Covid-19 shocked the hotel market but strong domestic demand has sparked a recovery

The Covid-19 crisis has adversely impacted the wider UK hotel sector, with the vast majority of hotels being forced to close for over three months between late March and July. The easing of lockdown measures and reopening of hospitality from 4 July triggered a phased return to business for some hotel groups while others remained closed, utilising the Government Job Retention Scheme until higher levels of occupancy could be achieved. As of early September, under 10% of hotel stock still remained closed across the UK, according to STR.

Based on the furlough scheme winding down in October and business rates holiday coming to an end in March, some hotel groups could be forced to streamline their business. Further insolvencies are also widely anticipated as businesses begin reabsorbing their full payroll costs at a time when revenues remain subdued.

Nonetheless, we have started to witness some very positive developments regarding recovery in certain markets. Continued limitations in regards to international travel with the ongoing risk of quarantine, coupled with pent-up demand to travel since lockdown has propelled the domestic staycation holiday market in recent months.

Domestic holiday trips in the UK increased 4.4% year-on-year in 2019, totalling 60.5 million. In the same year, UK visits abroad reached over 73 million, making the UK the second largest outbound source market in Europe after Germany. What this suggests is that the gap left by international tourists could in part be filled by heightened domestic demand while international restrictions last, supporting UK holiday hotspots.

In terms of location, domestic travellers have opted for less densely populated regions, veering towards coastal and regional towns with the likes of Plymouth, Bournemouth and Brighton experiencing occupancy levels in excess of 90% over large periods of August, as reported by STR. This mimics historic trends, with the South West dominating in terms of total domestic holiday trips in 2019 (see chart below). The current demand shift to regional locations is verified further when looking at the spread in average daily rates (ADR) between London and regional UK, which shrunk from £96.4 in July 2019 to £20.9 in July 2020.

City centres remain adversely impacted by the absence in corporate and international travel

The recovery profile of larger urban centres is expected to be more gradual, with regions such as London, South East and West Midlands exposed to both corporate and international demand. Latest WTTC forecasts suggest overseas visitor arrivals to the UK could fall 73% year-on-year in 2020. To put this into context, overseas arrivals accounted for a 64.7% share of total arrivals in London last year, compared to a 12.2% share in the South West.

Corporate-reliant markets are expected to be amongst the slowest to recover, in line with companies scaling back work travel whilst conferences and events remain largely online. This could amplify headwinds within the full-service, conference-reliant segment over the medium-term.

Outlook for 2021

Akin to previous recessionary behaviour, we can expect the budget hotel segment to enjoy a quicker recovery due to both leisure and corporate travellers watching their wallet in the face of an economic downturn. What’s more, a great deal of budget hotel supply is conveniently located with available parking, supporting social distancing. The budget segment also tends to have less room rate to lose, effectively meaning falls in ADR (and therefore RevPAR) may not be as severe on average.

Despite being historically dominated by corporate demand, the serviced apartment sector has increased its appeal to leisure travellers due to greater social distancing options in light of the typical self-contained unit layout, as well as a push towards more aparthotel product in recent years.

2021 is expected to be a very strong year in terms of recovery off the back of the unprecedented falls this year, with STR projecting London and regional UK occupancy rates could improve by 122% and 73% year-on-year respectively. However, full RevPAR recovery to the sector will likely be hindered due to a lagged pick up in ADR across larger markets in response to hotels dropping rates in the face of subdued demand. Most sources are in agreement that RevPAR will therefore not return to 2019 levels until 2023–2024 at the earliest, albeit with some markets expected to recovery quicker.

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