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On the operational front, hotel demand will remain strong and will hopefully enjoy the first full COVID-free year since 2019. The dynamics around high-end leisure remain favourable in both the short and long term, and the economy segment will hold its gains from the re-bound post-COVID. Corporate travel may face budgetary pressures in the face of wider economic weakness, but demand for small corporate MICE (Meetings, Incentives, Conferences and Exhibitions) business appears to be growing. As the debt market stabilises, the operating fundamentals will attract investors to step in, with growing investment volumes during the year.

Key Takeaways

  1. The rebound of the sector post-COVID has been more rapid than anyone predicted. The early rebounders (economy and luxury leisure) are expected to hold performance levels close to 2022 and continue to grow in later 2023. For those in the ‘squeezed middle’, it will be imperative to know how a property’s positioning is suited to the shifting market environment.    
  2. A focus on operations management will be key in the context of inflation that affects supplies, wages and utilities. On the revenue side, the sector’s historical ability to outpace inflation cannot be taken for granted, but its ability to reprice daily is still a key aspect for the sector while inflation remains high.
  3. Demand for larger events may remain muted, but the smaller MICE market appears to have growing demand. Corporates are holding smaller team meetings, but demand for in-person events appears strong – something that is expected to continue nationwide.
  4. The rapid slowdown in investment activity caused by the interest rate volatility is expected to reverse as both inflation and interest rate movements stabilise, providing investors with the landscape to invest in a sector where long-term demand fundamentals appear strong.

2023: A multi-speed market that requires operating know-how

Coming off the back of the worst industry crisis in history caused by the pandemic, the UK hotel sector staged a remarkable recovery during 2022. The sector has, historically, been affected by slowdowns in GDP growth. In the current version, we expect that the slowdown’s impact will be felt differently across different segments. Previously, people have tended not to stop travelling entirely, though they may travel more selectively. 

Two groups that we expect to do better are the luxury/leisure segment, poised to continue to do well as its demographic will be less vulnerable to the issues flowing from any recession. Alongside the economy/budget segment, which was the first segment to capture rebounding demand when travellers ventured out tentatively post-COVID – we see this segment as well placed to keep holding that demand. These segments also benefit from either an ability to reprice strongly to offset inflationary costs (in the case of luxury), or minimise the effect of cost inflation due to lower nominal levels of inputs (budget). Investors will see the benefits of these attributes. 

In contrast, full-service hotels that face competitive pressure on rates while requiring full input costs will come most under pressure, and it is here where dislocation may create opportunities for change that attract a more active investment strategy.

Large conference and group events remain a challenging arena for the sector, due to the impact of the pandemic, and as this segment tends to track the overall economy. However, the focus for businesses to get people together has been building, and operators are reporting strong in-bound inquiries for smaller MICE business. Investors will look for operators with sales teams that are equipped to capture this demand.

Affected dramatically from mid-year by the volatility in base rates, 2022 will have been one of the quietest investment years on record in the UK. As this volatility abates, investors surveying the landscape will see opportunities both in terms strong underlying fundamentals and more challenged segments that are ripe for repositioning.

Figure 20: Hotel performance, regional UK

Source: HotStats & CBRE Forecasts

Figure 21: Hotel performance, London

Source: HotStats & CBRE Forecasts

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Contacts

  • Alice Marwick

    Head of OPRE Research

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