The hotel sector’s recovery is underway

Hotels are a welcome escape for millions of people every year. Whether for business or pleasure, hotels have long provided guests an opportunity to explore new places, put their feet up and be looked after. Yet, the sector has faced a significant period of turbulence in recent years. From the Covid-19 pandemic to staff shortages and rising energy costs, it has been a challenging time for them. As we look towards the course of 2023, is there light at the end of the tunnel? Reason for optimism Research has recently found that operating performance had improved over 2022, moving hotels’ financial results closer to pre-pandemic levels. Across the UK, operators also saw significant growth, with the industry reaching peak RevPAR (Revenue Per Available Room) of upwards of 10% and 15% against 2019. The UK is also starting to see a more diversified market emerge, with changing consumer behaviours impacting the locations they are opting to visit. International travel restrictions stimulated ‘the great British staycation’, which caused hotels to experience buoyant trading performances across coast and country markets. During 2022, this was complemented by revenue growth across urban markets as consumers returned to cities and international travel recommenced. The strong trading performance achieved during 2022 came despite the impact of Omicron in the first few months of the year, and in an environment in which flight passengers remained 28% below that of 2019. Due to London’s appeal as an internationally renowned capital, the UK can expect increasing overseas tourism this year. Inbound travel from the US and the Middle East are returning to the UK as a result of minimal covid restrictions and the favourable exchange rate. With increased international visitation, vendors can expect an increase in international investors as well. The challenging climate ahead However, this optimism should be treated with caution. With challenging economic headwinds, focus will be on the debt markets this year. With the Bank of England base rate already reaching a 14-year high at 4%, the increased cost of borrowing will inevitably have an impact on investor sentiment, and in some instances, asset pricing. In the UK, we anticipate that this trend will be reflected by a limited number of portfolio transactions taking place compared with previous years. These will be replaced with smaller individual investment sales, most often to existing owner operators, many of which are cash-rich and able to complete without the requirement of third-party financing. The rise of bleisure travel Despite the challenges, there are green shoots of recovery for the European hotel sector. One of the key themes for 2023 is the opportunity to redefine hospitality, with a renewed focus for businesses to own the entire travel experience. People are reassessing their priorities with a heightened focus on work-life balance, spending more quality time with their friends and family, as well as a renewed desire to travel to different places and enjoy new experiences. This presents an exciting opportunity for the hotel sector. It has been a tough few years for the business travel industry, as global business travel spend dropped by 53.8% during the early days of the pandemic in 2020. Reduced allocation for travel in corporate budgets, environmentally conscious corporate strategies favouring virtual meetings, and the prevalence of working remotely, have all since influenced the recovery of the business travel sector. Last year we saw the early indications that demand for this kind of travel could be returning. In the face of these challenges, it is encouraging to see that the hotel sector is adapting. In a world where many people work remotely, hotels are now expanding their offerings and becoming places where visitors can use their weekend breaks to accommodate a few days on either end of their stays for work. A hybrid of business and leisure, “bleisure”, is being facilitated by hotels with the opening of co-working spaces for professionals, offering F&B services similar to cafes, and renting out short-term spaces for conferences and events. Investing in ways to adapt and utilise space in new ways to meet the needs of today’s modern traveller presents hotel owners and operators an exciting opportunity to capitalise on new or additional ancillary revenue, which can directly impact the bottom line profit. Conclusion While there may still be some way to go before the UK hotel market returns to pre-pandemic levels, hotel owners and operators who embrace creative solutions to attract demand and maintain high service levels, while navigating labour issues and high operational expenses, stand to benefit from the industry’s ongoing recovery. The last few years have demonstrated the industry’s resilience, and now that we are on a firmer footing, we expect the recovery of travel to continue well into 2023. With this recovery, increasing appetite from overseas and domestic investors will also return.

The hotel sector’s recovery is underway

By Kerr Young, the head of UK national hotels transactions at JLL

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