Hotels are beating the recession by embracing micro-development
For people with a healthy aversion to risk, the middle of the deepest recession since the Second World War wasn’t the most obvious time to invest millions in refurbishing London’s stock of grand, but ageing, hotels. These large projects have introduced considerable volatility into this sector, which usually consists of more smaller and cheaper projects. From a peak of 124 in February, the CPA/Barbour ABI hotels index has fallen away sharply, to just 68 in June.
Analysis of the contracts awarded in recent months, however, makes for considerably less glamourous reading. The number of contracts let in the first six months of 2011 may exceed numbers in 2009 or 2010, but with budget chains dominating activity, the average price of each contract was significantly lower.
On a more positive note, the trend towards micro-development, which has been enthusiastically embraced by food retailers, is now being trailed within the hotel sector. Keen to tap into concentrated demand in regional centres, where opportunities to expand using their existing model are limited, Travelodge plans to open 100 “metro hotels”, able to accommodate 20 rooms (half of the company’s usual minimum size), by 2020. Travelodge’s move towards micro-development is sure to be closely watched by its competitors, to see if this business model proves to be profitable.
Triggered by the start of the £220m refurbishment of the Savoy hotel in 2007, the rejuvenation of several of London’s finest landmark hotels will continue to provide a valuable work stream for the industry over the next 12 months. Thereafter, however, the outlook is considerably weaker. Expectations regarding GDP growth this year have been revised steadily downwards and consumers are really beginning to feel the impact of high inflation on their disposable income. Budget chains will continue to benefit as conditions remain challenging but the rest of the market will continue to feel the squeeze and is therefore unlikely to invest.
Kelly Forrest is a senior economist at the CPA