2023 was a significant year for the hotel sector, marking continued recovery from the Covid-19 pandemic as average daily rates skyrocketed but challenges in relation to hotel transactions meant that transaction volumes in the UK fell 28 per cent to just over £2.4 billion, according to Cushman & Wakefield. However, experts at the 19th Whitebridge New Year Hotel Summit say 2024 will come with its own set of opportunities, albeit with some points of concern.
Transactions
Nick Pattie, managing director at Whitebridge Hospitality noted that while sellers were more reluctant to part with their properties, many smaller independent hotels are continuing to come to the market, as they currently stare down the barrel of higher costs while dealing with depleted reserves following on from the pandemic.
“Costs, such as in payroll, have hit small hotel business hard and the impact is really tough. So now may be the time to buy one of the high-quality smaller, privately owned businesses, he says.
Philip Camble, director at Whitebridge adds there was a distinct uptick in the volume of distressed deals by value in 2023, noting that the possibility of that trend becoming more pronounced largely depends on the whether banks decide to enforce.
Simon Price, partner in Mayer Brown’s real estate practice believes this is highly likely. “Lessons from previous downturns show that it’s at periods like what we’re currently in that lenders get a little bit more confident and feel they can make enforcements. We think there'll be a little bit more of that in 2024.”
Transactions for 2024 and beyond are also expected to be aided by declining interest rates starting from the second half of the year, Price forecasts.
Operations
Michael Grove, chief operating officer at Hotstats adds that average daily rates have continued to see year-on-year growth, even in the last three months, with Camble noting that revpar jumped by almost 25 per cent in 2023 despite headwinds.
However, Grove notes a slowdown in rate growth, adding that revenue growth hasn’t been converting directly into margin improvement due to energy costs and in food & beverage.
“Food & beverage is definitely an area of concern and is becoming much more of a challenge in Europe. For example, the drop off in food and beverage profitability in London is quite stark for hotels. Most of that comes from this labour issue, with the 12 percentage point drop in London directly correlated to the increase in labour costs.”
He added: “Despite all the talk about hotels mostly being impacted by energy costs, food and beverage was about one and a half times the issue than energy costs were, looking at the impact on margins.”
Positively though, Camble says: “Drilling down into the stats, there's still some recovery to go, in London especially in terms of occupancy as we're still well behind. The average trend pre COVID was 80 plus percent, so there's still some more to come.”
He adds: “With occupancy levels still in recovery and more people travelling, we expect London revpar to grow again this year and we think it could grow by more than 10 per cent. A possible leg up for the London revpar forecast is the number of new branded luxury hotel recently opened or about to open in London. These will total about 15 new properties and that doesn’t include the new non-branded luxury.”
Segments and opportunities
Turning to segments which have thrived and have the potential to keep on thriving, Grove highlights the midscale, select and limited-service segments, noting “The midscale segment has really thrived year on year. And that links quite nicely to the Select and limited-service segment that is predominantly in the mid-scale.”
Staycations have continued to thrive, especially in the south of England, with rates continuing to grow, Grove says adding that there may be some opportunity in wellness, with spa and leisure identified as one area in the P&L which has continued to expand as guests spend more money on relaxation.
Positively, he noted that the corporate segment has returned and has all but recovered to 2019 levels across Europe. However, the absence of large conventions in markets such as Germany leaves more to be desired.
Another trend spotted by Price is the shift towards owner-friendly terms hotel management and franchise agreements, driven by competition among a large number of brands looking for good quality hotels.
“Owners are sharpening their pencils looking at more of the details. Also interesting is that in 2023, lenders have really gotten into the weeds of management and franchise agreements, often even re-opening negotiations asking for variations where there are terms they're not happy with. So lenders are also getting stuck in and that's resulting in a slight trend towards operators being asked to take more risk in the process.”
“This means that in documents, we’re seeing more flex to franchise rights, owners being a bit more picky about what they're giving to operators and what they're retaining for their own operation or having rights to do so in the future.”
But despite the highs and lows, it seems hospitality and leisure still remains a highly attractive sector to investors, with Price drawing attention to a survey by Alvarez & Marsal which found that out of over 100 fund managers, 86 per cent put hotels top of the list when asked which sector they would be focusing on in 2024.
In conclusion, while 2024 holds its challenges for the hotel sector, there are also significant opportunities, with the sector expected to see growth and enjoy continued interest from investors.