Could Donald Trump help the London hotel market?

London has always been a strong hotel market and it has only gone from strength to strength since the pandemic. However, as costs and macro-economic factors continue to eat away at margins could the market be in for a correction. Will Kirkpatrick, head of hotels and extended stay at Newmark, believes that while the hotel market in London is as strong as ever, it has some issues that need to be addressed.

Supply side issue

The biggest issue Kirkpatrick has seen in the market, as part of Newmark’s inaugural London Hotels Report, is a lack of supply. Put simply, London does not have enough hotels to meet its demand. In some respects, this is a good thing. The demand is not going anywhere meaning that hotels in the city are able to charge more for their rooms. This is evidenced by the fact that RevPAR for luxury hotels in London outperformed the Consumer Price Index (CPI) by 8.1% in the last 10 years. According to Kirkpatrick, in some areas RevPAR has increased 30-40% all while staff and energy costs have been increasing.

However, Kirkpatrick believes this presents a problem for London, as hotel prices cannot go up forever, especially as people’s incomes become stretched. Should the current trend continue he believes that the city is at risk of becoming overpriced compared to similar cities in other countries, which could hit hotel’s bottom line.

It seems as if the market has caught up to the fact that the city is in danger of becoming overpriced. According to Kirkpatrick, average daily rates have started to cool off in the last year, a sign that people are not willing to pay as much for a hotel as they were previously. The good news is that occupancy has not dropped, meaning that the demand has not disappeared. The issue is, if hotels in the city cannot increase prices much more at a time when costs are increasing then their margins are potentially going to be very squeezed.

What can be done to help?

If hotel margins are going to become squeezed, what can be done to help this? One thing that will help businesses is the continued return of tourists. While the pandemic is firmly in the rearview mirror, visitor levels have still not returned to 2019 levels. In particular, London has seen less Chinese tourists compared to 2019, as the country was slower to exit out of the pandemic. However, as the country’s middle class continues to burgeon and it moves away from the pandemic, London should begin to see more tourists return.

Another issue facing hotels, and all hospitality businesses, is the issue of business rates. This will be of particular concern to hotels at either end of the luxury spectrum. As of writing the government has not decided at what level it will set transition relief for the next five years. This is a particular issue as the sector has recently been hit with the increase to National Living Wage and employer National Insurance Contributions, so higher business rates could potentially eat into profit margins even more. Kirkpatrick would like to see the government set rates as low as possible. Otherwise, he believes that many hoteliers will have to consider redundancies, which is no good for anyone.

The Trump opportunity

With all that being said, the political turmoil in the United States could present an opportunity to the London hotel market. First of all, as a result of President Donald Trump’s aggression towards Canada and the subsequent backlash in Canada, the UK and London hotel market is set to see increased traffic from the land of maple syrup.

Kirkpatrick also states that some of Newmark’s clients have already seen increased interest from the US as a result of the uncertainty. One of its London estates has already seen an influx in applicants from America who want to come and live in London on a short term basis. This increased interest is a positive for London and its hotels as the city is already a popular destination for American visitors. On average, tourists from the US spend £221 per head per night, compared with visitors from the EU and China who spend £142 per head per night.

The arts and culture in the city alongside the royal family and shared language mean that American tourists like going there. London also benefits as it is still seen as the gateway to Europe for business. One thing that may dampen some demand from across the pond is the fact that various economic decisions from Trump have devalued the dollar against the pound, making it more expensive for American tourists to visit.

Overall, London has a strong hotel market as it has a large mix of demand drivers as a result of all the various things that go on in the city, from sporting events to universities to business. That means that demand is year round and less likely to drop. However, the city needs to build more hotels to keep up. Kirkpatrick believes that building conversions will allow this happen despite the fact that the cost of borrowing and building anything has increased in recent years.