London hotel rates drop to 2005 levels

After the intense highs of the last few years room rates are now returning to levels last seen in 2005, as London hotels experience record declines in RevPAR, a PricewaterhouseCoopers LLP (PwC) report reveals today.


The long running room rate hike in London finally came to a halt in Q4 2008. As a result, the city could now see a 14.2 per cent decline in room rates (to £100.31), and a 13.3 per cent drop in occupancy, to around 69 per cent.


Occupancy in London has not been this low since 1992. In turn, this will drive a massive 25.6 per cent RevPAR fall – a slide never seen before in the capital.


The contraction in economic growth and consumer spending will take its toll on travel demand throughout 2009 with room rates and RevPAR for each quarter getting progressively worse to the end of the year. Quarter two is expected to see a particularly marked deterioration.


The firm’s baseline scenario for the UK forecasts an overall drop in RevPAR of 18.9% – twice the rate expected as recently as last November. This is underpinned by an annual GDP contraction of 3.3 percent.


In addition, the provinces are predicted to suffer more severely than anticipated late last year, with RevPAR forecast to fall by 11.6 per cent this year, having already seen three quarters of RevPAR decline in 2008.


Robert Milburn, Hospitality & Leisure (H&L) leader, said: “The scale of the decline in quarter two partly reflects a strong performance in the same quarter for last year. But it’s also the case that in Q4 of 2008 corporate Britain sat up, and realised just how bad things were going to get. Given that hotels normally lag the cycle by two quarters, we are likely to be on the cusp of the worst few months of the year for hotels.”


“London in particular is likely to suffer at the hands of the increasingly cost-conscious corporate market, which is now demanding even lower rates, or cancelling altogether,” he added.


RevPAR freefall in downside scenario


However, the PwC downside outlook of a six per cent contraction in UK GDP, with negative growth continuing into 2010, paints an even bleaker picture for hotels.


Milburn explained: “This stark scenario could catapult a RevPAR freefall of 24 per cent in the UK and almost 31 per cent in London.”


“In our downside scenario, the magnitude of these declines has not been seen before, and if UK GDP does contract by as much as six per cent, London room rates could fall by almost £20 compared to 2008.”


He continued to say that during the last downturn (2001-2003) the UK saw nine quarters of negative RevPAR growth. So far in this cycle we have only experienced one negative quarter.


“Poor bookings visibility in the industry and the economic crisis make it impossible to forecast the end of this downturn,” he added, “but one thing is for certain, operators will have to battle even harder to win revenue in a rapidly shrinking market.”


In 2008 the UK saw 32 million visits from overseas residents, two per cent fewer than in 2007. However the number of inbound visitors fell 12 per cent in the fourth quarter compared with a year earlier.


Liz Hall, head of research for H&L, PwC, said: “The US, Ireland, Italy, Spain, Netherlands, France and Germany are all key inbound markets for UK hotels. Weakening economic prospects in these countries is likely to result in more empty UK hotel rooms. It is also still unclear whether domestic, leisure travellers will holiday at home this year and provide a cushion for hotels.”


Every segment will be hurt by the demand slump but especially those in secondary locations and oversupplied markets. However, the budget business model is expected to fare better.


In fact, in a PwC survey of UK hotel owners and operators, 75 per cent polled believed budget hotels will be more resilient in the downturn.


“There is a feeling in the market that, as consumers trade down, no sector is immune, and luxury and midscale will be hit hardest. In the early 90s recession branded budgets were only just getting going with less than 10,000 rooms. Now with nearly 85,000 rooms to choose from, this value alternative is widespread and is already mopping up cash-strapped business travellers.” Hall explained.


Corporate and leisure consumers need a reason to travel and blanket, naked discounting is unlikely to entice people. It will, however, translate into less revenue for hotels from those rooms occupied.


“Knocking £1 off the price of a room knocks £1 off your profits, and it took the industry six years to recover from the blood bath of indiscriminate discounting that took place in the early 90s,” Milburn said.


“While tactical and targeted offers are imperative to stimulate those with a need to travel and to retain loyalty in the years to come, the hope is that this won’t trigger the domino effect of discounting, which we have seen in previous downturns,” he concluded.



More information:


* PricewaterhouseCoopers

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