Hotel analyst STR Global has released data which shows that London hotels saw a deceleration of growth in the six months to June 2012, creating an occupancy slip of 1.2 per cent and only a marginal RevPAR gain.
June was a particularly disappointing month for properties in London, with occupancy levels dropping by 8.4 per cent to 82 per cent, against an average of 90 per cent in June 2011.
Commenting on the London hotel performance, Liz Hall, head of hospitality and leisure research at business analyst PwC, said: “Weekly trends data for July have shown continuing declines in key metrics although there are signs of a welcome uptick in the last week of the month.
"There are a number of possible reasons for the recent drop in hotel performance: the deteriorating economic situation, extensive new supply in the capital, the Jubilee holiday which saw corporate travel disrupted by the two bank holidays, a pre London Games dip, and difficult occupancy comparable have all taken their toll.”
Hotel management agreements
There are, however, signs to show that hoteliers are doing their best to react to the current difficulties. A separate piece of research, conducted by hospitality consulting and services company HVS London, shows that the global downturn has in fact prompted hotel operators to challenge traditional lease or hotel management agreements in a bid to achieve more balanced, less risky deals with property owners, reducing the chance of unsustainable rental levels.
The new report from suggests that traditional hotel management agreements are becoming more owner-friendly as owners secure a level of control on operations and a guaranteed return to at least cover debt service.
Report author Liliana Ielacqua, an associate with HVS London, said: “The industry is reacting and adapting to new necessities. Hotel operators don’t want to take the risk of operations on entirely themselves, and neither do property investors.
“Hotel contracts are reaching a level of optimal balance between operators’ and owners’ return while preserving the value of the asset, which is ultimately what sustains both returns.
“We are seeing a much more flexible approach to the hotel property market, whereby both owner and operators are more protected in a downturn, but benefit when trading improves.
“Lease structures have now become more flexible, depending on the level of risk the property investor is willing to take, varying from a fixed fee from the operator, to a share of revenue or a share in the net operating income.”
The report concludes that it is crucial both parties are incentivised to increase the property’s profitability as, should the hotel underperform, the owner would bear the consequences in either an HMA or a lease if the operator is not able to guarantee a level of profits that supports the rent payable.
Hospitality & Leisure insolvancies
Meanwhile, PwC has this week released the findings of its own research into hospitality and leisure insolvencies, which reveals that it is currently one of the worst affected sectors in the UK.
In total, 332 hospitality and leisure companies became insolvent in the second quarter of 2012. However, this represents a decrease of 22 per cent compared to the first quarter of 2012, when there were 428 insolvencies.
After two particularly bad quarters at the end of 2011 and start of 2012, the level of hospitality and leisure insolvencies has fallen back to that seen in the first half of 2011. This drop is driven by a decline in insolvencies for pubs and restaurants. However, restaurants were still the worst hit in the second quarter of 2012, with 159 businesses becoming insolvent.
London saw the highest number of restaurant insolvencies in quarter two 2012, when compared to other regions, at 56. London alone has seen 432 restaurant insolvencies since quarter three 2010.
"Only time will tell if H&L insolvencies reached their peak in the first quarter of 2012 and are now on the decline, but recessionary pressures on leisure spend are certainly expected to continue over the next 12 months,” said Robert Milburn, hospitality & leisure leader at PwC.
“This limited spending is likely to focus around those leisure activities with an element of treat and experience. However, despite cyclical pressures, leisure remains a key component of consumer spending.”
Looking ahead to the second half of 2012, Hall from PwC added: "Just how the second half of 2012 turns out will depend on how London fares during the Games and of course the economic outlook. We can only hope there will be some pent up demand post Games as the many business travellers and visitors who had avoided the city return.
“PwC has consistently warned against the inflated expectations of some hoteliers for a London Games bonanza, but the dawning reality after this first week’s events is that London has been much quieter than even we expected.
“While we still expect to see some occupancy growth, overall performance in the third quarter will be dictated by the extent to which hoteliers are able to hold on to their planned rate increases during the Games.”
London is consistently ranked as one of the top two cities in the world and that is unlikely to change. Looking beyond 2012, there will likely be a powerful tourism legacy from the London 2012 Olympics – with high quality visitor accommodation.
The challenge for London's hoteliers after the Games will therefore be how to differentiate themselves in such a competitive market off the back of the feel-good factor.