018) and a further luxury… they want you Kimpton Hotel later this year, while 80 rooms are due to open in 2019. the Principal Manchester will rebrand to never leave…” New rooms include the Grand Central to Kimpton in 2019, along with the on Bedford Street and Marriott at City Samantha Van Leeuwen, Head of Hotels Principal Edinburgh Charlotte Square Quays. In Scotland, Edinburgh will see and Venues, PwC and the Principal Blythswood Square around 500 new rooms open this year Hotel in Glasgow. and a further 1,549 rooms in 2019. Glasgow sees 200 rooms open this year Marking the Voco Hotels debut in the UK, and around 915 in 2019. Even Aberdeen, the Principal St David’s Hotel in Cardiff so long a difficult market, sees over will rebrand later this year. Further Voco 900 new rooms in total added in 2018 properties are expected to be announced and 2019. Manchester will add around soon. The Principal Grand Central Hotel 900 new rooms in 2018 and 1,200 in in Glasgow, De Vere Oxford Thames 2019. Liverpool increases its hotel stock and the Principal Oxford Spires Hotel by 600 new rooms this year and 960 are expected to join IHG’s portfolio in rooms in 2019. Q3 this year. Newer brands include Marriott’s budget lifestyle brand, Moxy. In 2018 and Chester and Edinburgh will see new properties in 2019. A new 224 bedroom Moxy hotel is set to launch at the National Exhibition Centre in Solihull in 2020.

42 UK Hotels forecast 2018/2019

2017 rebound on strong H2 Ribbon hotel portfolio (c. £750m), half of the year. This has informed our 2017 deal transaction volume reached Lonestar’s remaining Amaris portfolio expectation for a further c. £3bn of deals c. £4.92bn, up 34% on the year prior, of and Hilton hotels (c. £600m) to close in H2 18, resulting in a forecast but still down from the record £9.3bn in and Oaktree’s Saco Apartments business total 2018 deal volume of £6.8bn. (c. £430m). 2015. The 2017 improvement was driven What to expect for 2019? by a series of large portfolio deals which Single asset deals totalled only c. £0.6bn There is an expectation for continued closed in the second half of the year, during H1 2018, the most notable being strong inward investment from Europe coinciding with an increased sense of the hotel development site at 5 Strand and the Far East looking for good macroeconomic stability. (c. £90m), the Waldorf Astoria Edinburgh opportunities and strong returns, The most significant deals which – The Caledonian (c. £85m) and the especially given relative low value of transacted in H1 2017 were all single Premier Inn Kings Cross (c. £80m). the pound. Activity in part is being assets in London – the Grosvenor House The Wanda hotel development site at fuelled by the availability of cheaper Hotel (c. £600m), Doubletree by Hilton Nine Elms was also acquired for c. £59m finance including ground leases which Westminster (c. £190m) and Park Plaza with the buyer also agreeing to repay are now becoming more commonplace Waterloo (c. £160m). c. £160m debt. across the hotel sector. Long term fixed leases themselves have become far more H2 2017 saw three substantial portfolios Forecast for 2018 a large uplift common into 2018 with more hotels trade; Jury’s Inn acquired by Pandox on 2017 returning to this structure of leasing. (c. £800m); Q Hotels acquired by Despite the larger portfolio deals which Aprirose (c. £525m); and Tonstate’s closed in the second half of 2017, this There is also a continuing rise in investor UK Hilton Metropole hotel portfolio year’s deal volume is forecast to be appetite in alternative accommodation acquired by Henderson Park (c. £500m). around 39% higher than the prior year. such as serviced apartments, hostels This is primarily due to the additional and aparthotels. Portfolio deals continue to boost of significant portfolio deals in dominate into 2018 We anticipate however a slowdown 2018, which has resulted in portfolio deal in portfolio deal activity during 2019. Total deal volume for H1 2018 was at volumes already reaching 38% more by This is due to a combination of factors: £3.8bn, c. 80% higher than in H1 2017, the end of H1 2018, than the total level There has been a recent wave of new with hotel investors not yet seemingly of portfolio deal activity for the whole longer-term investors entering the UK deterred by the UK’s impending Brexit of 2017. at the end of March 2019. Portfolio hotel market compared to the previous transactions accounted for £3.1bn In H2 2018, we have already seen a generation of US fund with a typical (c. 81%) in H1 2018, compared to just portfolio deal of seven Hilton hotels 5 to 7 year investment horizon. For those £0.2bn for the equivalent 6 month period complete for c. £100m. In addition, there few US funds still holding UK hotel for H1 2017, with large ticket transactions are further number of large transactions portfolios, we have also seen a tranche becoming more commonplace as the rumoured to be currently in progress of refinancing over the last 12-18 months, competition for stable, high quality including the Zinc hotel portfolio, the taking advantage of the favourable hotels intensified. Noteworthy portfolio Midland Hotel, Manchester and the low‑cost debt terms currently available. transactions closing in H1 2018 all Beaumont Hotel, London. With these As a result of these factors, together with represented further significant exits by deals assumed to complete this year, forecast investor uncertainty around UK’s US funds from the UK hotel market – plus a number of other large London upcoming departure from the European including Starwood’s Principal Hotels assets rumoured to be coming to market, Union at the end of March 2019, we are portfolio (c. £860m), Apollo’s remaining we expect a degree of continuation forecasting 2019 deal activity levels to of the level of activity seen in the first fall by around 34% to c. £4.5bn.

45

Appendix 2 Methodology for the forecasts UK Hotels forecast 2017/2018

This section outlines in detail the PwC model used to forecast hotel occupancy, Average Daily Rate (ADR) and Revenue Per Available Room (RevPAR).

Data Econometric model Our hotels dataset provided by STR CPI were obtained from the Office of We developed a 2-stage least squares contained ADR, hotel room supply, National Statistics (ONS) and GDP data (2SLS) instrumental variables demand and occupancy on a monthly for key tourist markets were obtained approach that projects hotel demand basis. Macroeconomic variables such from the OECD; and these were available and price (ADR) using a two-stage as GDP growth, unemployment and on a quarterly basis. process with the specifications set out in the table below.

Table 3: Final specifications of the London and Provinces models London Provinces

Dependent variable Dependent variable Growth in London hotel demand Growth in Provinces hotel demand Explanatory variables Explanatory variables • Country-weighted GDP growth in the • UK GDP growth 1st stage previous year • Growth in Provinces ADR in the previous year • Growth in London ADR in the previous year • Growth in demand in the previous year • London hotel demand in the previous quarter • Quarterly dummies • USD exchange rate in the previous quarter • Quarterly dummies

Dependent variable Dependent variable Growth in London ADR Growth in Provinces ADR Explanatory variables Explanatory variables 2nd stage • Growth in London hotel demand • Growth in Provinces hotel demand • Quarterly dummies • Growth in Provinces ADR in the previous year • Quarterly dummies

1 Growth weighted by GDP growth in main origin countries of London hotel guests, which include North America (US and Canada), Europe (, , , Ireland, Italy, Netherlands, and Poland) and the UK. 46 UK Hotels forecast 2018/2019

Advantages of our econometric However, the challenge of producing Forecasts modelling approach robust estimates using the 2SLS Forecasts for ADR growth and hotel For the current forecasts, we conducted approach is the selection of ‘instruments’ demand were generated using PwC a literature review of academic research or variables that are sufficiently forecasts of macroeconomic variables, and tested several model specifications exogenous to price, but have an supplemented by additional forecast as part of an ongoing process to improve influence on hotel demand. data for hotel supply for London and model performance. Based on our Our model specifications includes the Provinces provided by STR to findings we used the 2-stage least squares quarterly dummies, the lag of GDP produce forecasts for occupancy rates. (2SLS) instrumental variables approach. growth, the lag of demand, the lag of Adjustments were made to ensure the comparability of STR data and an The 2SLS approach has several price growth, and the lag of exchange attrition factor was applied to simulate advantages. It does not require rates as instruments. Results from periodic drop-offs in rooms supply. any distributional assumptions for the Hansen J statistic suggest that the RevPAR forecasts were constructed explanatory variables, e.g. variables may instruments are exogenous and the using ADR, demand and supply forecasts. take a binary or non-normal form. It is model is valid at the 5% confidence level. also computationally simple and allows Similarly, the t-tests in the first regression This model was used to generate the use of diagnostic testing procedures suggest that the variables are significant forecasts through to Q4 2019, and for problems such as heteroscedasticity, at the 5% level. This suggests that the these were generated separately unit roots and specification error. In instruments are both relevant and for London and the provinces, with addition, the two-stage approach also independent of the dependent variable. forecasts for the UK as a whole allows us to estimate demand and constructed from a weighted average price separately rather than projecting of the London and Provinces forecasts. occupancy rates directly, recognising that These weights were generated using these are driven by different factors. the share of London and Provinces hotel room demand as a percentage of total (London + Provinces) demand. Contacts E: [email protected] E: T: (0) +44 7212 20 8510 Consultant Hotels Senior Stephen Broome E: [email protected] T: (0) +44 7213 20 4995 of Research Head &Leisure Hospitality Hall Liz E: [email protected] T: (0) +44 6397 7804 20 Leader &Leisure Hospitality UK David Trunkfield E: [email protected] [email protected] E: T: (0) +44 9366 7804 20 Partner Philip AShepherd E: [email protected] T: (0) +44 7213 20 2068 Adviser Economic Senior Sentance Andrew E: [email protected] T: (0) +44 7212 20 2974 Leader Hotels UK Samantha Ward

Consulting Services Consulting Macroeconomic Manager, Senior Snook Richard E: [email protected] T: (0) +44 78 4156 7264 intelligence of Artificial Director Rob McCargow E: [email protected] T: (0) +44 7212 20 1195

UK Hotels forecast 2018/2019 47

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