By Daniel Hunter

According to new PwC analysis, London’s hotel occupancy will drop to 80% this year, a fall of almost two percentage points over 2011, and will fall further to 77% in 2013. Occupancy in 2013 will be at its lowest level since 2005.

London Average Daily Rate (ADR) should end 2012 at a record high of around £143, £10 higher than 2011, which was also a record year. This will help drive Revenue Per Available Room (RevPAR) to rise 4% to a record £114.71 this year. In 2013, RevPAR is forecast to fall back by 7% to £106.42, as supply issues, the economy and comparisons with the 2012 Games weigh negatively.

Liz Hall, head of hospitality and leisure research at PwC, and author of the PwC UK hotels forecast 2013, said:

“The London hotel market has demonstrated remarkable resilience since the start of the recession. This has been helped by one-off events such as the Jubilee and 2012 Games, which have driven some highs and lows (reduced business travel) this year. It’s hard to feel confident about 2013; there will be winners but a weak economic and travel environment, a fight for market share and more new rooms to fill mean many will feel the hit.”

Regions - has the rates clock stopped ticking backwards?

Location has been key to regional success stories in 2012. Many cities had an erratic and unsatisfactory year as the Olympic effect put visitors off coming to the UK. The best performing regional cities have been Belfast (with Titanic Belfast, a new exhibition - the world's largest Titanic-themed attraction) and Aberdeen.

Exceptionally poor weather in the first half of 2012 no doubt dampened holiday demand and is expected to drag down occupancy by 2.8% to almost 69% in 2012. PwC anticipate only a marginal further decline to 68% occupancy in 2013.

PwC expects the regions to see a marginal ADR gain this year to £58.39, the fourth consecutive year ADR has languished at around £58 (and this is before taking account of inflation). Looking to 2013, PwC doesn’t expect any significant change to ADR — but at least it appears to be holding its own.

Despite the marginal rates growth, PwC expects the regions will see a 2.8% decline in RevPAR in 2012 and PwC doesn’t expect much to change in 2013 either. With weak occupancies, 2013 RevPAR could see a marginal decline of 0.7% to £40.

Luxury and reinvented budgets squeeze the middle harder

In retail it’s called the ‘squeezed middle’ and this trend is evident in the hotel sector with the differences of buying behaviours at the top and value ends of the hotel market.

Liz Hall, head of hospitality and leisure research at PwC, said:

“There has been a flurry of high-end, boutique and branded budget openings across London, often in newer hotel locations. These new products clearly differentiate themselves and offer lower rates to gain market position and lure consumers away from mid-range products.

“With at least 2,400 high-end and boutique rooms set to open in London in the next couple of years, the need to differentiate and reinvent the middle ground becomes ever more necessary.”

Supply hangover or future legacy?

2012 saw the UK’s largest room supply increase from new developments in the last decade. In London, the 2012 Games catalysed development on a scale unlikely to be seen again.

Supply growth remains above average and in a weaker travel environment this will inevitably take longer to absorb and will impact occupancy rates. London is likely to see supply growth of around 7% in 2012 and 3.8% in 2013, that is over 8,000 new rooms in 2012 and 4,900 in 2013. In the regions, pockets of supply also remain above average levels and new branded budgets continue to force down average rates.

Robert Milburn, hospitality & leisure leader at PwC, added:

“Supply growth is driven by high occupancies and ADR, and may result in a period of adjustment while new supply is absorbed. Brands in the right location and with a relevant product will be able to sleep easy, others may be more troubled.”

Meetings and events: has the market bottomed out (at last)?

While badly impacted by the recession and often the last demand segment to recover, there has been some recent hope that the downturn in this sector has bottomed out. Such optimism has been notable in the corporate sector rather than the not-for-profit sector, which may be anticipating some fall-out from the public sector cut-backs.

Robert Milburn, hospitality & leisure leader at PwC, said:

“Leisure and business demand remains fragile and price-aware, residential meetings are hard-pressed and we anticipate another challenging year ahead. More supply, changes to company procurement policies, sustainability issues around travel and communications technology have all left their mark.

“However, renewed optimism for a modest revival in conference and event demand and a continued resurgence in business travel should ensure the slow UK hotel recovery continues.”

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