London’s hotel market has evolved considerably over recent years, with the sector expanding into new areas such as the City of London/Shoreditch, the Docklands, Greenwich, South Bank and other areas of South London that previously were not on the radar of many developers, hoteliers or hotel investors.
Is London challenging Conrad Hilton’s famous quote: “You need three things for a successful business—location, location, location?” This article will examine:
- the major new hotel areas in London relative to the traditional prime areas;
- what makes the market-leading segments outperform others; and
- whether the new areas really are defying this well-known adage.
When London’s hotels were first conceived, they originally were integrated within or located close to major railway stations—the principal form of transport at the time—in grand and spacious buildings. Central London (West End and Knightsbridge/Victoria), the location of many of the capital’s Royal Parks and attractions, was where many of the capital’s hotels—including iconic ones, such as The Dorchester, The Ritz, The Savoy, Claridge’s and The Connaught—established themselves. The major tourist attractions, West End retail and Theatreland, continue to draw many tourists, and as a result, it has been the prime location for hotel development and ownership in the capital.
Alexandra van Pelt
However, London’s hotel market is spilling outside its established core zone, expanding into virgin areas. This expansion has been influenced by many factors, including:
- the city’s evolution itself, which has developed considerably over the last 20 years and has created new demand markets. The most striking example of this is Canary Wharf, which replaced the obsolete docks in the early 1990s with a vast swathe of office space and necessitated the development of hotels to meet the needs of business travelers to this area;
- the scarcity of available sites in the premium West End, which forced developers to look at less obvious locations, pushing the boundaries for London hotel development;
- the facilitation of global travel, which has had a major impact with passenger movements at Heathrow growing from 39.6 million in 1989 to a peak of 69.4 million in 2010; supply has expanded to meet the demand growth;
- the arrival of budget airlines, which influenced demand with an influx of many more cost-conscious tourists to the city, altering the underlying demand pattern;
- new segments entering the market such as budget and boutique. The requirement for economy accommodation was answered by the expansion of branded budget hotels such as Travelodge, Premier Inn, Ibis and Etap, which were prepared to take on conversions and fixed-income leases. This was very attractive to the investment market and enabled them to compete with other traditional real-estate classes and outbid other competitors for sites. The arrival of the boutique hotel product in the 1980s also had an impact as atypical, smaller or complex floor plates that would not have conformed to the brand standards imposed by the major operators could be converted to hotel use; and
- the advancement of construction practices and availability of buildings for conversion. The conversion of existing buildings to hotels is now more common, with certain buildings no longer deemed fit for their current use, which allowed the London hotel market to expand into new areas. Technological advances mean this can be done cost effectively.
The table below illustrates the revenue-per-available-room performance achieved by a selection of London submarkets in the 12 months to May 2011 and May 2012.
Knightsbridge/Pimlico/Victoria and the West End lead the sample by some distance, achieving RevPAR in the 12 months to May of £167.11 ($262.11) and £162.86 ($255.45), respectively (150% and 146% of the overall Greater London RevPAR, respectively), according to STR Global, sister company of HotelNewsNow.com and the source for all the performance data in this article.
Knightsbridge is the main rate driver in its subset, as Pimlico and Victoria remain more volume driven but at a discount to the Knightsbridge market. The vast majority (86%) of the hotels in the two submarkets are from the upscale to luxury end of the market. While achieving occupancy rates in the low 80s, RevPAR is largely driven by the strong rates that hotels in these subsets achieve. These submarkets crucially contain the Park Lane set, which achieves some of the highest average room rates in London and appeals to the ultra-wealthy, including the Arab and Russian markets, which pay close to rack rate during their stays. Furthermore, these sets capture the hotels with the highest suite ratio in the capital, which further pushes rates.
Hotels in Knightsbridge/Pimlico/Victoria and the West End are not only centrally located, but also they are where the vast majority of London’s leading leisure attractions and high-end retail are situated. Because of this, the hotels have significant appeal to tourists. For some travelers, these areas represent the only places to stay in London.
South London is one of the principal areas that experienced a wholesale transformation over the last 20 years, which was kick-started by the instatement of Waterloo International railway station, until recently the London terminus of the Eurostar international rail service (now relocated to St Pancras International). The South Bank has undergone substantial expansion and improvement of its image with new attractions popping up all along it—the London Dungeon is now joined by the London Eye, the Tate Modern, Sea Life London Aquarium, the OXO Tower, White Cube Bermondsey and Vinopolis, as well as the development of quality office space.
This area of London is now home to a growing number of corporate tenants. Development has spread both east and west (from Wandsworth to Tower Bridge), with high-profile new developments such as London Bridge Quarter and The Shard, Europe’s tallest building, continuing to improve the area’s image. The area also is home to restaurants, bars and retail, servicing the growing number of corporate tenants.
Because of the increase in demand, there has been a surge in new branded hotel supply in South London, with a mixture of budget, midscale and upscale hoteliers expanding their brands, including Travelodge, Premier Inn, CitizenM, Park Plaza and Hilton. Future entrants to the market include Shangri-La and Mondrian, illustrating its appeal to the upper-end of the market.
The South London area achieved a RevPAR of £106.17 ($166.53) in the 12 months to May 2012 (95% of the overall Greater London RevPAR) and recorded strong RevPAR growth of close to 8% that period. With occupancy in the high 80s, this subset enjoys the highest occupancy rates, illustrating its strong appeal to both corporate and leisure guests. These high occupancies also could indicate that the demand generators in these areas are growing faster than hotel supply. Therefore, there is an opportunity for hoteliers to develop here. The mix of midscale and upscale hotels in this subset also will have a positive impact on the rates achieved.
City of London/Shoreditch and Docklands/Greenwich
The City/Shoreditch and Docklands/Greenwich also have seen considerable new branded hotel development in recent years, expanding across all segments of the market.
Since the opening of the Four Seasons Canary Wharf in 1999, the first true luxury hotel in this area, upscale and luxury boutique hotel development has become increasingly prevalent. Prominent hotels that helped kick-start the regeneration of the area include Threadneedles Hotel, a luxury offering; Malmaison Charterhouse Square; and the Hoxton Hotel, which brought chic industrial style at competitive prices to the up-and-coming trendy Hoxton-Shoreditch area.
New upscale entrants include the DoubleTree by Hilton Hotel London – Tower of London, Grange Tower Bridge Hotel, The Boundary, Shoreditch House and Apex Temple Court Hotel, while future developments Four Seasons Heron Plaza and 10 Trinity Square are set to improve the luxury hotel offering in the area. Likewise, the budget end of the market has experienced significant expansion with Travelodge and Premier Inn being the main promoters.
The City/Shoreditch and Docklands/Greenwich achieved RevPAR of £91.15 ($142.97) and £81.93 ($127.51), respectively in the 12 months to May 2012, the lowest of the subsets (achieving 82% and 74% of the overall Greater London RevPAR, respectively). Trading levels tend to be strong during weekdays when these areas drive good corporate business. However, weekends are much more challenging because of the limited leisure activities in the area, the distance from London’s main tourist attractions and as some areas of the City become quieter with numerous shops, pubs and cafés shutting down. (Although the leisure-driven areas such as St. Pauls, Smithfield and Spitalfields tend to stay open.)
Since this area of the city is highly dependent upon corporate demand, average rates can vary considerably between weekdays and the weekend, with rate reductions being offered to leisure guests during weekends and holiday times. As result, year-round occupancy also is challenged. It also should be noted that half of the subset contains hotels from budget to midscale segments, which are likely to have had a downward impact on rates achieved.
Why are these areas of the capital becoming increasingly appealing to hoteliers? Over recent years, the City and East London have expanded into popular locations for international organizations because of its affordable real estate. Canary Wharf kick-started this and is now one of Europe's largest clusters of skyscrapers and Excel London, a major exhibitions and conference center. There also has been an increase in the number of large-scale new office developments in the City such as Heron Tower, 30 St Mary Axe and Broadgate Tower, which have attracted major corporations and driven demand for hotels.
New corporate locations in East London are emerging, such as Tech City (dubbed ‘Silicon Roundabout’), in an area comprising Shoreditch, Hoxton and Old Street. At the same time, London’s transport connections in the east improved with the growth of Stansted and City Airports in particular, facilitating access to the area. Along with the increase in corporate demand generators, the City has become more diverse, with a notable increase in services available in the City/Shoreditch: retail improved significantly and new restaurants, bars, nightclubs and cinemas have sprung up extending time spent in the area to past 11 p.m. Moreover, this wholesale rejuvenation includes new residential developments, which have taken shape around the City over the last 10 to 15 years, and as a result these areas have now become acceptable and aspirational places to live, work and play. This regeneration of the east of London also has been accelerated in the build-up to the Olympics.
Attractions north of the river, such as St Paul’s Cathedral, the Tower of London and Tower Bridge continue to appeal to a significant number of leisure tourists while areas on the City fringe such as Smithfield and Spitalfields markets are popular weekend tourist destinations. Further south in Greenwich, the O2 Arena, the world's busiest music arena, has enhanced the area’s appeal. However, attractions such as the O2 Arena, National Maritime Museum, Royal Observatory and Old Royal Naval College, are more likely to appeal to tourists for a day trip, and those that stay in the local area are likely to expect a rate discount. It is not envisaged that this trend will change in the short term. In addition, the rate differential between weekdays and weekends will remain significant in these two subsets because of the nature of demand. Nonetheless, the City/Shoreditch and Docklands/Greenwich are still emerging and occupancy is likely to grow rate further.
Knightsbridge and the West End are likely to continue to be London’s hotel market leaders for some time, and it will be difficult for new areas to attract clientele away from these hotels. “Location, location, location” is still paramount for hotels, but as new areas evolved within London, these districts gained prominence, changing the perception of prime locations in London.
The dynamics of the city itself will continue to influence hotel guests since London is one of the world’s largest cities and takes a long time to cross. The growing number of major connecting points (City Airport, St. Pancras International, London Paddington and London Victoria) facilitated this, and it is now possible for tourists to be accommodated in the areas where the core of their activities in London take place.
It will be interesting to see which districts will grow in popularity in the coming years with future potential contenders, such as north London and Midtown high on the list.
STR Global can be contacted www.strglobal.com or firstname.lastname@example.org
Alexandra van Pelt is a Senior Consultant at Horwath HTL (UK). She joined the company in 2010 and is assisting the team with Valuations, Consultancy, Development and Asset Management assignments. Alexandra has over seven years of experience in the hospitality industry. Alexandra speaks fluent French and Spanish and her expertise lies in the following areas: Development advisory, strategic advice in connection with portfolio development, hotel positioning and branding, feasibility studies including cross-border assignments, single asset and portfolio valuations, operational reviews, hotel disposal and due diligence. You can reach her at email@example.com
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