The outlook for the hotels sector

Following the staycation boom and double digit RevPAR growth in early 2023, 2024 has seen a normalisation in trading performance. Equally, the onslaught of inflationary headwinds has largely abated.

There are pockets of challenging sub-markets where there is an oversupply of similar product offerings compounded by openings of new developments which will take time to be absorbed. Corporate demand has been slowly increasing, although this remains less robust outside of Tuesday to Thursday.

Market concern in relation to the unwinding of Government contract hotels having implications on occupancy has been very localised and definitely not viewed as a market theme for concern.

Hotels are however having to adapt to deliver for multiple demand drivers or refine their offerings for example to cater for the longer stay market or provide well invested, convenient but limited service offerings all of which have seen robust performance.

There are reasons for optimism, with reports of emerging economies’ growing appetite for travel. Oxford Economics forecasts to FYE 2026 that international arrivals into Europe shall increase by an average of 8.5% p.a. which is positive for international tourist destinations. However, hotels have to be innovative in order to remain relevant for their target customers, whilst driving operational efficiencies.

For the rolling 12-month period to August 2024, HotStats report that the highest RevPAR growth has been seen in UK Regional Golf & Spa hotels (at 11.5%) followed by London Upper Scale hotels (at 7.9%). This reinforces the perception that the new generation of consumers are willing to spend on experiences that foster personal growth and clean living, with a focus on care for the mind and body. Successful hotels are investing to meet this experiential demand through their amenities and food & beverage offerings, the most successful of which either have a captive market or are mindful to not compete but work in partnership with specialist establishments in their immediate neighbourhood.

2024 saw a peak of loan refinances in the hotels sector, following short term extensions structured in the wake of the pandemic. This cycle of loan maturities has enabled HSBC to finance some new best in class customers.

Looking ahead, following two years of resilient trading performance, we expect to see more sales transactions in 2025. There will be institutional investors who have been forced to hold hotel assets for longer than their original investment horizon that need to sell and we also anticipate some private investors, that have depleted their cash reserves to drive performance, will look to exit.

Specialist knowledge of operational hotels is more relevant than ever as, with strong investor and lender appetite, the challenge shall be in maintaining focus on the operational performance metrics that a hotel can sustainably meet and sizing appropriate levels of gearing to meet business needs.

The hotel sector is no longer an alternative real estate asset class. Investment appetite is at an all-time high, attracted by robust consumer demand and the demonstrable ability with capex investment to adapt and adjust in order to drive operational efficiency and deliver performance.

Sources:

Savills Hotels, ‘UK Hotels 2024: Strengthening Fundamentals and Increasing Investment Opportunities’ (2024)

Knight Frank, ‘UK Hotel Market Trading Update’ (Oct, 2024)