The UK hotel industry is experiencing its best performing year since 2000 and looks set for steady growth over the next three years, according to PricewaterhouseCoopers LLP ‘Hospitality Directions Europe - UK Hotel forecast’ released today.

Favourable dynamics including better than expected economic growth, a sustained recovery in corporate travel demand and leisure travel volumes and few over-supply concerns have all contributed to forecast RevPAR growth (a key industry metric) of 5.5 per cent for 2006, 4.5 per cent for 2007 and 4.9 per cent for 2008.

This growth takes RevPAR to £56.18 this year, £58.69 in 2007 (outgunning the record-year 2000) and with the potential of five years of uninterrupted growth, RevPAR should reach £61.53 by 2008.

Liz Hall, head of research and editor of ‘Hospitality Directions Europe,’ PricewaterhouseCoopers LLP comments:

“The hotel sector has had to work hard over the last few years to sustain its recovery. The current boom is very much a case of London having the year it should have had in 2005. London is the engine driving the UK at the moment with occupancies at their highest for almost 10 years and robust room rates growth pushing RevPAR to 12.9 per cent in 2006 or 9.9 per cent stripping out inflation.

Outside London the picture has been mixed but there are still some exciting stories, reflecting the regeneration of some of our historic destination cities and the buoyant short breaks market as well as new concepts opening and strong mid-market performances. Reflecting this, we expect to see good RevPAR growth in Birmingham and Edinburgh this year and further solid growth over the next two years.”

Risks for travel demand remain significant in an industry that is both cyclical and vulnerable to external events. Hall adds:

“Last year we saw a very resilient hotel and travel sector bounce back quickly after the July incidents and we anticipate few long-lasting impacts from the recent events at UK airports.

But a harder than expected economic landing, rising oil and energy costs, terrorism, bird flu fears, and a discretionary income squeeze as well as the spectre of a bed tax could all impact travel demand and shift performance off-course.”

Robert Milburn, UK hospitality and leisure sector leader, PricewaterhouseCoopers LLP, said it would be those hotels that move with the times that perform the best in future:

“Location may remain king but hotels that can differentiate themselves through brand, product and guest experience, will benefit most from anticipated rate growth levels. For others, the going may prove tougher.

This is a good news story for UK hotels. While London is undoubtedly booming at the moment, the longer-term benefits may not yet be seen outside the capital where the investment in new and reinvigorated products is continuing apace. Private equity certainly seems to see this as an opportunity judging by the recent levels of deal activity.”

City Forecasts

London knows better than most that it has to keep reinventing itself to maintain market share. The capital has seen healthy demand for luxury hotels and the return of events, like the British International Motor Show, have helped occupancy levels grow 7.8 per cent to almost 82 percent for 2006. These are expected to hover around 83 per cent in 2007 and 2008 by then getting closer to capacity when room rates are expected to nudge up growth. Average room rates are anticipated to increase to £112.04 in 2006, racing to £123.43 by 2008. Records could be broken in 2008 as RevPAR tops £100 – the first time ever.

Edinburgh has recently been rated the second fastest growing economy of 20 of the world’s top cities. With a vibrant tourism industry, the city is performing strongly with RevPAR growth of 6.6 per cent in 2006, 5.2 per cent expected in 2007 and 6.3 per cent in 2008. Occupancies are a major factor driving this growth and will reach almost 80 per cent this year before flattening out in the next few years.

Manchester is expected to see a small RevPAR decline in 2006, as the city fully absorbs all the recent additions to supply. New openings in the future will include the Hilton in the Beetham Tower next month; the City Inn in 2007; further ahead a Travelodge and Sleeperz - a service development set to be built next to Piccadilly Station. We expect a return to RevPAR growth in 2007 of 2.1 per cent growth and a further 4 per cent gain in 2008.

Birmingham is one of the UK’s leading business tourism destinations. Reliance of the city’s hotel market on conference related business leads to a cyclical market as the events themselves operate on a cycle that may occur every few years. PricewaterhouseCoopers is uncertain what the effect of the loss of the British International Motor Show may be for the city but it is still expected to achieve very strong 7 per cent RevPAR growth this year, dipping a little to 5 per cent in 2007 and 4.4 per cent in 2008. This softening RevPAR growth is due to occupancy growth slowing.

Provinces Forecast

Provincial prospects have been more mixed and have been revised down since our March forecast. We now expect 3 per cent RevPAR gains for 2006, 2.9 per cent in 2007 and 3.1 per cent in 2008. Occupancies are likely to remain static at around 70 per cent over the next three years. Operators are still looking at the provinces favourably though, with notable investment from key players.