LONDON HOTELS SURPRISE ON THE UPSIDE
Contrary to forecasts at the beginning of the year, London hotels achieved positive growth in 2015. Despite a 4% increase in room supply and a significantly lower number of Christmas tourists visiting the capital in December, London hotels recorded a 2% year-on-year increase in profitability. According to CBRE Hotels, this was mainly due to the “Rugby World Cup effect”, when, in October, demand for London hotels reached fever pitch and average room rates surpassed £160 (+7.3% Y-o-Y).
By Q3 2015, economic uncertainty in the key source markets of China and Russia, plus a 4% increase in new hotel stock throughout the year meant that the London Hotel market was potentially facing negative growth by the end of 2015.
“In Q4 however, with over 2.5 million visitors coming to the UK to watch the Rugby World Cup, and 3 out of the 13 rugby stadia being in the capital, there was an explosion in demand for London’s hotels, returning the sector to profitability by year end.
Transaction activity in the market continued at a high rate across 2015 and appetite for investment into the sector remained keen even into Q4 2015, which saw several notable deals, including the 203-room Regency Hotel in Kensington that sold in excess of £100m. The fourth quarter also saw 12 new assets commence trading, including the 5-star InterContinental London The O2 and the London Hilton Bankside.
London is one of the few UK markets, owing to high actual trading performance, that can support new hotel development, despite rising construction costs. This was reflected in a number of forward sale and forward funding deals that took place.