UK hotel industry ends 2022 on a positive note but 2023 will be a “see-saw” with mixed fortunes

30 January 2023

There were some positive signs for the UK hotel industry at the end of 2022 with improving room rates in December, despite a fall in occupancy rates according to the RSM Hotels Tracker. 

The data, which is compiled and produced by Hotstats and analysed by RSM UK, also highlights the cyclical nature of the industry when occupancy and room rates, revenues and gross operating profits (GOP) tend to fall at this time of year.

Average daily rates (ADR) of occupied rooms were up from £144.55 (November) to £152.68 (December) in the UK, and from £226.62 (November) to £246.89 (December) in the London market. More positive data shows ADR of UK hotels is still 22% higher than the same period in 2019, and 30% higher for London hotels.

However, occupancy rates dipped from 71.5% (November) to 63.1% (December), with London hotels also decreasing (73.9% in November compared to 68.7% in December). Occupancy continues to lag behind pre-pandemic levels of 70.2% (UK) and 78% (London) in December 2019.

Revenue per available room (RevPAR) also dropped from £103.41 (November) to £96.27 (December) in the UK, but increased in the London market, from £167.48 to £169.72. Gross operating profits of UK hotels fell from 35.2% (November) to 32.7% (December), and from 43.4% to 42.7% in London highlighting that, although room rates remain strong, profits are still under significant pressure due to rising costs.

Chris Tate, head of hotels and accommodation at RSM UK, said: ‘Yet again the UK hotels sector is showing some mettle in the face of economic challenges. Despite the fall in occupancy rates, which is usual at this time of year, and not helped by the heavy industrial action on the railways last month, the spike in room rates for December shows hotels’ resilience at still being able to pass on higher prices to consumers.

‘December is usually a compressed month for hotels in terms of trading because of the Christmas holidays. However, compared to last year when the sector was dealing with Omicron, it appears people did take advantage of being able to go out, travel and socialise in the lead up to Christmas which helped hotel operators increase their room rates.’

Looking ahead to this year, Chris Tate added: ‘Like a see-saw, there will be ups and downs for the hotel industry. Operators are managing their cost base whilst juggling other financial pressures. As for 2023, there’s going to be a mixed bag of fortunes for the industry. Events like the King’s Coronation and the extra bank holiday, along with Liverpool hosting Eurovision and international sporting events across the UK, will boost both domestic and inbound tourism.

‘But fragile consumer confidence and increasing cost pressures will impact on the profitability of the hotel industry. With many having recently renewed, or having to renew their energy contracts shortly, it remains to be seen if hotels can continue to enjoy passing on costs to consumers and to maintain their REVPAR. The sector has a great opportunity in 2023 to capitalise on demand but challenges will remain.’

Thomas Pugh, economist at RSM UK, comments: ‘The record-breaking drop in households’ real incomes in 2022 and 2023 means that consumer spending is heading for a sharp fall this year after dropping by 1% q/q in Q3 2022.

‘As you might expect, spending on most discretionary areas, such as clothes and household goods, has fallen sharply recently as the cost-of-living crisis has caused consumers to cut back. However, more surprisingly, spending on hospitality services has continued to grow over the last three quarters, despite the huge headwinds as consumers have favoured experiences over goods.

‘However, even hospitality spending will suffer in the face of a near 2% drop in real incomes this year. Indeed, with consumer confidence near a record low, meaning that consumers are still adding to their pile of excess savings rather than spending them, we think total consumer spending will fall by about 2% in 2023.

‘The good news is that inflation should fall rapidly this year reaching 3% by the end of the year, or even lower if the recent falls in energy prices are maintained. That means households’ real incomes should be rising again by the end of this year, setting the stage for a decent recovery in 2024.’