STR downgrades London post-Brexit, but regional UK up
STR downgrades London post-Brexit, but regional UK up
01 SEPTEMBER 2016 9:12 AM

STR has downgraded London performance for the near future following the Brexit vote, but regional United Kingdom performance is expected to show slight improvement.

LONDON—The United Kingdom has undergone some relatively seismic changes in the three months since May, the month in which STR, parent company of Hotel News Now, last published quarterly performance forecasts.

Back in May, it was assumed the U.K. would vote to remain in the European Union. That did not happen, as U.K. voters used a 23 June referendum to decide to leave the EU, and thus analysts have considered whether any adjustment to end-of-year 2016 and full-year 2017 forecasts was necessary.

London’s performance has been downgraded for the near future, but regional U.K. performance is predicted to show slight improvement, according to Robin Rossmann, managing director of STR.

“For London, forecast 2016 revenue-per-available-room growth has been reduced by 2 percentage points and is now forecast to decline by just over 4% for the year,” Rossman said. “The decline primarily reflects a continued decline in occupancy due to supply growth of 3% per annum outpacing demand growth, which is expected to be only marginally positive. We also expect average room rates to continue to decline as they have done in the year to date, although there may be some upside due to the weak pound sterling making London a more affordable destination, particularly in the luxury segment.”

London’s 2017 forecast also has been reduced, Rossmann said.

“We have also downgraded our 2017 RevPAR forecast by 2 percentage points,” he said. “We still expect to see RevPAR return to positive growth in 2017 on the assumption that the pound sterling will remain at its current weak levels, which will drive demand growth in excess of supply growth. However, the majority of demand growth is expected to come through lower-rated leisure demand replacing lost higher-rated business demand, and, as a result, we are forecasting average daily rate to decline.”

Rossmann said regional U.K. performance is showing slight improvement, though. Regional U.K. RevPAR should climb to 4% growth by the end of 2016 and rise again to 5% in 2017.

“This is underpinned by limited supply growth, stronger results than previously forecast for the year to date and the view that the weaker pound sterling will encourage more staycations and make U.K. destinations more price-competitive for inbound tourism,” Rossmann said. “However, the risk to these forecasts appears on the downside. There is a close correlation between regional U.K. hotel performance and the wider economic performance, so to the extent that there is a significant downturn in gross domestic product beyond current consensus forecasts, this would most likely result in declining RevPAR.”

Staying close to home
U.K. travelers have already paid for their summer vacations this year, so 2016 numbers will likely not show much Brexit impact, Rossmann said, and the regions have shown more percentage growth than London in the last three years. That is a historic achievement for the regions.

If staycations become more popular for U.K. travelers, the regional U.K. would benefit, but perhaps not its major cities such as Birmingham, Manchester, Liverpool, Leeds and Newcastle. Rather, vacation destinations such as Cornwall, The Cotswolds and the Lake District will see the lion’s share of growth.

Confidence is key
All U.K. business, including the hotel industry, therefore will look at what guidance derives from the new administration of Prime Minister Theresa May, notably in relation to when Article 50 of the Lisbon Convention is triggered, the act that will start the full removal of the U.K. from the EU.

No date has been set for that, and there is only speculation as to when it will happen. A conservative estimate is the full process could take between two to three years.

Uncertainty and cautiousness could play more into the equation, and even result in further tweaks in forecasts for the U.K. hotel industry, but one encouraging development was the quick pace of the resignation of former Prime Minister David Cameron and the choice of May as his replacement. That all transpired far quicker than most people expected.

There are other moving parts that might also affect future U.K. hotel-industry performance.

One is the rate of inflation, which on 16 August marginally increased to 0.6% from 0.5%. It is now at its highest point since November 2014, and further increases are likely.

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