When investors think of London they are reminded of its steadfastness - a beacon of light in an otherwise gloomy global environment. Consequently, it is only natural to want to plough money into the hot spot, reaping the benefits of its economic and political position. When it comes to hotel investment, this impulse remains the same. However, recent figures suggest there could be some clouds on the horizon for the sector. In fact, it seems adventurous buyers are done with good old London and are considering pastures new.
Despite a solid performance in May, preliminary figures from BDO suggest hotels in the capital are continuing to lag behind their regional counterparts when it comes to growth. A 0.9 per cent year-on-year reduction in room rate was recorded in the penultimate month of Q2, taking the average to GBP 136.27. During the same time in 2012, the average room rate stood at GBP 137.45. While a 1.9 per cent increase in occupancy from 83.6 per cent to 85.2 per cent was noted - creating a room yield growth of one per cent from GBP 114.99 to GBP 116.12 - this follows a bleak April.
Confirmed figures for the first month of Q1 show a one per cent drop in average daily room rate, a 0.7 per cent fall in daily room occupancy and a 1.6 per cent reduction in yields per available room. Conversely, May saw a 4.1 per cent rise in occupancy for regional hotels (from 72.7 per cent to 75.7 per cent) and a yield increase of 2.3 per cent from GBP 44.65 to GBP 45.67. With positive results preceding in April, there is clearly a trend to move away from London among investors.
But is there really anything to worry about? Should we be celebrating the expansion of horizons about buyers? Ultimately, London's position as one of the most popular cities can't be denied. Revenue and occupancy are still higher in the city than elsewhere in the UK, despite a lack of growth. After all, the capital receives countless business travelers and tourists each year. What's more, according to PwC, things will improve in the future.
The firm claims international tour operators are starting to put the city back in their programmes after leaving it out last year due to concerns about overcrowding during the Olympics. This will undoubtedly see more people heading to the city. There is also lots of regeneration in London, drawing yet more people through its borders. One of the most exciting is the transformation of Silvertown Quays in the Royal Docks. The GBP 1.5 billion deal with the Silvertown Partnership will turn the quarter into an area of innovation, attracting global brands and creating over 9,000 new jobs.
The site will contain a guest quarter with space for an incubator, technology businesses, 1,500 new homes, restaurants, cafes, galleries and leisure facilities both on and off the water, drawing in people from across the globe.
Investment in the UK hotel market is also growing overall, meaning London will undoubtedly enjoy its share in the future. According to Jones Lang LaSalle, during the first half of the year Britain was the most active transaction market among EMEA countries. Investment volumes amounted to EUR 2.3 billion - 41 per cent of total volumes.
However, London will experience another tough year. PwC claims this is partly due to saturation, with a 6.5 per cent (7,700) increase in rooms noted last year and a further 4,600 expected for this year. Yet, there is certainly no cause for concern. In fact, Robert Barnard from BDO believes the latest figures suggest a cause for celebration.
"It is encouraging to see operators across the country posting year-on-year growth in rooms yield," he said. "Hotels in London, in particular, will be relieved that they are back in the black after several difficult months. The market remains challenging but the sector is, as always, putting up a strong fight." In a bid to attract more visitors, many hotels are employing a range of new tactics, including selective price discounting.
So what does the future hold for London? Undoubtedly it is going to lose some of its overall market share to growth in other regions. However, this is a positive sign for the sector as a whole, ensuring the market isn't so concentrated. HS2 will undoubtedly also have an impact, improving commuter links and enabling people to stay outside of the capital. Nevertheless, the city will continue to hold its status in the international community, evidenced by rising prime property prices and foreign investment levels. Consequently, investors will always do well to look to London - but alternative regeneration areas may prove the best bet in the saturated market.
- Saturday 06 July 2013