Hotels

Travel demand will be strong in 2024. While consumers’ disposable income will remain somewhat constrained by high inflation, international tourist numbers are expected to remain high. Inflation will also impact labour costs, which will raise operational costs. As a result, we expect Average Daily Rates (ADRs) to increase to maintain profit levels.

Key Takeaways

1. Demand from tourism will be strong in London, which remains the key hotel destination in the UK. Other key cities likely to attract high tourism numbers are Edinburgh and Dublin.
2. 2024 could be the first post-COVID year that sees occupancy rates surpass 2019 levels. Currently, UK occupancy outside London has been lagging on pre-pandemic levels, but expected demand for domestic leisure will help hotel occupancy.
3. The strong Average Daily Rate (ADR) and Revenue per Available Room (RevPAR) reported by UK hotels is expected to continue into 2024.
4. Yields are expected to flatten once pricing meets an equilibrium among buyers and sellers. The investment volume is expected to be lower than previous years due to the high cost of financing. However, investment activity will resume once interest rates reach a peak and refinancing occurs.

Recovery brings cautious optimism to hotels sector 

Recovery of inbound tourism 

Tourism numbers have continued to recover this year, with Heathrow passenger numbers above 2019 levels. This has been a welcome boost for the sector considering the challenging economic environment. In 2024, we expect to see continued growth in inbound tourism stays, particularly in London, which will continue to cement its reputation as a global destination for business, entertainment, and events. 

Domestic leisure 

There has been strong demand for domestic leisure destinations. This has particularly benefitted regional UK areas including coastal towns. One of the main drivers of domestic tourism has been the UK’s weak pound, which has led to many households opting for holidays within Britain. With household finances remaining squeezed into 2024, the staycation trend is likely to continue next year.  

Key performance indicators 

The hotel sector has experienced strong trading performance, with Average Daily Rate (ADR) and Revenue per Available Room (RevPAR) well above 2019 levels – up 20% compared to the corresponding month in 2019. Heading into 2024, it remains to be seen if operators can continue the high ADR levels achieved since the COVID-19 recovery. In particular, the challenge will be for ADR to keep pace with cost inflation. Regional markets may find this particularly challenging due to the reliance on demand from domestic visitors. 

Operational performance 

High levels of inflation have caused operational costs to rise, particularly in utility costs and payroll PAR, which has risen 17% from last year. Despite the rise in costs, year to date Gross Operating Profit PAR is up 18% for the UK on a year on year comparison. 2024 is still expected to see relatively high inflationary levels, which means operators will have to be proactive with revenue management and stringent cost control.

Figure 23: Heathrow passenger numbers, seasonally adjusted

Source: CBRE Research

Figure 24: UK Hotel KPI performance

Source: CBRE Research

Investment market 

The rise in interest rates has tempered investor transaction activity within the UK hotel market. However, we think the interest rate cycle has reached its peak and expect rates to remain at this level for at least the first half of 2024. Once financing stabilises, yields should begin to stabilise too, which should end the ongoing buyer-seller pricing disparity and result in more hotel investment activity. 

2024 trend 

As operators realise the impact technology can play in hotel operations, it is likely to play a central role in benefitting customer travel experience. With artificial intelligence (AI) consistently improving and becoming more prevalent in use, AI has the possibility to improve the personalisation of customers’ experience. For instance, online bookings would recognise the guest’s preferences for their stay and propose suitable room suggestions. Guest check-in could become more personal too, with staff already having knowledge of guest hospitality preferences. 

Figure 25: UK prime hotel yields

Source: CBRE Research

Figure 26: UK hotel investment volume

Source: CBRE Research