We’re heading towards the end of the summer here in the UK and we thought it would be a good time to take the temperature of the holiday market with a four-part series exploring how our travel patterns are changing - and what this might mean for hotel investors. You can catch up on the story so far here.
One of the many phenomena that Covid lockdowns brought with them was the rise of the staycation, with people opting for a main holiday or city break in their country of residence rather than overseas.
Of course the spike in uptake of domestic vacations was borne initially out of necessity. During the immediate post-lockdown period, travel was difficult, rules and regulations differed by country and often changed from week to week, and there was the risk of a costly quarantine should travellers contract the disease while outside their own country.
The UK population was one of those to adopt staycations enthusiastically and, despite the wider range of choices and the ease of travelling post-pandemic, it would seem that the habit has stuck if a survey released in July is any indication.
Staycations still popular
More than half (56 per cent) of people are planning or have taken a UK-based holiday this year, with those going on a staycation in 2023 spending £875 on average on their trip, research commissioned by American Express found.
Last year, UK adults took just one domestic holiday, on average, but this year, of those who are holidaying in the UK, the average number of trips is predicted to be two, according to the survey of 2,000 people carried out by Opinium.
“This new research finds that half of Brits will holiday in the UK this year, with proximity to restaurants, bars and cafes a top staycation priority for many,” says Maggie Boyle, vice president at American Express.
Wales topped the list of destinations, with London second, Cornwall and the Lake District in joint third place and Devon the fifth most popular location.
The research also found that younger people aged 18-to-34 are more likely to be holidaying in the UK than those aged 55-plus, with 64 per cent of younger adults doing so versus 51 per cent of the over-55s surveyed. More than a third (37 per cent) of people surveyed had already booked their UK travel or accommodation at the time they responded.
While STR Senior Director Thomas Emanuel says that despite increasingly expensive airfares, hotel demand across Europe is “pretty much in line” with last summer, but he also believes that the domestic holiday picture looks quite rosy.
“For domestic results, it's very much a similar picture. We are there or thereabouts, we're looking at the staycation markets and they seem to be very strong as well,” he says.
ADR and revpar on the rise
The latest data from HotStats backs that assertion and showed that the ADR for occupied rooms in the UK increased from £138.38 (April) to £150.12 (May), with the London hotels market experiencing an even greater increase from £218.58 to £239.16. Room rates were up 15 per cent in both the UK and London when compared with May 2022.
Occupancy rates rose slightly from 73 per cent (April) to 74.7 per cent (May) for UK hotels and from 74.3 per cent to 76 per cent in London, while revpar jumped from £100.96 (April) to £112.08 (May) in the UK and from £162.51 to £181.74 in London.
While occupancy rates are yet to reach the 79 per cent achieved in 2019, across ADR and revpar, the UK hotel market is significantly ahead of pre-Covid levels.“Demand is robust and, although we expect hotels to perform well during the busy summer season, May has provided a better boost than usual. RSM’s latest consumer survey shows people still want to book breaks away and are doing so, while households rein in their spending in other areas such as eating out,” says Chris Tate, head of hotels and accommodation at analyst RSM UK.
“Hotel investors are looking for new hotel builds, but the rising costs are delaying and even preventing such projects from going ahead. This will have an impact on supply and feed into the current pent-up demand for hotel bookings, which could mean revpar continues increasing. While other areas of leisure and hospitality are seeing insolvencies rise, the hotel sector appears to be performing well.”
That is borne out by the latest Cushman & Wakefield Operator Beat for H1 2023, which found that increasing development costs, plus issues with debt funding and with equity funding made up three of the top four reasons for hotel groups delaying or cancelling expansion plans, with 72 per cent of those delays of up to 12 months.
Marie Hickey, director of commercial research, at Savills adds that domestic occupancy levels and ADRs are high for British hotels and accommodation, with London room rates especially high as the city benefits from both domestic tourism and an influx of overseas visitors, especially Americans buoyed by the strong dollar earlier in the year.
Investment market muted
Despite the ongoing demand for staycations, interest to the hotel investment market has been muted according to advisor Knight Frank.
It says total UK hotel transactions of around £860 million for the first half of the year are some 60 per cent below the previous year's investment levels, with specialist hotel-focused investors, both domestic and from overseas, as well as high-net-worth-individuals (HNWIs) and family-offices accounting for 70 per cent of the transaction volume.
“Movement in pricing provides opportunity for buyer and seller price expectations to be realigned and further incentivises other types of investors to enter the market. HNWI and family offices are certainly becoming more active in the sector and with the increasing cost of debt finance they can outbid other types of buyers. Where assets have been operating exceptionally well, we are seeing competitively priced assets attract multiple strong offers, proof that capital is readily available where investors can see value," says Henry Jackson, head of hotel agency at Knight Frank.While constraints on supply should help protect margins for existing operators – and the terrible fires on the Greek islands may encourage some late bookers to holiday at home – there are further potential clouds on the horizon.
‘The hotel sector epitomises the recent resilience of the UK economy where demand has remained robust despite the cost-of-living crisis and rising interest rates,” says Thomas Pugh, economist at analyst RSM UK.
“However, consumers are taking out less credit and are using savings to pay down expensive debt. It now looks more likely that the lagged effect of the huge rise interest rates that has already happened, combined with the risk of further rate rises, tips the economy into recession later this year or in early 2024. This will impact on consumer demand and affect spending on discretionary items like holiday bookings.”