Regional UK MarketView 2015

Regional UK; No let-up in sight for hotel investment growth​

 

 

* Year End 2014 (Source: HotStats, CBRE Hotels Research)​

 

Executive summary

 

2015 is shaping up to be another hot year f​or hotel investment in the regions; however, sceptics and pragmatists are questioning how much longer the stellar performance of the UK regions can be sustained and how this may effect investor enthusiasm for provincial stock. At CBRE, the house view is one of optimism for continued top line growth, the improvement of EBITDA conversion and positive prospects for investment returns. This ViewPoint highlights the key fundamentals in support of CBRE’s hypothesis.

2014 proved to be a categorically positive year for the regional UK hotel market; occupancy averaged almost 74% whilst rate powered on to £76.69, the result was an outstanding RevPAR gain of 9.2% based on a notably punchy 2013. With a shortage of strong investment opportunities in other mainstream asset classes it came as little surprise that hotel transaction volumes for the provinces surged over the £4 billion mark (+133% Y-o-Y). This was predominantly driven by portfolio sales, with investors exhibiting the appetite to place large quanta of capital and benefit from strong cyclical upturns and low interest rates. 

 

UK Economy 


 
 
 
 
Regional UK hotel performance, due to its largely domestic nature, shows close correlation with that of the UK economy. The broad picture is currently one of continued economic recovery with Britain’s gross domestic product (GDP) ahead of any other G7 counterpart in terms of 2014 growth (fig.1); 0.7% in the third quarter can be compared to 0.2% registered for the Eurozone as a whole. The International Monetary Fund anticipates UK GDP growth to have also outpaced that of the US when year-end figures are confirmed and published. Despite headwinds from the Eurozone, resilience is anticipated to prevail throughout the course of 2015 and all key bodies forecast strong U.K. economic growth.  
 
GDP recovery and growth can be attributed to robust economic fundamentals; all key components (Manufacturing, Production, Construction, Services) continue to track an upward trajectory (fig. 2). Respective Purchasing Managers’ Indices (PMI’s) have registered considerably higher than the long term average, suggesting strong business confidence in continued growth and a sustained positive economic climate. Notably, the Services sector, including hotels, is the only sector thus far to exceed pre-crisis output levels and comes with news that the tourism industry in Britain could double in value (to £257bn) by 2025. 

 

 

 
 


Hotels are amongst the few consumer-driven real-estate sectors and socioeconomic factors correlate strongly with trading performance and asset capital values. Unemployment in the UK continues to head in the right direction with the jobless rate falling to 5.8%; levels only seen prior to the global recession (fig. 3). Inflation (fig. 4) remains low at 0.5% and as a result household spending has heightened through the climax of 2014; the British Chamber of Commerce forecast growth in household consumption to exceed 2% throughout 2015 and 2016. Interest rates are likely to remain low for the foreseeable and low oil prices are expected to propel the consumer spending trend further with the New York Mercantile Exchange (NYMEX) anticipating $65USD per barrel for the duration of 2015 at least. The oil glut of the mid-1980’s contributed to a consumer boom aiding economic growth and lowering the costs of travel, all of which drive further demand for the hotel sector.

 
 


Regional UK Hotel Performance

 
The UK provincial hotel market, as a result of economic turbulence, experienced 25 months of RevPAR decline from the start of 2008 (-18.8%) and a further 32 months of recovery to regain lost ground. At the close of 2014 the UK regions have encouragingly entered the 13th month of consecutive RevPAR growth based on a pre-recession peak ​
 


 

 

The initial stages of recovery were predominantly driven by volume as the market looked to capitalise on resurgent leisure demand and restore occupancy levels. It is now widely acknowledged that Provincial UK has entered the second phase of recovery; in which corporate confidence is increasing on a rising economic tide, thus growth in volume has made way for climbing average rate. It is important to note that whilst the average market occupancy sits almost 5 percentage points ahead of the pre-recession peak, rate (un-adjusted for inflation) remains over 3% below, suggesting that there is still considerable headroom for continued growth in Regional UK room revenue.

 

 
Gross operating profit on a per available room basis (GOPPAR) was also dealt a bitter blow in the face of the recession, not only due to declines in rooms revenue, but also packaging in add-ons in a bid to preserve top line rates and a decrease in demand for other hotel revenue centres. In 2010 the UK government introduced austerity measures to lower the national budget deficit and the public sector requirement for meetings and events (M&E) reduced dramatically.

 

Hotel M&E revenue has clawed back ground of late, capitalising on the flourishing UK PLC and increasing delegate spend, ultimately reflected in a +7.6% Y-o-Y (2014) increase in M&E revenue per square metre of hotel conference space. A further demand hike is also anticipated in the coming years for conferences and events held in strategic, regional locations; a trend that well-equipped provincial UK properties are inherently positioned to capitalise on. 


 

 

Promisingly, monthly GOPPAR movement returned to positivity in March 2013 and has since continued on an upward course (fig. 7). However, a clear void in the conversion of total hotel revenue to gross operating profit still exists following a period of heightened costs in the pit of the downturn; this was largely the result of a spike in commodity prices and the commissions paid to booking intermediaries in the search for absent volume. With occupancy levels now at or close to peak the scene is set for regional hoteliers to focus on rate growthCouple this with a substantial reduction in global commodity prices over 2014’s closing months, including energy and food costs, and there is strong potential for the so-far elusive leveraging to bottom line growth. Regional UK GOPPAR remains 14% behind the pre-recession peak and those with solid management credentials have every opportunity to take advantage of the headroom and drive increased returns on investment. 



Supply - It Ebbs and Flows

Given the health of the UK economy, growing consumer confidence and scope for further enhancement of hotel trading performance the demand from developers to add new supply is inevitable. As a result, many prime locations and an increasing number of secondary locations have confirmed projects in the construction pipeline; however based on the completion of all developments, the Regional UK supply increase will be nominal at +2.1% for 2015 and 1.5% for 2016. But averaging the tidal range of supply across the country reveals that, throughout the course of 2013 and 2014, the number of new rooms entering the Regional UK hotel market were almost evenly matched by the number of rooms closed (fig. 8); largely a result of old stock and the potential for alternative development. With the considerable likelihood of this trend continuing, the coming years could result in low net increases of provincial hotel stock. 

 

 

 

Many cities within Regional UK, including the performance hotspots of Manchester, Leeds and Edinburgh, are seeing continued development of infrastructure which will inevitably aid the absorption of new room supply entering the markets. Jileen Loo, Director within CBRE Hotels and focussed on European-bound global capital is all too aware of the importance in continued infrastructure development;

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Closing Remarks – There’s return in the regions


With all of the aforementioned in mind, the opportunity for real-estate investors to deploy capital into the Regional UK hotel landscape has reached a pivotal point. A rising economic tide has lifted performance thus far; however there is irrefutable opportunity to push profitability further. In the continuation of a leading economy, with assured trading growth, opportunity to improve conversion and the limited impact of supply lies the potential to drive un-paralleled returns. The future looks bright for the provincial hotel market and investment volumes will undoubtedly reflect this throughout 2015.