LONDON—Hotel supply in London is on the upswing, but that growth isn’t the full story. While increased supply and results from new demand generators might cancel each other out, what’s missing from the equation is the mathematics needed to improve average daily rates, sources said.
“I do not think supply is frothy,” said Robert Barnard, partner of leisure and hospitality services at BDO, a U.K. business advisory firm. “London is not a question of occupancy, but one of the impact on average daily rates.”
STR, parent company of Hotel News Now, reports that Central London has 940 properties with 95,139 rooms, while London as a whole has 1,327 properties with 125,597 rooms. The Central London pipeline will rise to 100,887 rooms in 972 hotels by 2020, according to STR data. Between 2016 and 2020, the year-over-year rooms increase in Central London will peak at 2.6% in 2017.
Looking at year-to-date February 2016 numbers, London as a whole saw ADR drop 0.8% to £123.72 ($176.49), according to STR. Central London experienced a drop in ADR of 0.3% to £140.42 ($200.31).
In its recent “Hotel bulletin: Q4 2015” HVS warned that flat lining average daily rates would be the biggest symptom of London oversupply. HVS London Chairman Russell Kett confirmed the report’s finding that the impact of new supply is falling in the budget hotels segment.
“As has been the case for some time, future openings are heavily biased towards the budget hotel sector as these are relatively quick and cheap to build and offer good returns,” Kett wrote in the report.
According to HVS, approximately 7,000 hotel rooms will open in London in 2016.
“Even London hoteliers, used to robust performance in almost any conditions, may be concerned by this large impending increase in supply given recent limited demand growth in the city,” the report said.
Another report, BDO’s “Hotel Britain 2015,” pointed to a significant 4% increase in London supply during 2014 and agreed with HVS’ conclusion that most supply would be in budget hotels, which comprise about 47% of overall supply.
“I have a rule of thumb, proved mathematically, that if you exclude low occupancy in January and February and on Fridays, when corporate business leaves London, and Sundays, then London has occupancy levels of 99.97%,” Barnard said.
This, according to Barnard, suggests many guests are unable to book their first-choice hotels on weekdays unless booking months in advance.
“There is a lot of frustrated demand,” Barnard said. “London occupancy hovers around 82% to 85% on an annual basis. It is almost impossible for London to get beyond that.”
Barnard added the only place he saw tension “was at very top end of the market.”
So far in 2016, year-to-date metrics for both Central London and all of London are down. STR analysts suggest this was caused by reduced demand following the November Paris and Brussels terrorism attacks, which caused travel across the English Channel to dip, too.
In Central London, occupancy was down 3.4% to 71.3% year-to-date February, while revenue per available room was down 3.7% to £100.14 ($142.85). Across all of London, occupancy was down 3.5% to 70.9%, while RevPAR fell 4.2% to £87.68 ($125.08).
Demand generators, deterrents
Hilton Worldwide Holdings has the largest room count in London, with 9,450 rooms, according to STR. Two additional companies have more than 8,000 keys: Whitbread has 8,826 and InterContinental Hotels Group has 8,774. London also has 43,001 independent rooms in 762 properties.
Patrick Fitzgibbon, SVP of development of Europe, the Middle East and Africa at Hilton, told HNN that London continues to be “a robust market and remains a must-visit destination.” He cited the city’s global visibility and its remaining development opportunities as positives and pointed to the Crossrail project as one demand generator.
The Crossrail will run for approximately 75 miles between Reading and Heathrow Airport to the west of London to Abbey Wood in the southeast and Shenfield in the east via more than 13 miles of new tunnels. It is scheduled to be completed and functional in 2019 and will bring an additional 1.5 million people within 45 minutes commuting distance of London’s key business districts, according to the government’s Department for Transport.
“Our long-term outlook for the city remains very positive,” Fitzgibbon said. “Infrastructure projects such as Crossrail are welcome; they improve transit to and within London and have the potential to grow demand.”
He said proposed projects, such as an additional airport runway HS2 and Crossrail 2 are examples of infrastructure projects that will improve hotel demand. HS2 and Crossrail 2 are scheduled to begin operations in the early 2030s.
Patrick Angwin, senior director at business consultancy Horwath HTL’s London office, said Crossrail could actually cause demand to drop.
“Whilst I suspect (Crossrail) will do wonders for the London economy generally … I suspect it could have a detrimental impact as it will make it easier for people to commute in from farther away, potentially lessening the need for overnight stopovers,” Angwin said.
Instead, Angwin said outdated, poorly performing properties that might be forced to leave London will have a more immediate impact on the market’s supply.
“Another important factor which I think helps to offset new supply, and one which is often overlooked, is the quantity of old, tired and frankly sub-standard hotel stock (that) drops out of the market each year,” Angwin said, “which somehow never gets analyzed or reported with anywhere near the same degree of interest as the quantity of new supply coming in.”
Angwin also noted London’s constantly flowing hotel pipeline, and he is confident about the city’s place as one of Europe’s top markets for years to come, despite the worry about the 23 June referendum vote that could possibly signal the U.K.’s exit from the European Union.
“Even so, it continues to be one of the best performing hotel markets in Europe, indeed the world, with occupancy levels regularly over 80%,” Angwin said.
“Continued RevPAR growth has to be primarily rate-driven where other, lower-performing cities generally have the potential for both occupancy and ADR growth,” he said.