Publication

UK staycation market

The staycation surge: a pandemic trend or a permanent feature?


The staycation market recovery that had been experienced and widely reported throughout the less restrictive periods of 2020–2021, largely continued into 2022. Revenue per available room (RevPAR) continued to report growth compared to 2019 levels for key staycation markets. However, we did begin to see weakening demand this summer with occupancy dropping below both summer 2021 and 2019 levels, a reflection of the reopening of international travel and perhaps the early signs of consumers reacting to the cost-of-living squeeze.

Are we seeing the early signs of the cost-of-living squeeze hit the UK staycation market?

Popular UK coast and country markets significantly outperformed the UK regional average in terms of post-Covid recovery. Rural locations such as Cornwall and the Lake District reported an increase in occupancy in summer 2021 compared to 2019 levels, as pandemic-related concerns increased the appeal of less populated locations.

Based on a staycation market average (including markets such as Cornwall, Lake District, Brighton, Bath and Blackpool) this outperformance against pre-Covid levels continued over the 2022 summer (July and August). Average RevPAR for these staycation markets were 12.6% above those in the summer 2019, although in YoY terms were down -19.7% on 2021 levels as the strength of the staycation market over the summer of 2021 saw ADR’s surge. It is worth noting that VAT rates for the hospitality sector reduced to 5% between March 2020 and September 2021, which may have supported room rate growth for operators over this period as some of the VAT cut was passed on to the consumer. VAT rates subsequently returned to 12.5% in October 2021 and then 20% in April 2022.

Perhaps of more interest is the fact that RevPAR performance across the staycation markets has, in average terms, been driven solely by ADR growth. In the summer of 2021 average daily rates (ADR) were up 44.5% on equivalent 2019 levels, while occupancy was almost 3.0% lower than that seen over the same period in 2019. This summer (2022), while ADRs were down YoY they were still 21.5% ahead of 2019 levels however there was a further weakening in occupancy, falling -7.0% below 2019 levels. For example, Brighton reported a 35.6% increase in ADR over this summer, placing RevPAR 21.7% above 2019, while occupancy remained 10.4% lower than the average reported for summer 2019.

While the staycation market average for occupancy was below 2019 levels, it was still ahead of that seen in London (+1.1 percentage points) as occupancy there continued to regain lost ground on the back of improving international arrivals.

The question is whether this weakening in occupancy this summer against 2019 for staycation markets is down to international travel reopening or a case of consumers cutting back due to pressures on disposable incomes.

At a headline level, based on RevPAR, UK staycation markets continued to outperform against pre-covid norms, but clearly competing international destinations dampened demand. Likewise, the higher cost of staycation hotel stays, as indicated by higher ADRs may also have had an impact particularly as news flow around the cost of living squeeze started to weaken consumer confidence which hit a new all-time low in August before weakening again in September.

There are short-term challenges to staycation market performance but the medium to longer-term fundamentals remain positive

Hoteliers learnt from the 2008/09 recession in that they kept ADR recovery in line with that of occupancy once the market reopened after the pandemic lockdowns. The staggered reopening of hospitality did present operational challenges in regards to capacity restrictions and staffing that meant ADRs had to be set at a level that delivered a positive return in light of lower occupancies. It also helped to drive margins, allowing operators to recoup some of the lost lockdown revenue. Subsequent inflationary pressures, linked to staffing, energy and materials, has meant further upward pressure on ADRs since. This was largely absorbed by consumers as demand remained relatively buoyant as households continued to prioritise holiday spend this summer. But, with inflation now hitting double digits and the outlook for the UK economy deteriorating alongside consumer confidence, the short-term outlook for the staycation market looks challenged.

Real personal disposable income is forecast to drop to -3.8% year on year in Q4 2022, the largest decline in real terms since Q3 1994, and is not expected to return to positive territory until Q3 2023. As a result, household spend on holidays is likely to come under downward pressure. Whether this will mean cutting back on travel altogether or exploring lower-cost holiday alternatives remains to be seen as pent-up post-pandemic demand remains. Staycations may be seen as a more affordable alternative to overseas travel considering the depreciation of the pound and the rising cost of air travel, which could help shore up domestic demand. Irrespective of this, however, the first half of 2023 is likely to see weaker RevPAR performance across UK staycation markets. Albeit some markets and segments will continue to outperform.

The second half of 2023 could see a return to growth as disposable incomes move back into positive territory in real terms particularly as the longer-term fundamentals driving growth remains unchanged. These include the shift in consumer spending habits towards experiences and the improved awareness around staycation markets, helped in part by improved product. For example appetite for domestic trips remains robust with VisitBritain’s October traveller sentiment survey stating that 58% of respondents expected to take the same or more domestic trips in the next 12 months, compared to pre-pandemic levels. However, 42% did cite the rising cost of living as a potential barrier to domestic travel in the short term.

While not an immediate driving factor behind the recent shift to increased domestic travel, the sustainability aspect of more localised travel is set to be a longer-term driver of staycation demand, in alignment with greater consumer awareness regarding the environmental issues associated with air travel.

How has the regional hotel investment market reacted to amplified staycation demand, and what’s the outlook?

Since the relaxation of travel restrictions in 2020, the UK’s regional hotel market has seen buoyant demand from investors. The buyer pool has been formed of a range of purchasers, from owner-operators to private equity-backed platforms.

Confidence in the regional hotel investment market has been reinforced by multiple cross-border transactions. The relatively low value of the pound compared to other currencies could support ongoing interest from some international buyers. Singaporean Fragrance Group recently acquired the Marine Hotel in Torbay for £1.5 million, while their £23 million Corbyn Head Hotel in Torquay is scheduled for a summer 2024 opening.

Hotel investment volumes in the South West reached £92.3 million this year to date (Q3 2022), across 11 individual deals. While this is still below pre-Covid investment levels for the region, it does represent a 7.2% increase on total 2021 volumes already, with Q4 deals remaining. Meanwhile, the South West has become the largest UK region by investment volumes this year-to-date, outside of London and the South East.

RedCat-backed Coaching Inn Group continued its regional expansion this year, adding Forest Park Hotel (New Forest) and Moorland Hotel (Dartmoor) to its already 30-strong portfolio, with the objective of capitalising on popular domestic holiday locations across key UK national parks. In Scotland, numerous leisure-based hotel deals have recently transacted, including AJ Capital Partners acquiring The Dornoch Hotel for an undisclosed amount in September.

As the cost-of-living squeeze continues to soften demand over the short term, it will remain difficult for operators to reduce ADR whilst battling with higher utility and labour costs, without applying significant pressure on profit margins. The strong-performing summer months may have supported balance sheets for many operators and so, despite short-term headwinds proving difficult for many domestic operators, we are not anticipating a significant rise in distressed operation in the market.

In the face of squeezed operator profit margins alongside rising debt costs, there has been a growing divergence between buyer and seller expectations, resulting in a slowdown in UK hotel investment activity. However, there remains a number of cash-buyers and private equity-backed groups seeking individual regional assets, supported in part by the relatively attractive yield profiles available for smaller regional assets.

Cautious buyer sentiment is likely to limit deal count in the short term, however, we believe the longer-term demand for regional hotel assets will remain resilient, driven by the aforementioned underlying visitor demand, as well as the relatively attractive pricing available.