LONDON—The United Kingdom hotel industry is standing atop a high peak, as its CEOs, movers and shakers survey the land below to move sensibly forward, locate the next plateau and attempt to get politicians truly and firmly behind their businesses.
Some hotel leaders cautioned from too much exuberance, however, during a panel titled “Opportunities in the United Kingdom” on the second day of the Hotel Investment Conference Europe, known as Hot.E.
“The previous peak has always been higher than the last one, but that is not true in this case. Occupancies are not in the 90s, which is where hotels can charge what they want, and we will not get there. In London, two days a week are in the low 90s, but most hotels, I believe, rather are getting high 80s,” said Sir David Michels, chairman of Michels & Taylor.
The economy sector shows the most growth, according to Peter Gowers, CEO of Travelodge (U.K.).
“(Revenue per available room) overall year to date is +4.3%, in midscale +8%, but Travelodge is doing +13%, so we are outperforming the market. … The regions continue to go from strength to strength, and while we’re not so large in London, we are seeing strength across our portfolio,” he said.
“An (average-daily-rate) increase of between £3 ($4.55) and £5 ($7.58) can be huge for a chain like us,” Gowers added.
Crisis? What crisis?
Times are good, but it might be intrinsic to the makeup of most Brits that they always look for headwinds, barriers and speed bumps.
“Most people have not forgotten 2008, but there will come a time when they will,” Michels said.
Tim Stoyle, head of hotel valuations at business consultancy Savills, said he is seeing examples of high valuations and yield compression driven externally as well as internally, but not to levels causing him undue concern.
“Regionally, there is more yield compression, but again not of concern. There are plenty of deals in the budget sector, and there are also plenty of stories to tell that add value. It is not just about the Day One price, so the yield argument can be a little misleading,” he said.
Michels was not all doom and gloom either.
“I do think provincial prices have peaked, but it isn’t a crisis. Just as with everything else in life, it has reached a maximum,” he said, adding United States private equity owners would continue to sell the U.K. assets they had purchased in the past three or so years, which would bring prices down.
Gowers said demand had changed in the U.K., with some of his hotels’ rooms being filled by customers who simply did not stay at hotels 10 years ago.
“Look at locations and ask where will the next demand be. Demand is shifting. It is not so easy now to build hotels in the old, larger, northern U.K. cities,” Gowers said.
Surinder Arora, CEO of Arora Group, views U.K. opportunities in light of what’s happening in the rest of Europe and beyond. He said the large weight of international capital searching for fewer and fewer deals means the analysis of property sustainability is more important than ever.
“Buyers are still willing to buy with 1% to 2% yield. I’m nervous about Russia and China, where it not so easy to get money out now. And with Lloyds (Bank) saying they’d do deals at 85% (loan-to-value ratios), that makes me nervous, too,” Arora added.
Stoyle was more sanguine about Asia.
“The latest Asian deals (in the U.K.) were done pre-correction, so we’re not seeing a softening of demand from Asia. When you see higher LTV values, that’s usually one way in, where there’s a turnaround story. Now the primary objective is income, not LTV,” Stoyle said.
Gowers added that most capital invested in U.K. budget hotels comes from inside the U.K.
Stoyle said consultancies such as his are being asked to analyze management teams and ground-rent structures so buyers can fully understand potential revenue and savings.
“The industry has seen a move away from banks to specialist development companies. The argument is over the liquidity and strength in the secondary market, and now there is a developed path for such developments, allowing them to flip it after a couple of years to an institution,” Gowers said.
“Leases come with distinct covenants to seasoned operators,” Arora said. “Banks are not being reckless and want to see the margins are there.”
Meddling politicians
The debate became most feisty concerning the input, or lack of it, of politicians to the industry.
Michels’ view is that lack of government intervention is a good thing.
“We’re not in their manifestos. … The government has had absolutely no difference. Every other industry the government has taken interest in is now dead—steel, cars, DeLorean (Motor Company), railways. We’re not perfect, but we’re growing; we’re healthy,” he said.
Gowers was not having that.
“We need to get our argument across. Making it harder for the affluent traveler to reach here is not good for us,” Gowers said.
The government’s introduction of its new National Living Wage, which will increase minimum pay, will have an implication, Stoyle said.
“The bigger question is how sustainable it can be. … In the end we’ll see the government taking more interest in what the low paid get paid, and as a business we’ll just have to live with that. You need to invest more in productivity,” Gowers said.
“The amount we provide to (gross domestic product), yes, we do need the help other European countries receive. Our politicians have never taken the industry seriously. We need to club together,” Arora said.
A possible exit from the European Union also is of worry, at least to some.
“If we left the E.U., I suspect the pound (sterling) will fall in value, which would be good for the industry. We do not import much in this industry, other than labor, and that will still come,” Michels said.
Gowers argued against that synopsis, too.
“You need to look at the whole package the E.U. provides,” he said.