We expect weak global growth to keep a lid on UK tourist flows. And with yields most likely to continue to rise, hotel capital values are likely to fall over the next few years.
- We expect weak global growth to keep a lid on UK tourist flows. And with yields most likely to continue to rise, hotel capital values are likely to fall over the next few years.
- A weak global economy and ongoing Brexit uncertainty weighed on tourist flows over the first half of the year. Overseas visitors fell by 0.6% y/y in H1 2019, the equivalent of 103,000 fewer people. The breakdown suggested the key drivers behind the fall were visitors from the EU and the ‘Rest of the World’ (which includes all countries excluding the US and the EU), which fell by 1.4% y/y and 3.7% y/y respectively. This weighed on hotel capital value growth, which decelerated to just 3.1% y/y in Q2, the slowest increase since early 2013. (See Chart 1.)
- We think that the prospects for a sustained pick-up in demand for hotel rooms are limited. Granted, as long as there isn’t a no deal Brexit, tourist flows will probably pick-up somewhat over the next year or so. But our tourist demand indicator suggests growth will average an anaemic 1% y/y over the medium term, far below the historic average of 3.2% y/y. What’s more, we are forecasting very weak growth in the euro-zone over the next year or so which will keep a lid on any rise in tourist numbers given that over 70% of foreign visitors originate from the bloc. (See our ’European Economic Outlook’.)
- Admittedly, real wage growth should remain strong in the UK, suggesting domestic demand will hold up. But consumption data shows that households have curtailed spending since the EU referendum, with consumers unwilling to spend as Brexit uncertainty persists. And, importantly, spending on hotels has fallen to an even greater extent. Even if a Brexit deal is struck, we expect consumption growth to remain below its pre-crisis average.
- In any case, even if demand did pick-up, we doubt it would have any meaningful impact on rents and capital values as the hotel supply pipeline looks solid. Indeed, the government estimated in a recent policy paper that a further 130,000 rooms will be available by 2025, that’s an increase of around 14% on 2018. What’s more, with the ever-growing popularity of companies who offer alternatives to the traditional hotel sector, such as Airbnb, there is likely to be more intensive competition.
- Investment market factors aren’t likely to change this outlook. Indeed, hotel equivalent yields have already risen by 24bp since the end of last year. And regardless of Brexit, we expect global factors to cause UK bond yields to rise, pushing up hotel yields. All in all, hotel returns are expected to average around 3% between 2019 and 2023. (See Chart 2.) That’s below recent levels and the all-property average, which is expected to be 4%.
Chart 1: Tourist Demand Indicator & Capital Values (% y/y)
Chart 2: Hotel Sector Forecasts
Sources: ONS, MSCI, Capital Economics
Sources: MSCI, Capital Economics
Gabriella Dickens, Assistant Economist, 020 3974 7421, firstname.lastname@example.org