1 UK Hotels 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 hotel 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.