Room to Grow: European Cities Hotel Forecast 2014 and 2015

This third edition of PwC’s European cities hotel forecast is published against a backdrop of a region that has taken an economic pounding but is seeing clear evidence of economic recovery and returning confidence.

The world is changing at a pace and in this snapshot (taken in February 2014) we look forward to resurgence in travel and hotel prospects in 2014 and 2015.

In terms of where hotels are compared to before the recession, in nominal terms the market is almost back at its pre-recession peak (reached during 2007) but it remains significantly behind in real terms. For example, European ADR is now only 5.7% below its pre-recession levels in nominal terms but 17.9% lower in real terms.

There are 18 cities in this econometric forecast – all are important gateway cities and/or business and tourism centres and some are en route to becoming mega cities. The 18 reflect the challenges facing other cities in Europe where position on the economic and hotel cycle is crucial, and some cities are clearly better placed to grow than others. We anticipate growth in 17 out of the 18 cities in both 2014 and 2015.

In this edition we give look back at 2013: give our forecast for 2014 and 2015, and provide a city by city forecast for 18 gateway cities in Europe. We also give our view on the challenges facing hotels in these locations, along our economic, travel and supply outlook, and we explore the megatrends that will be transforming hotel businesses.

Forecast - Spotlight on prospects for 2014 and 2015: A growth story

The good news is that the improving economic and travel backdrop has fed into improvements in trading fundamentals in almost all the cities analysed. See RevPAR growth outlook chart below. The pace of growth clearly varies from city to city

None of our city forecasts shows double digit growth though and it’s not been, nor is it likely to be, an easy ride. Many report a bit of a struggle in 2013 and it’s often unclear how trends will crystallise in 2014, let alone 2015.

So, despite the challenges, which cities are best placed to take advantage of the improving economic backdrop?

Top RevPAR growth stories in 2014 are Dublin, followed by London and Paris, then Edinburgh, Berlin, Frankfurt, Vienna and Moscow. In 2015 London tops the growth league, followed by Dublin, Lisbon, Prague, Moscow, Edinburgh, Zurich and Frankfurt.

We forecast growth in 17 of the 18 cities in one or both of the two years. The exception is Madrid, but encouragingly the rate of decline in the Spanish capital, hard hit by the impact of the financial crisis on domestic demand, is slowing.

Forecast 2014

Megatrends - Economic outlook and the megatrends transforming business

” There is growing optimism in the European economy which is now recovering from the double-dip recession triggered by the euro crisis. Significant improvements in confidence and activity through the second half of 2013 mean that we now expect growth across Europe in 2014 and 2015 – even in the economies at the centre of the economic crisis. The challenge for the hotels industry will be to capitalise on this improving economic climate whilst responding to the megatrends impacting their business” -- Dr. Andrew Sentance, Senior economic advisor to PwC

Europe is the world’s largest tourism destination with over 560 million international tourist arrivals in 2013. The cities in this survey represent over 680,000 hotel rooms and are visited annually by some 80 million international tourists. But, averages hide the story; Europe is a multi-layered market and one size does not fit all.

The improving economic backdrop has the potential to rejuvenate the European hotel sector although it’s likely to remain a challenging environment. Owners and operators are pressed to achieve profitable growth. The challenge for hotels is to capitalise on the improved environment and the new opportunities a changing world offers. There is plenty of room to grow on many fronts including traveller volumes, new hotels and brands, trading metrics and investment opportunities.

Megatrends are transforming today’s businesses and include shifts in global economic power, innovation in technology and demographic change. Hotels need to be nimble and understand the issues and their implications for their business. Some trends, like the mobile and digital revolution are taking hotels into a whole new world as they battle to stay relevant to consumers.

The global economic landscape is changing quickly, and hotels have to constantly adapt to these changes to remain successful in the market  While it’s a growth story for hotels and the global economic outlook for 2014 is improving, hotel revenues are well below their pre-recession peak in real terms. Most European cities are struggling to recover the ground lost in the recession - see charts - where the top right quadrant is where cities would like to be along with London and Paris. While it’s a growth story for hotels and the global economic outlook for 2014 is improving, hotel revenues are well below their pre-recession peak in real terms. Most European cities are struggling to recover the ground lost in the recession - see charts - where the top right quadrant is where cities would like to be along with London and Paris.

Issues - Beyond the data: Issues facing hotels

The cost of doing business, regulations and taxes, competitive accommodation products, keeping customers - all these and more concern the sector

Cost of doing business is set to increase: Although economic prospects are improving and inflation rates are relatively subdued across the Eurozone, hotels will have to be watchful of changes in the cost of doing business. Hotels increasingly have to pay to secure bookings from intermediaries like comparison websites, loyalty programmes used by larger hotels must be funded, and after years of pay freezes or restraint – employees are pushing for higher salaries. In some countries like the UK politicians are considering significant increases in the minimum wage.

On the other hand fixed costs of marketing and customer communications are lower than ever before, leading to the rise of micro-providers, e.g. Airbnb. Technological innovations, such as automated check in and check out may be as much about trying to reduce labour costs as about meeting customer preferences, but are likely to become more common.

More regulation and taxes: In illustration of this we see hotels, victims of their own success, being viewed as an easy target for raising tax revenues by hard pressed local governments. There are new city taxes in Milan (2013) and Berlin is introducing a tax on private overnight stays this year. Oversupply fears have ushered in stricter planning policies in Amsterdam.

Is it goodbye hotel rooms? Structural shifts in travel habits mean many people are using alternatives to hotels through companies like Airbnb and sites like FlipKey, Homeaway, and Rentalo etc. However we have seen governments move against this trend. In France there are plans to clamp down on holiday rentals which could push some travellers back into hotels. Hardly goodbye hotel rooms but the competition is hotting-up.

More branding but a more personal touch needed: Branding is likely to continue as the large chains seek to gain market share and offer consumers a range of products.

More investment opportunities: Improved trading fundamentals in 2014 are expected to stoke investor interest in the sector. While the UK and France accounted for more than half of 2013’s deals, Germany, Spain and Ireland are forecast to be investment hot spots this year.

While debt financing is becoming easier, it’s often only for acquisitions and refinancing rather than new development. In the UK property experts believe there will be increased interest for alternative assets like hotels in the second half of 2014 as more compression is seen on mainstream property yields as the year progresses. And PwC/Urban Land Institute’s Emerging Trends in Real Estate in Europe found that out of 19 alternative investment classes, hotels ranked twelfth

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