Stronger pound and increased supply will affect London hotel

Revenue from London hotel rooms, which was buoyed for much of last year by a British pound weakened by the 2016 Brexit vote, has been slipping amid the pound's strengthening, growing concerns about business travel and increasing room supply.

London's occupancy in January, the most recent month tracked, fell 1.1% from a year earlier, even as Europe-wide occupancy advanced 3.4%, reflecting a drop in room demand from 2017's peak levels, STR said late last month.

The matter was discussed in hotel companies' fourth-quarter earnings calls last month.

Marriott International CEO Arne Sorenson said RevPAR in London had "weakened," while Hilton CEO Christopher Nassetta said London's results reflected "softness."

Nassetta echoed that sentiment earlier this month in an interview with Bloomberg, in which he said there is "trepidation" among prospective travelers to London as Brexit talks continue.

Analysts credit swings in room demand, especially within the leisure sector, to fluctuations in the valuation of the British pound against the dollar. The pound peaked at more than $1.70 in mid-2014 and was at almost $1.50 on the eve of the U.K.'s referendum to leave the European Union in June 2016.

The pound's value dropped immediately after, plunging to about $1.20 early last year, thus fueling the so-called "Brexit bounce" in demand, especially from U.S. travelers. As a result, while last year's occupancy held steady at about 83%, average nightly rates advanced about 6%, to 150 British pounds (about $208), after having been flat the previous two years.

But the pound has since appreciated to about $1.40, hampering leisure demand to a city where corporate travel had already softened amid Brexit talks.

In its report on European hotels last month, consultant HVS wrote, "The pound is now beginning to strengthen against the euro and U.S. dollar, meaning tourists are no longer getting the bargain exchange rates they have recently enjoyed when visiting London and other U.K. hot spots."

Compounding that issue is the aggressive development of hotel rooms in London, where an inventory of 150,000 rooms is about 30% greater than New York's inventory. In its 2018 market forecast last year, PricewaterhouseCoopers (PwC) estimated that London room inventory will grow by more than 10% between 2017 and 2018.

Thomas Emanuel, London-based director of business development at STR, stressed that the city's cultural and historical draw will ensure strong inbound numbers from both the U.S. and other parts of Europe. He added that London is one of the very few European cities where occupancy has remained solidly above 80%.

Overall, international visits to the U.K. rose more than 6% last year, to almost 40 million, according to VisitBritain.

"There are only a few markets where we've seen 80%-plus occupancy," Emanuel said, noting that among European cities, only Amsterdam matches London's consistency. "It's still an incredibly robust market."

That robustness is feeding new hotel openings and development announcements.

Among London's higher-profile hotel openings last year were the Four Seasons Hotel London at Ten Trinity Square and the Nobu Hotel Shoreditch, as well as the city's first hotel under Marriott's Moxy brand.

This year will mark the opening of the Principal London, which is owned by Barry Sternlicht's Starwood Capital and will open at the site of the old Hotel Russell. Meanwhile, London's iconic Admiralty Arch building is being redeveloped into what will be the city's first Waldorf Astoria, debuting in 2022.

Still, the combination of a stronger pound and a hesitancy to travel for business may put the brakes on any chances for continued increases in room revenue, especially given the anticipated increase in room supply.

"PwC expects a new spike in openings in 2017, as around 8,500 rooms open their doors across London and another 7,000 rooms could open in 2018," the consultancy wrote. "That's a lot of new rooms to fill."