INACTIVITY IS STIFLING

Philip Johnston MRICS, Founder of Guildprop, Hotel and Leisure Property Consultants and former Head of Hotels at Savills gives an insight to the current state of the hospitality market.

The stagnation of the hotel sector is causing considerable concern within the industry, with many of the large property corporates reporting the quietest transactional market for over 20 years.

This inactivity is primarily caused by uncertainty in the lending and finance markets, as interest rate rises continue to dominate thinking and policy amongst buyers and sellers alike. A significant adjustment in pricing will need to occur, as investors will be dissuaded from an investment yield of 6% when they see interest rates at 4.5% and commercial lending 2-3 % above this.

The continuation of high inflation and increasing staff costs, both from finding and paying people, is causing much disillusionment amongst owners and operators. It appears that the continued policy of a rate rises from the Bank of England will do little to ease these pressures. The annual inflation rate sits stubbornly high, as the core CPIH annual inflation rate rose from 5.3% to 5.7% between January and February 2023.

In addition, the price of food in the UK rose at the fastest pace in 45 years last month in, keeping inflation above 10% for a seventh straight month amid a cost-of-living crisis that has fuelled a wave of strikes by government workers.

The arrival of summer, plus government intervention appears to have eased some of the worry around utility bills, but the general cost of living crisis has not gone away. Businesses are concerned, over both corporate and leisure spending particularly in Q3 and Q4.

Many operators have been turning their hotels over to ‘Humanitarian Contracts’ via the Home Office. These can be an assured form of income, but concerns over the potentially short lease length and the anticipated wear and tear, combined with poor press and local reaction has meant several of these deals have fallen away in the last two months, despite continued demand.

Now more than ever innovation is required in the ownership, development, and investment into the hotel sector. Many of my conversations within the industry is to remind people that is it not often the fault of the operator or owner, and that this is an industry and nationwide problem. guildprop.com

Trading remains strong in many well-run establishments, and although we have not seen a significant number of distressed sellers, there are major price adjustments occurring and despite it all now is a good time to find opportunities, some at below the cost of building.

Even with current market conditions and inactivity, the hotel sector is remarkable at evolving and we are seeing new entrants into the UK market, taking the opportunity to acquire market position whilst the competition is hesitant.

I remain optimistic about the sector’s ability to adjust and hopefully the wider economic issues will subside significantly during 2023.