2009 Forecasts for the UK Hotel Industry

. April 28, 2009

LONDON, UK, March 26, 2009 - UK chain hotels are facing the most challenging trading conditions in 17 years according to forecasts made by TRI Hospitality Consulting. The hotel advisory firm's central scenario predicts that London will experience a 10 per cent drop in room revenue (RevPAR) this year followed by a further 0.5 per cent dip in 2010.

In the provinces RevPAR is expected to decline by 8 per cent in 2009 and a further 2 per cent in 2010. The central scenario is premised upon the UK economy contracting by 1.7 per cent in 2009 followed by 0.2 per cent growth in 2010.

Inbound visitor numbers, which account for more than half of London hotel overnight stays, are estimated to have decreased by 2.7 per cent last year and will decrease by a further 0.7 per cent this year, according to VisitBritain.

'VisitBritain's forecast for inbound tourism in 2009 might seem fairly modest in the light of the widespread global downturn. Yet, if it continues, the low value of sterling against most major currencies may have a moderating effect on anticipated reductions in inbound tourism. For the first time in many years London must appear a good-value destination,' said Jonathan Langston, managing director, TRI Hospitality Consulting.

Preliminary data from Eurostar for December and January shows a 15 cent year-on-year increase in London arrivals from continental Europe, which the train operator attributed to the currency parity of the pound and euro.

Leisure business does not command high room rates, however, and the fact that many upscale London hotels are losing their highest-paying corporate business informs the central forecast of a 10 per cent decline in RevPAR. If corporate volumes disappear in even greater numbers as a result of a deeper recession and tourism inflows fall further than projected, then London may experience the downside scenario -a RevPAR decline of 18 per cent in 2009. This is premised upon a 2.6 per cent drop in UK GDP. In the provinces, the downside scenario would see RevPAR fall by 14 per cent.

The current consensus is that, like the recession of 1991, there will be only one full year of recession in the UK, followed by a year of very modest recovery. Our central projection for provincial hotels is thus one of RevPAR falls limited to 2 per cent in 2010. Occupancies should have stabilised at 2009 levels, all of the fall is predicted to result from reductions in average room rates. If, however, the worst projected case should happen and the recession continues with a further 1 per cent fall in GDP, then provincial RevPAR would drop by 3.5 per cent.

In the absence of any great visibility on exchange rates and inbound tourism projections, TRI's central scenario takes the view that London hoteliers will have the opportunity to stabilise average room rates at the end of 2009 and may lose a minor level of volume, leaving RevPAR only 0.5 per cent behind 2009. On the other hand, if the UK is still in recession, the downside scenario sees London losing a further 3 per cent in RevPAR.

'It is our prediction that despite the coming heavy falls in RevPAR, UK hotels will maintain profit conversion at a higher level than they did in the early 1990s. UK hotels are better prepared for recessionary times than they were in 1991 due to a combination of structural reforms to cost bases during the intervening years and far greater access to markets through today's enabling technologies. In addition, they enter this recession enjoying much higher occupancies than in 1991. Then, there was something of a lag of six months between economic change and its impact on hotel trading. Things move faster these days, although forward visibility remains minimal, any reaction to more positive economic news will be more rapid,' said Langston.

Postscript

During compilation of these projections, HM Treasury has published its most recent consensus forecasts for UK economic growth in 2009. The average has fallen from -1.7 per cent to -2.4 per cent. This worsening of the situation would not cause our projections to change but makes realisation of our downside scenario more likely.

Notes

The core influencers of demand for UK hotels are UK Gross Domestic Product (GDP), movements of which have a strong correlation with demand for provincial hotels in particular and a significant but less dominant influence on London hotels. The latter market is strongly impacted by inbound tourism flows which in turn are influenced by the following external factors:

The economic strength of these source markets
The strength of sterling against their currencies
The presence or absence of major geo-political events.

In addition, our modelling is informed by historical data and lessons learned from the last major recession of 1991 and the years of economic downturn surrounding it. That recession and the first Gulf War were responsible for three years of RevPAR decline in the London hotel market and a briefer but deeper two years of decline in the provinces.

For more information contact:

Jonathan Langston, managing director 020 7486 5191

[email protected]

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