Hotel performance in Scotland continues to recover at pace according to strategic real estate advisor Avison Young.
Avison Young’s latest Hotel Market Overview, which looked at trends in Glasgow, Edinburgh, Aberdeen, Inverness and Scotland as a whole, explains that the return of international travel alongside large conferences and events are helping the sector reach, or in some cases surpass, pre-Covid levels of demand. The report looks beyond the key performance indicators to present a more detailed view on the potential impact on the bottom line of various prevailing factors.
Andrew Renouf, Principal, Hotels and Leisure, at Avison Young, said: “In most markets year to date average daily rates (ADR) have surpassed pre-Covid levels and we expect demand (occupancy) to follow suit during 2023. As a result, hotels in most markets are generating higher revenues than in 2019, which is very positive. There are however significant economic headwinds that are impacting operating costs and profitability.”
The hotel recovery is driven by ADR, with demand (occupancy) still behind 2019 across the board. Exceptions are Aberdeen’s upscale hotels, East Lothian and Renfrewshire where year to date occupancy is equal to or higher than in 2019. The former is driven by the energy sector with Aberdeen’s corporate market less affected than in other cities, with the latter two most likely benefiting from lower rate overspill demand as the main cities push room rates higher.
Andrew Renouf, added: “The main cost pressures currently are in two key areas; energy and labour. Energy costs for hotel companies who pre-bought at fixed prices are unlikely to see an impact of profitability until later this year or early next year.
“Hotels by their nature require intensive energy consumption and those without fixed utility contracts have faced the burden of massive increases this year.
“There are increasing pressures around labour availability and pay rates. Demand for staff is currently outweighing supply and as a result the labour market is highly competitive and salary expectations are much higher than even a few months ago.”
Avison Young’s Hotels team found that Scotland as a whole is performing well, with revenue per available room in line, or ahead of 2019, in most cases.
Edinburgh has seen a quicker recovery than Glasgow for two main reasons. Firstly, the proportion of high-end and luxury hotels in Edinburgh is helping to drive ADR higher. Secondly, Glasgow has seen a 9.9% increase in supply since January 2020 whilst Edinburgh supply has increased by only 4.4%, impacting Glasgow’s recovery as it absorbs the new supply.
Airport passenger numbers show demand ramping up towards 2019 levels at Scotland’s main airports, highlighting the correlation between improved hotel performance and increased travel.
Transactions of hotels in Scotland have also picked up pace.
Andrew Renouf, said: “There is no shortage of interest in Scottish hotel assets, with a large amount of private equity ready to be placed in the sector and a number of deals having completed since late 2021.
“Edinburgh continues to be a sought-after destination and investors are seeking to benefit from the market’s post-pandemic recovery by acquiring high quality, city-centre assets.”
In December 2021, Pandox acquired the 146-room Adagio Aparthotel Edinburgh for approximately £40.5 million. The resilience of Aparthotels during Covid and their appeal to both leisure and corporate segments means they are particularly attractive to investors. In September 2021 Castleforge Partners acquired the Crowne Plaza Edinburgh Royal Terrace (97 rooms) for an undisclosed sum. The building is currently undergoing a full refurbishment and is expected to be relaunched as a voco hotel by InterContinental Hotels Group later this year.
In Glasgow, hotel investment has picked up pace with portfolio sales at the forefront as investors seek value-add opportunities and growth potential. In February, Atlas Hotels acquired the Chardon Group portfolio comprising six hotels (569 rooms) across Scotland including two assets in Glasgow city centre; the Holiday Inn and Holiday Inn Express Theatreland.
The upcoming months are more uncertain however, with reports of a recession looming as interest rates and inflation continue to rise. This may deter buyers from the market, while owners may decide to hold assets until the economy starts to show some signs of improvement.
New development remains challenging to a degree, even as market performance recovers; as well as the increasing cost of finance, construction costs have risen significantly over the last 12 months.
Andrew Renouf, said: “Overall, it has been an encouraging period for the hotel sector in Scotland, however clear challenges remain and will likely continue into 2023 and beyond.”
The full report can be find here.