Carl Ridgley, a partner in the Hospitality & Leisure team at Edward Symmons, looks at the challenges facing the regional hotel market and the impact this has had.
The UK hotel market has long been polarised between London and the regions. Businesses in the capital continue to perform well, benefitting from London’s reputation as a world-leading business centre and tourist destination that sustains its occupancy levels regardless of economic changes. By comparison, the regional market remains much more challenging, being closely aligned to the performance of the domestic economy.
While it is incorrect to say the whole of the regional market has been in decline since the crash of 2008, trading conditions have been tough and there are some common themes among poor performers: location, quality and the adaptability of management.
Hotels that occupy prime positions within a location tend to perform best. Secondary locations, which offered overspill capacity during the last boom, have suffered due to reduced demand, and have had to undercut their better-located competitors on room rates in order to generate business.
There is also a direct correlation between the performance of a hotel and the quality of the asset, with many hotels having become cash cows, with owners taking out profits generated without reinvesting in the business. The negative impact of this style of management is particularly noticeable with mid-sector hotels, due to the increased competition caused by the emergence of limited service hotels over the past decade. These are often new-build developments, and of better quality than those which are supposed to be of a higher classification.
Point of no return
For older hotels that have suffered a lack of investment, any works undertaken in the current climate may only maintain current trading levels rather than provide a tangible return on investment. In some instances hotels may have gone beyond the point of no return and may have no viable long-term future as a hotel.
With hotel revenues in the regions struggling to keep up with inflation, profitability has been eroded by a rise in operating costs. Wages represent the highest cost for most hotels, and when considered along with food, utilities, insurance and commission paid to internet booking agents – which can be as high as 20% of room rates – balancing the books can prove a real challenge.
Controlling these costs without impacting the operation or the service level provided is tough, and owners who are unable to adapt to such tough trading conditions, or take a more hands-on approach to the business, tend to struggle.
While it is important from a trading perspective for a hotel to service debts leveraged against it, the value of a hotel is reliant on its earnings and declining income and profit will impact upon the amount that can be realised should a sale be required. As a firm, we have witnessed several examples of purchasers reducing their bids for hotels as profitability has declined.
There are a number of measures that can be taken when dealing with a poorly performing hotel with a view to protecting and ultimately enhancing value. Where the hotel has a future as a trading entity, the first step is to undertake an asset review assessing the existing operation of the hotel, its position in the market, its strengths and weaknesses and the management team.
Once the review has been undertaken, an improvement plan can be developed. Focusing on quick wins to improve demand, making cost savings and investing wisely and selectively can enhance performance and value.
In many cases, businesses can be turned around while maintaining the hotel as a trading entity.
For further information:
Contact Carl Ridgley MRICS
Edward Symmons – Hospitality and Leisure
020 7955 8421 / 07918 651041