European recovery gains momentum

• The region's supply increased 1.2% and demand is up 6.8% in year-to-date results.
• In spite of the larger fall in RevPAR in 2009, the current upswing in Europe is supported by the close correlation between demand and ADR.
• Among the four regions in Europe, Western Europe reported the highest ADR, EUR111.

Across the globe hotel demand in terms of rooms sold is back and Europe is no exception.  Data from STR Global, the leading provider of market data to the world’s hotel industry, shows that coupled with only a modest rise of 1.2% in the supply of available rooms for the year to September 2010 (YTD) Europe has year-on-year improvements in all three key indices – occupancy, average daily rate (ADR) and revenue per available room (RevPAR).  Europe’s demand has improved each month since December 2009 resulting in a 6.8% increase YTD.

YTD supply and demand increases

Source: STR Global

Like most businesses hotel performance is of a cyclical nature and this is generally expected to take place over an eight to ten year period.  European market performance as measured by annualised RevPAR, using a 12-month rolling average to even out seasonality, saw the peak of 2001 followed by the decline to 2003 that accompanied the Iraq war and SARS.  There followed a four-year climb back to the next peak in 2008 when nevertheless the annualised RevPAR of €73.21 failed to match that of €75.45 in 2001.  The drop from 2008 to the recent low in 2009 was certainly swifter as the Global Financial Crisis and economic downturn bit, and further too, with RevPAR dropping to €57.40 compared with €60.23 in 2003. 

 European rolling-12 RevPAR and occupancy, ADR % change

Source: STR Global

 In spite of the larger fall in RevPAR in 2009, the current upswing for Europe is supported by the close correlation between demand and ADR.  Historically increases in rate follow increases in demand on the basis that hoteliers can only begin to increase rates when there is growing demand for their product.  Of note is the shortening of the lag in time between hotel demand, based on an annualised, 12-month rolling average, crossing the 0% threshold and ADR following.  Take the movement of demand into positive territory in mid-2003, as can be seen in the graph below, the rolling-12 ADR continued to fall for some months after and did not begin positive growth until late 2004.  More recently, demand growth moved from negative to positive in April/May 2010 to be followed just months later by ADR in August/September 2010.  Whilst this most recent downturn has seen both demand and ADR fall to new lows, the faster rate of pick up of demand matched so closely by ADR is heartening news for the industry.

European rolling-12 demand & ADR % change

Source: STR Global

Looking at European hotel performance on a regional and city level does reveal some differing and unexpected results.  Using rolling-12 month RevPAR figures, the following analysis looks at the difference between current performance in September 2010 and the peak for a particular destination since January 2008.  Whilst most destinations, unsurprisingly, have not reached their peak performances yet there are a couple of notable exceptions.  The rolling-12 month September 2010 performances of London and Istanbul for example, are better than any previous month since beginning 2008. 

Eastern Europe has seen difficult recent economic times where, for the most part, falls in ADR and increased supply have hit RevPAR.  Specifically, troubled destinations like Prague show in September 2010 a 44% decline in RevPAR since their high of January 2008 and Bratislava a fall of 53% since their peak in April 2008.  Similarly, Budapest currently has a peak to September 2010 gap of 27% before levels of RevPAR in May 2008 will be matched again.  On the other hand, the stronger performance of the Polish economy together with the absorption of the last of the large supply increases sees Warsaw only now 12% behind its peak in June 2008, relatively modest compare to the others. 

Northern Europe shows a similarly mixed picture with the Irish capital struggling whilst London shines.  Similar to some other Eurozone countries, Dublin has been struggling in the face of harsh austerity measures with RevPAR in September 2010 some 35% down from its peak in January 2008. London in the meanwhile has just seen in July 2010 its best month since 1999.  A world-class destination, the English capital did not loose so much of its leisure business in the recent downturn and the return of corporate business has boosted performance.  The month of July benefited further from the Farnborough Air Show and an early Ramadan.  A more average looking performance for the Nordic countries sees Oslo in September 2010 down 15% since its August 2008 peak and Copenhagen similarly down 18% from September 2008.  Bolstered by the performance of the Swedish economy both are bettered by Stockholm, which by September 2010 saw a decline of only 3% since its peak of June 2008.

In Southern Europe, Istanbul shows a relative performance comparable to that of London’s RevPAR in that it is also now peaking since 2008.  The relative strength of the Turkish economy plus the designation of Istanbul as European Capital of Culture this year both helped to raise the profile & performance of the city.  Otherwise the effect on RevPAR of the structural economic problems faced by countries such as Greece, Spain and Portugal are not invidious.  At September 2010 Athens was down -23% (since October 2008), Madrid by -27% (May 2008) and Lisbon by -19% (March 2008).

Hotel performance in Western Europe, which has the highest ADR at €110 amongst the four regions, shows steadier results and less significant declines from which to recover.  This is particularly so in Berlin where the German economy is pulling strongly out of the recession and hotel performance benefitted as well from the reduction in VAT on hotel stays from 19% to 7%.   By September 2010 Berlin shows a decline of just 2% since its peak in October 2008.  Leisure demand in Paris has continued to hold and in September 2010 the city faces an 8% decline in RevPAR since its peak of August 2008 that needs to be made up.  Amsterdam sees in September 2010 a 19% deficit of performance since May 2008 but a gradual improvement is underway due to increased demand for the YTD and the return of MICE business.

Source: STR Global

“The outlook for hotel performance shows Europe on a bumpy road to recovery,” explained Konstanze Auernheimer, Director of Marketing & Analysis, STR Global, “The recovery is set to continue but is not without its risks. The mixed picture of highs and lows sit within a positive performance envelope that will need to maintain momentum as the austerity measures by governments across the continent start to impact.”  Konstanze will be presenting at the Eye for Travel conference on 23rd November 2010 in Amsterdam.  Konstanze can be contacted on kauernheimer@strglobal.com

About STR Global:

STR Global provides clients—including hotel operators, developers, financiers, analysts and suppliers to the hotel industry—access to hotel research with regular and custom reports covering Europe, Middle East, Africa, Asia Pacific and South America. STR Global provides a single source of global hotel data covering daily and monthly performance data, forecasts, annual profitability, pipeline and census information. STR Global is part of the STR family of companies and is proudly associated with STR, RRC Associates, STR Analytics, and HotelNewsNow.com. For more information, please visit www.strglobal.com.