UK Real Estate has been facing a number of challenges of late largely focused around Brexit and structural shifts in regards to consumer behaviour and use of technology. For some sectors, such as logistics, this has thrown up opportunities. For hotels the positive implications of some of these shifts have been somewhat under the radar.

Whether the UK is in the EU or not will have little bearing on its appeal as a tourist destination, highlighted by the boost in tourist arrivals due to the weakening in the Pound immediately after the EU Referendum result. This tourist appeal is expected to continue beyond the UK exiting the EU in March 2019 with international arrivals forecast to increase 12.7% to 44.2 million by 2030. This will support operational performance, particularly in those key gateways cities that attract significant numbers of international tourists. For example, London is forecast to see a 12.5% growth in arrivals to 22.3 million by 2030. However, this expansion is likely to throw up regulatory challenges in terms of maintaining a sustainable balance between local resident and visitor need (see below).

Changing consumer behaviour also set to support demand

Changing consumer preferences for ‘experiences’, such as travel, will also support operational performance, driven both by international and domestic visitors.

UK households have increased spend on holiday accommodation abroad by 29.9% in real terms since 2009, with a similar trend seen across a number of European countries. This shift in spend is more marked when you consider that total household expenditure has declined 5.8% over the same period. Likewise, spend on ‘staycation’ accommodation in the UK has grown by 52.4% in real terms since 2009.

Those consumers driving this growth are the under 30s and over 50s. With millennials and Gen-Z consumers (largely those under 30) placing more onus on ‘experiences’, this is a trend that is likely to pick up pace over the coming years.

While there are a number of attractive operational drivers for UK hotels going forward, the sector does have its own unique headwinds that may be apparent at a submarket and geographical level. These include the development pipeline, softening corporate demand and shifting guest preferences when it comes to branding and type of offer.

Hotel stock due to grow 1.3% per annum through to 2023

From an operational perspective, one of key concerns is the volume of new stock coming to the market in 2019. According to STR, close to 23,000 new rooms will be delivered across the UK in 2019 on the back of the 15,000 delivered in 2018. By December 2023 this will total an additional 46,400 new rooms. While this is sizeable, in growth terms it averages only 1.3% per annum, lagging the historical five year average of 2.0%.

This national picture, however, does mask significant pipeline variations across regional cities and grades.

London accounts for 32.1% of total new rooms forecast to be delivered by the close of 2023 (approximately 14,900 new rooms). While there may be some very localised and subsector absorption risks, we expect that where these do materialise they will be short-lived. This is reflected in the continued RevPAR growth reported in 2018 (year-end growth of 2.4% year-on-year) in the face of a 3.3% growth in stock, highlighting that overall demand continues to outpace supply.

It is in those regional cities set to see a significant increase in four-star supply that may be more exposed over the short term particularly in the face of softening corporate demand in response to the UK actually leaving the EU. In these cases resilience will be determined by the specifics of location, operator expertise and product differentiation.

Retail to hotel development opportunities emerge

The well-documented challenges facing UK retailing is generating redevelopment and intensification opportunities both in-town and out-of-town, as retail vacancies increase and planning regulations relax. For example, planning consent was secured for the redevelopment of vacant retail and office space at Chester’s Grosvenor Shopping Centre into a 94 room Premier Inn in 2018 with a similar scheme secured for the former BHS store on Princes Street, Edinburgh.

Apart from the obvious conversion benefits hotels can add value and a sense of ‘place’ to the remaining retail and town centre offer. Firstly, hotel guests can provide additional footfall. Secondly, integrated hotel amenities such as gyms, bars, restaurants, event space and co-working, not only for the use of hotel guests but also local residents and day visitors, can also provide an additional draw and vibrancy further enhancing footfall.

BALANCING LOCAL AND VISITOR NEED

The growth in overseas visitor arrivals has brought about challenges in terms of managing both the needs of local residents and tourists.

This is a key concern for a number of European tourist gateway cities, with many implementing hotel development and Airbnb controls to help mitigate the issue. Barcelona, for example, has effectively banned any future hotel development within the city centre as well as curbing Airbnb supply.

In London, we are starting to see similar policies put in place. From a development perspective some inner boroughs are refusing planning consent for hotels on the grounds of maintaining local resident amenities.

Westminster City Council (WCC) has taken this a step further with their new City Plan that may require all new hotel developments (including extensions) within Westminster’s Central Activity Zone to ensure at least 35% of floorspace is allocated to on-site affordable housing. This will likely challenge viability, in some cases, within the zone. It does mean however, values and operational performance of existing properties will be more immune from future development. It may also open up new opportunities in surrounding areas and other boroughs.