Knight Frank recently chaired a UK hotels roundtable debate, an annual series chaired by CoStar News that reflects with leading figures in the hotels sector on the state of the market.
The debate has been split into two parts with the second half focused on the impact of tourist taxes and dynamic pricing, the likely impact of Labour's upcoming first budget, and predictions for the next 12 months.
For the first part click here.
The debate, which took place at Knight Frank's London headquarters at 55 Baker Street, was attended by: Shaun Roy, head of hotels, Knight Frank; Karen Callahan, head of hotel valuations and advisory, UK; Knight Frank, Francesca Scott, executive support, hotels; Knight Frank, Paul Norman, managing editor, UK and Europe, CoStar News; Cristina Balekjian, director of hospitality research, CoStar; James Dunne, head of operational real estate, Abrdn; Tony O'Brien, Travelodge UK development director; Janice Mitten, business development director, HKS Architects; Anil Khanna, managing director, KE Hotels; Louise Wallace, head of corporate, M&A, specialising in hotels and leisure, CMS; Nick Kalamaras, head of hospitality and leisure, MetroBank.
PN: So, the tourist tax: with Bournemouth Christchurch Poole [council] having implemented £2 pound tax and Edinburgh [is] expected to introduce a 5% on roommates. How will this impact change in average daily rates? Obviously we see it in Europe, where it is very common, but I don't know, what's everyone thinking about that?
AK: They've got a tax in Manchester they've brought in, and I don't think it's had a massive impact, but they have started it low, about £1. But once you start these things, give it 10 years, it won't be a pound.
CB: Not every hotel is part of the scheme.
AK: It has to be of a certain size.
KC: Yes.
NK: I think it's going to be location-specific, I think Edinburgh. Yeah. I'm not too sure. Is that really going to have an impact more than in a smaller regional location like maybe Bournemouth?
JM: I think the small numbers won’t have an impact on the number of tourists, but it's important to know what that money will be spent on. And, will Airbnbs, which is part of the problem of overtourism within some international locations, will they be subject to tourist taxes?
AK: A lot of cities around Europe have started trying to limit the number of tourists coming in, Barcelona's a perfect example where they're really trying to restrict it. Airbnb is a big factor, because before the hotel number was limiting the number of people in the city, and now with Airbnb it's snowballing. And that's what New York have done it, haven't they? Because no one can afford to rent now.
But in terms of tourist tax in this country, I just think councils are looking at ways to raise finance, aren't they? But that's what they said in Manchester, this was going to be helping to get more conventions and more events to the city, but, you know, we haven't seen any activity. It's raising quite a lot of revenue, I think all these hotels in Manchester are paying, and most of the hotels are paying this £1 per guest tax, it's quite big numbers.
TO: Paul, to your question about what's it going to do to average daily rates. Clearly, additional costs often go through to the customer to depress ADRs. You either put your prices up or it comes off your bottom line, which I think ultimately impacts upon the independents more than it does on the major brands. With the major brands, you can just spread it across your whole estate, but if you’ve got a small number of hotels in that market, then it's going to cost you.
PN: So it's obviously come to some of the hotels you have, and that's what you're doing basically in response to this.
TO: Yeah, we haven't put pricing up, but you know, we've obviously seen a trend in the industry of the number of independents shrinking over the last 20 years, and down to about 40% of the market being independent. That trend is accelerating. And that's going to continue, and probably shrink to maybe 30% of the market over the next 10 or 15 years.
SR: It's been one-way traffic, really, hasn't it?
TO: Yes.
LW: But you don't separately mark it on the bills then and say, this is the price plus taxes, because that's what they do in other jurisdictions where there is a city tax, isn't it?
AK: That's what we're doing in Manchester.
LW: Is it?
AK: We’re making it very clear to the customers.
LW: We tend to do VAT-inclusive rates, don't we in the UK?
AK: In America, they do that as well.
LW: Yes, they do, plus tax, plus service.
AK: So, it's really good the way they split it. It's really clear to the customer that this is not tax, we're not getting less.
SR: And then you've got to tip the person who's taking you to your room.
LW: Yes. “I've still got to get through college somehow.”
PN: Are there any implications for the hotel sector from the tax changes being rumoured for inclusion in the October budget.
LW: What are they?
AK: I don't know.
PN: Well, they've said they will abolish the business rates system, Labour, but what is in its place is the question, I guess.
LW: That's the thing. I wonder, because I'm a bit of a glass-half-full sort of girl, that we're hearing it's all going to be so bad, so that when it does come, it's actually not going to be as bad as we think it is, but depending on what area.
AK: I'm not sure I agree with that. I think initially the talk was that they were going to be quite sensible with taxation, but I think as time's getting nearer to the budget and the gap's getting bigger as the pay rises kick in, where the unions [are] putting more pressure on them, I'm very concerned that they're going to start making quite a negative Budget for hotels, buildings, commercial property. When you want to sell, you know, what kind of taxation applies? And I think they're going to make it quite tricky because they'll probably look at it as a way to raise revenue, but [it will] really affect the market. It’s already been affected quite a lot over the years.
SR: I think the most signposted one is capital gains tax increase.
AK: Yes.
SR: That's got to have an impact on desirability too.
AK: And just the rules associated with it, you know, that won't get any headlines because it's too much in the detail, but actually will have a big effect on that.
NK: Sorry, I was going to ask Louise this question: the last 15, 16 years, we've kind of seen movement with regards to corporate structures, such as clients bringing their structures back onshore. Have you seen any movement with all these rumours around CGT increases, are any clients looking to move them back offshore?
LW: Well, I think it, because of the non-resident landlord schemes, it's quite hard. I’m not a tax expert, but I’ve not seen that much taken off because I think they're trying to catch any which way.
I think the rates probably will change, which will obviously mean…we expected, and we've obviously got lots of transactions going on in the firm at the moment of people trying to beat the budget, but they're more, I would say, in the leisure sector than they are in the hotel sector, maybe because there are more individuals who are selling out at the moment.
So the restaurant side of things and the food service, we've got lots of deals on, and some as a rush to get them over the line before [30] October.
SR: We haven't got any deals on for that reason.
LW: We certainly have in the leisure sector, where there are more, sort of, individuals personally making gains.
SR: Where we are definitely getting feedback is it is less desirable, that's my word, lack of desire to come to the UK because of a shifting or unknown tax regime, particularly from hig- net-worth privates, which are often drawn to the hotel-hospitality sector because they know they like it, it's very global. We're having people put on ice their plans until they know what this new Labour government has in mind.
LW: I think that's right. It's uncertainty, isn't it?
SR: People don’t like uncertainty.
LW: No, they don't. They would like to be able to price the risk and if they don't know what it is, they can't price that.
SR: But we all remember, was it 10, 15 years ago and they put up stamp duty from 4% to 5%. Everyone was like “this is a nightmare”. It took about four weeks and everyone had just factored into the numbers and the market kept going. All the market wants is facts and stability.
KC: Well, let's hope they don't move stamp duty because obviously at the top end of the residential market, you're at, 12%. So, if the precedent is there, is that going to come into the commercial market, because that could be one area that they could target and then that would have quite an impact, wouldn't it?
LW: And that will have an impact on construction because they'll probably try and do it on the basis of corporates. So you put your property into a corporate and then you're selling shares, which is much more beneficial from the stamp duty. And we don't have the legislation they have in Europe, so the real estate transfer tax, where even if you put it into a corporate, you get caught.
JD: There was talk about that.
PN: So if none of this happens in October then they'll just be a floodgate of deals. Everything will go crazy? Probably.
LW: Might need the interest rates just to come down a little.
PN: That's true.
PN: And then, moving on to the lending side. Are debt credentials holding back refinance opportunities? To what extent will these drive further volume into the transaction market? Well, there's only one place to go with this. But, yes, I mean, obviously you're doing a lot of deals, some with Anil I think as well?
NK: Borrowers are more sophisticated today. There are still a number of transactions out in the market that, for me, that are unfundable. Hence the reason you are seeing the growth of alternative funders and bridging finance who are willing to take a higher risk for at a higher return on those transactions.
Are we likely to see further transaction volume? We all know that the hospitality world has been a challenging environment from a lending perspective over the last four years, lenders have been relatively considerate to borrowers especially after COVID. Given some of those challenges, some banks have been more challenged than others. I'd personally say that this was more challenger banks and alternative lenders, as the larger ones have bigger balance sheets.
I do see signs that more lenders are becoming more active in financing hotels. My personal view is that the funding climate will likely improve over the next 12-24 months. I think borrowers will have more options available to them.
KC: Do you think that's off the back of perhaps a decline in interest rates? Or do you think that the parameters in terms of debt coverage ratios will change?
NK: I think it'll be a bit of both, if I'm honest. I can't see many banks changing their appetite on debt coverage ratios because, following COVID, some of these are already fairly low. My view is that it is to do more with the interest rate environment and the possibility that they may potentially reduce in the not-too-distant future, as well as an improvement in banks' appetite, as for some lenders, this may have been subdued over the last couple of years following COVID.
TO: Well what's your view on where interest rates will be in 12 months?
LW: Oh that was the question I was just about to ask!
NK: I mean, who knows? There is a lot of speculation. I personally don't believe they're going to head back down to where many people are expecting them to do so, around 2% and 3%. I personally believe interest rates will settle around 4% over the next couple of years.
TO: Do we all agree?
LW: Three and a half, I was thinking.
AK: I think best case.
NK: I think four.
TO: Yes, same with me.
LW: Yes, said I was a glass half-full.
PN: Right, 3.75.
PN: There was one question that jumped out at me just because it's a hot topic is the government might be looking at dynamic pricing after a certain Ticketmaster incident. Could this spread into the hotel sector? Government interference, is that a worry? Say if something happens to Ticketmaster over this.
TO: I don’t think so because dynamic pricing is already in so many industries. I just don't see how you could regulate it.
SR: What’s the problem with dynamic pricing?
AK: It's quite interesting. So, when the football was on and flights to Berlin were £2,000, I didn't see any media coverage.
SR: Exactly.
AK: Oasis announced a get-together after 30 years, and suddenly there's a huge outcry over ticket price changing. It's unusual though. It's a little bit unusual in music. Normally the ticket price is a fixed price. So, the switch into dynamic pricing has been interesting.
TO: I think the way they've done it is problematic because, you know, under the old, contract law, you know, invitation to treat and acceptance, if you’re on line and say “right I’m happy to buy two tickets at £90”, and then, as you go through the transaction process, when you come to pay, it's something like £400. Well, no, I was offered tickets at £90. So I think that is a problem.
AK: But should the government, on the day after this, be getting involved?
SR and NK: No.
AK: And that's the worry for me. Is this the start of government interference into the economy?
SR: Surely they’ve got bigger problems than Oasis!
AK: Well, why was it headline news? Why was it getting the coverage?
NK: I think Ticketmaster have spent the last decade highlighting illegal ticket touts. And they're essentially doing the same as them with their dynamic pricing, haven't they?
AK: Yes. They're trying to minimise the ticket touting aren’t they?
NK: That’s what I believe the storm was really about.
LW: I think the regulatory environment and the powers of the Competitions and Markets Authority have obviously increased over time. And they're much more active. The types of cases they do get involved in, and you saw it with the big transactions where they might be getting cleared in the US, but the UK pull it in for review.
We've had a number of transactions where the UK CMA have got involved and generally you think on the basis of consumer protection, it should be fine. I would have thought this is such small beer in comparison to other issues, it's not as though you haven't got plenty of competition. You know, it's not “there is only one Oasis”. That is the thing.
JD: So yeah, it was obviously a big media story because Oasis is a big media story. And I agree that they didn’t do it in the best possible way. But people benefit from dynamic pricing as well. You know, you only get those low room rates or those low airline rates because the company is able to charge more when demand is there.
PN: But interestingly, when an event like that happens and we were talking about it, you've got to have a conversation about it because there will be negative press now if the prices are seen to go up for hotels or, you know, there was a story about some hotels that kicked people out and jacked the prices up after Oasis announced the tour dates. You've got to think about the implications, for you as a brand.
TO: Yes, because you don't want to be seen as price gouging and exploiting your customers. So…
AK: But it’s okay for airlines when football tickets are announced for Champions' League days. The second the games are announced. Only from England, as well.
SR: Or Mipim flights…
AK: Got to get in there early.
SR: Or fly Easyjet from somewhere…
KC: One question we haven’t yet discussed, is how far off is the sector from achieving a stabilised trading performance? In the current year, some markets have seen ADRs decline marginally, albeit off record highs, whereas growth elsewhere has been more limited at 2 or 3%.
Does anyone have an operational perspective or any other thoughts on whether the market has achieved a post-pandemic stabilised level?
AK: Yes, I definitely feel like what we've seen this year is that demand has been a bit softer, just talking to other hoteliers. The cost of living crisis potentially is having an impact on bookings, especially transient bookings.
TO: I mean, you look at the stats, the industry is completely back, isn't it? We had a record year last year for the whole industry. Significantly up on 2019, pre-pandemic.
KC: The most noticeable sector that isn’t fully recovered is the London Luxury market wher, although there has been strong rate growth as seen elsewhere, occupancy is still much lower than 2019, with the current year’s performance still around 10 percentage points lower than the same period for 2019.
TO: And the international visitor numbers are still not back up to pre-pandemic levels.
SR: Why do you think that is?
TO: So, the Chinese market is still not back.
SR: Because of economic problems in China or travel concerns or...?
JM: Also, there may be a few less domestic visitors to London for long weekends and so on, due to the current cost of living.
CB: And that has affected the budget side of things as well, the London budget.
TO: London’s expensive.
CB: Definitely a lot more than the rest.
LW: And the shopping is the other way isn’t it, no duty free. I think it is at the luxury end I think. Why would you come to London and visit our shops if you can go to Paris?
AK: But is that buyer affected by the pricing differential? Do you think?
KC: Depends what your budget is, really.
CB: I guess if you can go to Paris or Rome and buy the same thing without…
LW: Yes and if something’s going to be £5,000 or £4,000, even if you’ve got squillions, that’s quite a difference isn’t it.
KC: Well, it’s more the top end of the luxury market, where there’s more of an impact.
AK: They’ve seen the sights, they just want handbags.
PN: Yeah, there's a question here. What are the current trends in rent payable for the fixed lease sector? Tony?
TO: So, I think, in general terms, that the agency market is underestimating where market rents currently are. I think there's an underappreciation of the strong trading performance post-pandemic and that rental levels are higher than the agency market thinks it should be.
SR: I’m surprised to hear you say that.
TO: I've spoken to all of the major agencies and I think, in general, people are underestimating market rents, especially in London.
SR: Why do you think that is? Or why do you want people to know that?
TO: Well it’s a balance really, because you have to walk a tightrope… if you can negotiate a deal for a lower rent, then great, but only if you get the deal. Most of the opportunities that we’re considering, we’re not competing against other hoteliers, but against other land uses.
SR: Student? Resi?
TO: Yes. Both and offices and retail, whatever. And so, if the agency community is thinking “well there’s no point to ask a hotelier because I think the values are just not sufficient, then we miss out on it”. So it’s a balance.
PN: Obviously [we're coming] to an end, but I just wanted to go around and ask quickly. We always do ask, what you think would be the big issue to look out for in the year ahead in the hotel sector? So, Karen, what are you looking out for?
KC: I would stay stability, I think we're not far off achieving that from a trading perspective, but where we haven't got that stability is in things like the cost of debt, we need interest rates coming down. There's a lot of speculation about how far they will come down, as evidenced by us discussing that topic. Once we have more visibility on interest rate cuts and have confidence in trading performance having stabilised, particular average room rates, then I think that will lead to transaction volumes increasing.
PN: There’s some of that in the pipeline. And Shaun?
SR: I'll give three sort of predictions for the year ahead. I never get this right.
So, I think we'll see continued platform and portfolio sales. We've seen the start of that with these sort of collections of portfolios trading. So I think we'll see more of that. I think we will see more pension fund money coming back to the hotel market, it’s generally in, but I think it's generally stayed away for the last two or three years for a variety of different reasons. The money being sucked out of the system, negativity towards the sector and such, so I think we'll see that come back and I think we will see a moderate yield compression because of that. Might be right, might be wrong.
JM: With my hospitality operations background, something that's close to my heart is the “S” in ESG, and I think there might be even more focus on hotel employee welfare, inclusive and respectful workplaces, community engagement with local hiring and sourcing, and a safe and welcoming environment for all types of guests. Initiatives like this can help build a positive reputation, attract and retain talent – especially in this time of staff shortages and foster guest loyalty with repeat bookings.
TO: Well, I think we’re in quite a significant period of market flux at the moment, and I think that’s being hidden a little bit because of the lack of transactions and general economic conditions that make it difficult from an operations perspective.
Record industry performance last year, but this year’s flat year-on-year, with additional overlay of costs, so that is going to continue to put a little bit of pressure on some operators. I think, a lot of independent operators. I think we’re going to see an accelerated trend of some of those hotels disappearing from the market and, actually, not staying as hotels. Often those hotels go from one independent to another, I think a lot of them are just disappearing and I think they’re going to get knocked down and repurposed and be used for something else.
I agree on ESG. I think that’s becoming really important now and rather than just something that all the operators have been talking about, it’s something that we’re all really embracing and I think we’re going to see some significant change with that.
I also think that we are going to see increased investment activity and a hardening of investment yields. So, exciting times ahead.
This roundtable has been edited for clarity and length.