Are record summer performances the calm before the storm?

The UK, one of Europe’s largest hotel markets, experienced record trading in July, with higher occupancy rates, daily rates and gross operating profits. According to RSM UK’s Hotels Tracker, occupancy rates hit a triumphant 77.1% in the month, compared to 73.7% in June. “Hotels are making the most of the summer period by passing on costs and getting good room rates, and that's across the whole nation,” says Chris Tate, head of hotels and accommodation at RSM UK. Hoteliers have made the most of the summer demand and charged premium prices in July, with average daily rates (ADR) of occupied rooms surging to £267.73 in London and £165.99 in the wider market. This is a stark contrast to pre-pandemic rates of £209.92 in London and £138.38 in the UK during July 2019. RSM reveals that revenue per available room of UK hotels increased by £12 to £127.90 in July, whilst rising £24 to £205.63 in the London market. The STR also reported a 105% jump in the gross operating profit per available room (GOPPAR) in London to $172.1, compared to 2019 levels. A key example of this strong performance is PPHE, the international hospitality real estate group, which reported profits of £17m for H1 2022, up from a loss of £14m year-on-year. The group’s average room rate was £141.1, up 48.2% compared with H1 2021 and up 16% on H1 2019, with occupancy growing to 48% compared with 12.8% in H1 2021 and 76.8% in H1 2019. “After Omicron hit, the UK stayed open, as did our hotels, therefore London occupancy rates ramped up much sooner than our other territories, leading to a record summer. We did better over the summer than in the same period in 2019,” Daniel Kos, chief financial officer at PPHE Hotel Group, says. Across PPHE’s operating markets, booking momentum continued to build throughout Q2, resulting in higher occupancy rates during the weekends in particular, and a gradual return of corporate activity and demand for meetings and events spaces was seen in Q2. Will a record-breaking summer be enough? Despite significant improvements since the start of the year, occupancy rates continue to trail behind pre-pandemic rates of 86.3% in July 2019. As customers are starting to tighten their belts amid the cost-of-living crisis and rising energy costs, hotel demand will likely drop, meaning hotels will have to fight for a limited demand. “Cost pressures and shrinking consumer confidence are creating more cautiousness, which is going to hit hotels,” Tate says. This therefore begs the question of whether record trading in the summer will be enough to insulate the sector from a difficult end to the year. Is this simply the calm before the storm? How to weather the storm “Hotels need to stand out against competition and they can't just trade for the sake of trading, they still need to make a profit,” Tate explains. “The ideal scenario is cutting costs and increasing revenues. In order to cut energy costs, hotels may want to be more strategic in when they decide to open and what parts of the hotels they open.” He suggests that looking at closing certain parts of the hotel, such as the spa or gym, might be on the cards. “Individual hotels can look to see where there is wastage. They can shut off some floors when demand is low to cut down energy and stop heating these areas, rather than heating empty rooms,” Tate notes. However, Kos reveals: “One thing we have learnt from this dreadful two-year period is that keeping a hotel property open with a heartbeat in it is more beneficial when things go back to normal than having a property shut.” He discloses that this economic situation is different from other cycles the group has experienced. Occupancy rates have usually remained stable in past recessions, he says, as people still travel, but they're likely to pay less for a room. “However, we are still behind 2019 occupancy, so we still have a way to go.” To tackle current headwinds, PPHE is implementing a range of energy-saving capital expenditure (capex) measures, such as replacing heating and cooling systems in all properties and implementing LED lighting. Secondly, the group is working to see if it can directly do business with solar plants or wind farms, which is at significantly lower prices as these are long-term agreements. Furthermore, PPHE has been investing heavily for its hotels to go off gas, following plans to reach net zero. Meanwhile, Tate highlights that the government could reintroduce the cut to VAT rates, as seen during the pandemic, to take some weight off hoteliers’ shoulders. “The government can also promote and incentivise businesses to go green to cut energy costs, but this will be more of a long-term solution.” Hotels need to become more energy efficient in order to sustain themselves. Tate says: “Hotels are big energy consuming buildings; they're either being heated in the winter or air conditioned in the summer.” He suggests that hotels can start by replacing their windows, boilers and air conditioning units, however heavy capital outlay is very expensive, and takes time and disruption, therefore it's not going to be an immediate fix. Nevertheless, loyalty schemes and promotions are a short-term solution to offer incentives to customers. “Hotels can lean on existing loyalty schemes to give additional incentives for people to visit. They can also provide offers, even quite far in the future for next summer, to maximise revenues,” says Tate. Similarly, hotels can differentiate themselves by offering an extra night for free or free spa treatments, for example, to entice more custom. Tate concludes: “There's going to be a lot of competition in the market to grab hold of that limited demand. Hotels have to try harder for the winter months to attract that demand, and think outside of just room rates. However, hotels are resilient; they have survived the pandemic, and if they survive this tough period, they’ll come out stronger.”

Are record summer performances the calm before the storm?

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