Since the election of a new Labour Party government in July, hoteliers in the United Kingdom have had to quickly come to terms with the policies of the new administration.
In October, the Labour government outlined its first budget in almost 15 years, one that places additional weight on hotel operating costs due to increased taxes, higher National Insurance contributions and a rising National Living Wage.
During a webinar focused on the U.K.'s regulatory environment and its impact on the country's hotel industry conducted by HVS London and EP Business in Hospitality, AlixPartners and Bird & Bird, hoteliers said there are challenges to overcome but those obstacles are not insurmountable.
Kate Nicholls, CEO of UKHospitality, said the Labour Party has set out its mission statement over the next five to 10 years and its policies are a bit more predictable after several years of fiscal shocks with recent U.K. governments.
There is “certainty and stability on macroeconomics, long-term planning … It is a government by technocrats. [Prime Minister Keir] Starmer started as a civil servant. We are back to having an annual budget,” not fiscal shocks every few months, Nicholls said.
The new U.K. government has hinted it seeks to position itself between the European Union and the next U.S. presidential administration as Donald Trump returns to office. U.K. officials have ruled out rejoining the EU, but the government seeks to alter its trading relationship with the 27-country bloc. U.K. leaders also have put into place the first steps to create a sovereign wealth fund for the country, the National Wealth Fund.
“It has formulated an industrial strategy centered on the foundation sector, which [the hotel and hospitality industries] are considered as, and the importance of place-based business. It has also formulated a High Street strategy, a hospitality and tourism strategy and a small-business strategy. Other parts include cheaper energy and the reform of skills around apprenticeships, business training and in-job training,” Nicholls said.
She said there is hope reforms will benefit policy, business and social areas in which “our sectors play well in,” she added.
Consumer spending and higher operational costs
There are some dark clouds on the horizon that could be keeping hoteliers up at night, including consumers pulling back their spending, higher taxes and employee-related costs.
Perhaps the largest worry is the fall in customer confidence, which Nicholls said began when the incoming government warned of doom and gloom to prepare the country for its first budget. As a result, consumer spending has fallen.
Any positivity seen since the Labour government released its budget has not been sufficient to have “moved the dial in terms of consumer confidence. There is a £3.4 billion ($4.33 billion) tax increase for hospitality. Eighty-five percent of our sector said they will cut jobs, and 95% said they would increase prices,” Nicholls said.
So far, consumers have continued to book hotels, but hoteliers are worried spending could continue to plummet.
Rachael Farrington, head of tourism affairs at VisitBritain and VisitEngland, said the U.K. still has a “good story to sell.” For many potential guests the cost of accommodation is a top barrier, and consumers are spending less on eating out, but the U.K. is one of only two major global counties or regions where there has been an increase in booking hotels directly.
Farrington added that in 2023, 20.3 million of the 38 million inbound visits to the U.K. were to London, which resulted in £16.7 billion of the £31.1 billion travel spend.
Peter Anscomb, senior corporate director at Edwardian Group, said it's difficult to know how long customers could continue to accept the increases in hotel prices. Edwardian Group has two hotels in London and one in Manchester. In January, the company sold 10 London hotels to Starwood Capital Group for reportedly £800 million.
Any increases in costs and taxes on top of what has already come will require further increases in average daily rate at hotels, Anscomb said, and guests won't keep paying higher rates for long.
“That will be heavy. If taxes deliver back, then we can rethink the situation, but most likely taxes will go into a wider pot that will go back into the things [the government feels] are important,” he said. “The budget has put £1 million to £1.5 million of operational costs for each of the hotels in our portfolio. As full-service properties, there is a base-level of service needed.”
Puneet Kanuga, chief investment officer at EQ Group, said the increased taxes to businesses as a result of higher National Insurance contributions has put that one cost up to between 3% to 4% of total payroll.
“Businesses will need to increase the top line by 5% to 7% to mitigate that, even with efficiencies. Some markets will struggle to get that,” he said.
James Salford, partner at Bird & Bird, said it will be tricky for some businesses to see the path to growth and to hire employees.
“Wages will grow, though. … It will come even more to the fore [for some hotel companies],” he said.
Higher operational costs would likely decrease U.K. hotel transaction values by between £18 million to £20 million, Kanuga said.
“Private equity remains interested in London, and we’re still not as heavily regulated as some other markets in Europe,” he said, adding that competition is coming from markets in the southern Mediterranean.
Emma Young, head of loan syndication at AIB Bank, said any negativity has not deterred her company from lending to hotel investors.
The budget did “proportionally affect [our] labor-intensive sector. … The fundamentals of loans remain the same — location, location, location and the management team,” Young said.
The hospitality industry and the U.K. government need to maintain and encourage employment flexibility, Nicholls said.
Graeme Smith, Europe, Middle East and Africa leader for risk advisory at AlixPartners, said the U.K.'s budgetary environment might be an opportunity for limited-service hotels, “which have an ability to absorb increased costs.”
More taxes
U.K. officials will next report the progress of the budget in April as part of a spending review, Nicholls said.
Hoteliers hope that will not lead to more taxes, but panelists said they would not be surprised if inbound tourists started seeing tourism taxes, which haven't spread throughout the U.K. yet. Such taxes have been passed in many markets in Europe, and it's possible they will eventually arrive in the U.K.
It's unlikely Labour officials will overturn the 2021 cancellation of sales/value-added tax refunds for international visitors, a program that ended with the previous Conservative Party government, Nicholls said.
Ed Odell, director of business advisory Flint Global and who spent eight years working in the U.K. Treasury, said he worries the new Labour government does not understand the true effect of all its tax cuts and growth strategies. He added the government needs to show growth.
“It has penned itself in, so their route to another election win is to provide above-trend economic numbers. Hospitality needs to underline its critical role in helping the government achieve this. We need to place ourselves in the center of the debate,” he said.