Hotel Market Spotlight: London

Despite lower occupancy and headwinds of rising costs, notably wages and utilities, the fact that London hotels have nonetheless increased profitability is testament to the enduring demand fundamentals, driving exceptionally strong rate growth. With Sterling likely to remain weak, and inflationary pressures easing, profitability prospects for London hotel investments are strong and emphasises the attraction of London hospitality as a sector likely to outperform.

London Hotel Market Overview 

Despite the growing costs and occupancy remaining 3.7 percentage points below 2019 levels, there has been a 5% increase in Gross Operating Profit per Available Room (GOP PAR) compared to 2019. 

Operating expenses saw a notable 19% rise, driven by increases in utilities, other expenses, and payroll; however, this was effectively countered by robust revenue growth (+12%), fueled by a substantial 22% increase in Average Daily Rate (ADR). While the rooms department thrives, the Food and Beverage (F&B) sector grapples with challenges, marked by escalating costs and declining revenue, particularly in beverage sales, which witnessed an 11% drop. Nevertheless, the market maintained a healthy GOP margin, reaching 44%.

F&B Revenue Declines As Costs Continue To Grow 

Utilities Costs 

The London market experienced a noteworthy surge, with electricity costs witnessing a remarkable 120% increase and an overall 106% growth in utilities per available room (PAR). Consequently, these escalating costs led to a shift in utilities' share of total revenue, rising from 2.4% to 4.4%. Looking ahead, there is optimism for a moderation in utilities rates by 2024, as declines in wholesale energy prices are anticipated to impact commercial contracts during the renewal process. 

Payroll Costs 

Since 2019, payroll costs have seen a significant increase of 15%, primarily driven by an escalation in non-management salaries and wages. Notably, the rooms department led this surge with a substantial 30% increase in payroll costs, surpassing the 11% increase in the Food and Beverage (F&B) sector and the 3% in Admin and General. This growth is attributed in part to the rise in the National Living Wage in April 2023, coupled with increasing pressures to retain staff amid the prevailing rise in the cost of living. Anticipated National Living Wage increases in 2024 are expected to contribute to further growth in payroll costs. 

Other Expenses  

The category of "Other expenses" exhibited a notable increase of £8.1 per available room (PAR), marking a 17% rise, which falls below the overall Consumer Price Index (CPI) growth of approximately 24% during the same period. This highlights effective cost management strategies implemented over time. The primary contributors to this expense escalation were identified in the subcategories of Rooms Other Expenses and Sales & Marketing (S&M) Other Expenses.