Inflation and cost pressures are more pronounced in the United Kingdom than in the United States or other parts of Europe, and hoteliers are feeling the strain, especially hotel owners.

In the latest figures from the U.K. government’s Office For National Statistics, inflation rose 7.8% year over year in April, up from 6.2% in March. The inflationary increase is the highest level since the ONS began compiling data in 2006.

Additional pressures include labor shortages and higher wages, exacerbated by the closing of staffing opportunities from the European Union, and the U.K.'s currency, the pound sterling, weakening against major currencies such as the U.S. dollar.

Kate Nicholls, chief executive officer of UKHospitality, said she is seeing price hikes and cost pressures across the board.

“Unfortunately, emerging from the pandemic has proved … tough. We are facing massive increases in costs, a dip in consumer confidence and a severely disrupted labor market,” Nicholls said.

In May, the U.K. government announced an emergency stimulus package to ease the cost of living, estimated to be worth 15 billion pounds sterling ($18.8 billion), including rebates for higher energy bills and additional stimulus for low-income households. Energy costs, which have already risen appreciably, are set to increase again in October and November.

That stimulus is welcome, but businesses, including hotels, need more help, Nicholls said.

“Direct, focused cash payments for lower-income households will hopefully shore up some consumer confidence, but now we need a commensurate focus to reduce the costs of doing business to reduce further price rises,” she said. “The government needs to identify and accelerate policies that will cut costs, minimize red tape and accelerate growth. A reiteration of its commitment to cut business taxes to incentivize investment in High Street, people and innovation would also help to settle nerves across many sectors, including hospitality."

Lionel Benjamin, co-founder of Ago Hotels, which operates 14 hotels, agreed that a sweeping cost-of-living stimulus won't immediately benefit U.K. businesses.

“That is good, but if you calculate that into business benefits, there is no benefit at all,” he said.

Government officials also aim to reduce VAT — value-added/sales taxes — to 19% by the end of the year. During COVID-19, the rate was slashed to 5%, but it has since returned to its current 20%.

“The upcoming 1% reduction in [value-added taxes] will be extremely useful so that guests do not see increases in hotel rates and have some discretionary spend … [but] it is not going to shift the dial,” Benjamin said.

He said government intervention must be something meaningful that is seen by the public as adding value and allowing more discretionary spending.

“If there is not, business will feel [the consequences] very quickly. It will be a vicious cycle,” he said. “The rebate of 400 pounds sterling is not even touching the sides.”

Alex Sogno, CEO at hotel asset management firm Global Asset Solutions, said he fears that after some businesses successfully survived two years of reduced COVID-19 demand, inflation might be the last straw.

“Inflation — and the added specter of stagflation — is greatly feared by both economists and the wider population alike," he said. "For those with debt, however, there at least used to be a silver lining as the loss of value in money has a corresponding effect on any debt. … But you can go too far. If inflation starts to run away, the borrowing to deal with it can outpace any reduction in value, and then a spiral begins, which is hard to break."

Benjamin said hotel owners need help from the brands with costs in such an inflationary environment. He said brands are beginning to reap fees from the top line as occupancy soars, but owners are paying most of the costs before the bottom line is calculated.

“My perspective is that we are under pressure, and there is only so much we can absorb with room rate, and if that does not happen, our conversion will be minimized and profitability will be deeply eroded,” he said.

Benjamin added that the collective weight of brands — most of them being asset-light companies — must be used to influence government.

“Right now, they have the firepower, as they are the biggest earners in this game, even if any relief comes with the quid pro quo that money needs to be clawed back at some point," he said. “Owners need to breathe. Brands talk about brand loyalty, but how about loyalty to the owners, who are loyal to the brands?”

Most fees are calculated on rooms revenue, so if there is revenue, brands will do well, Benjamin said. Brands do not need to wait to see the earnings before interest, taxes, depreciation and amortization before their cuts are taken, he added.

“Fees should be reduced for a window of time, to support owners on the conversion of the bottom line,” he said. Hotel brand companies' "income stream is protected, so now is the time to show some owner loyalty," he added.

"This is merely commercial goodwill, the brands being sensitive to the longer-term relationships. We have not seen inflation like this for 30 years. This is not just me getting my violin out just for hospitality, let me make that clear," he said.

Benjamin said the hotel industry should push for more owner council meetings.

“In the past, these have existed for the different brands, but collectively we should approach brands to tell them they have to rethink things. Business must be approached differently now, and brands must be attuned to the way the industry has evolved,” he said.

Benjamin said he would like to see branded hotel firms being more flexible with capital-expenditure minimums and management fees to give owners the chance to catch up with profit losses.

“There must be a renewed understanding of the partnership between owners and brands, and that takes on heightened importance if the hotel has a long-term agreement. We need such thinking to stimulate business, and not just hotel businesses," he said.

“We have moved on from COVID-19 in terms of people falling ill, but not in terms of the ramifications and devastation resulting from it. We’re just picking up the pieces now and will do so for some time,” he added.

Hotel owners must be sympathetic to employees who are facing a rising cost of living, Benjamin said.

“The labor situation is bad now without losing any more good people. To offset that potentiality, we have had to increase salaries again, so if you add that increase on to all the inflationary pressures on the [profit and loss account], then profitability will decline,” he added.

Sogno said hotels are finding what kept them afloat during the pandemic might now sink them as they find ever-decreasing volumes of cash available to meet cost demands, let alone service debts, “which could drive an acceleration of loan-to-own scenarios as well as an increase in transactions in general.”

“A critical additional factor is the impact this scenario has in terms of the valuation methodology applied, and the increased potential for the sort of downward pressure on asset values many investors anticipated and in some cases hoped would lead to forced sales before now," Sogno said. “Although the focus on the top lines is necessary for a speedy recovery, it is recommended asset managers and hotel owners rerun their projections: Evaluate the inflation impact on their 10-year projection and clearly estimate the risk of a high debt ratio on the discounted cash flow. It is important not to misjudge the inflation threat until it is too late."

He added it is important to not play down rising prices and concentrate only on operating departments’ recovery efforts.

“It is essential to evaluate the potential exposure below [gross operating profit] and value the risk of rising inflation and cost of debt. Although hotel value is holding up, for now, the current market conditions will soon impact hotel valuations. Combined with the geopolitical instability, the situation may worsen rapidly,” Sogno said.

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