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Analysis


until it considered market conditions were right, according to hotel analysts, although it is hedging its bets by opening initially at airports. But many independent regional hotel groups that rely on the conference market have also fallen foul of the post-2008 structural shifts in the meetings sector, including shorter length of booking periods, fewer delegates and pressures to reduce costs. Unfortunately, the pre-recession buoyancy of the regional conference business encouraged many mid- market hotels to invest heavily in new facilities, which are not now paying off in the current market conditions. Yet, in some respects, the debt- fuelled hotel boom over the past decade is a symptom for much of what is collectively ailing UK businesses at present. Companies in all sectors are struggling to meet debt repayments and are having difficulties refinancing from a ‘once bitten, twice-shy’ banking sector which prefers to hold on to its money in uncertain times as a triple-dip recession looms. But the financial squeeze facing regional hoteliers is not likely to easily go away. New data from TRI Hospitality Consulting reveals that provincial hotels in 2012 suffered a fifth consecutive year of decline in their profitability, with increasing costs outpacing any rise in revenues. And the higher costs were not just the usual suspects of wages, taxes and energy: travel agency commissions rose 6.8 per cent on a per-room-let basis to an average value


of the assets, but often the complexities surrounding a sale. A portfolio of 42 Marriott-branded hotels around the UK (Marriott is the operator and not the owner) has been on the market for the past 18 months after being put into administration when the investor consortium that bought it from Royal Bank of Scotland for £1.1 billion in 2007 did not keep up with interest payments due on the debt finance. But while many investors


are adopting a ‘wait and see’ strategy for prices to fall before buying assets at knock-down prices, this delay


of £5.50, which was the equivalent of 7.3 per cent of total rooms revenue. “After five years of decline, the ‘keep calm and carry on’ mentality is wearing a bit thin,” says TRI managing director Jonathan Langston. “It is clear the fundamental shift in the operating structure of provincial hotels will continue to be played out as the market anticipates further casualties in 2013.” TRI believes that profit-per-room data is a more significant metric than a focus on the usual measure of revenue per room, since ultimately it is profit that counts. Thus, hotels in Liverpool saw a 3.7 per cent increase in


“Regional hotel performance is closely linked to the health of the domestic economy”


profit per room last year, even though the revenue per room increase was only 0.9 per cent. This, says Langston, “suggests that the recent tough trading conditions in the city have engendered a parsimonious mentality”. But Liverpool was one of the few regional cities whose hotels showed an increased profit per room: declines were reported in Newcastle (down 10.4 per cent), Nottingham (12.7 per cent), Bath (4.7 per cent), Manchester (1.9 per cent) and Leeds (3.8 per cent). Nick van Marken, global head of hospitality at Deloitte, also points out that “regional hotel performance is closely linked to the health of the


is also putting undue financial pressures on hoteliers. Q Hotels, for example, which


operates 21 provincial hotels – many with a strong focus on conferences and meetings – spent much of last year seeking to sell a clutch of properties to help refinance the business and pay down debts. Eventually, in January this year, it was forced into a more radical solution of putting its original holding company, Q Hotels Group, into administration, and arranging a three-year refinancing. The scheme has the advantage that the hotels are still trading as usual while the debts are paid off under the refinancing plan.


Refinancing, in fact, is


the preferred name of the game for hotel groups which either cannot – or do not want to – sell assets. Late last year, for example, the 32-strong Jurys Inn chain carried out a refinancing of its £600 million debt with the help of Middle Eastern and private equity backers. The move encouraged the chain to invest in a £25 million renovation programme. Lloyds has become one of the key players in restructuring the UK’s regional hotel sector, a legacy of its rescue of HBOS at the height of the financial crisis.


domestic economy, and the real concern is that unless


volumes return, hotels are unlikely to be able to drive their pricing – with a significant erosion of the bottom line and little sign that an improvement in profitability will be seen for some time.”


FINANCIAL PRESSURE While those inhibitions on pricing power is bad news for regional hoteliers, it is good news for travel buyers who will be able to continue to exert pressure on rates. But there are other implications for corporate travel buyers and business travellers alike. The financial pressures on the regional mid-market means less money is available to be spent on room refurbishment and investment, leaving facilities sometimes not up to the level expected or paid for. This is especially in contrast to the


emergence of branded mid-market chain operators who can afford to invest in higher standards, have the access to corporate buyers from their extensive databases and are better able to offer corporate, added-value deals. But in spite of all the gloom, the UK regional hotel market is set to grow this year, with a 1.4 per cent increase in the number of available rooms coming on stream, according to hotel market data provider STR Global. But the bad news from STR for regional hoteliers is that demand is only likely to grow by just 0.6 per cent, meaning that occupancy levels will continue to decline – an opportunity, perhaps, for some shrewd bargaining on rates? ■


Other regional hotel groups


that remain indebted to Lloyds include Macdonald Hotels, Scotland’s largest hotel chain with 45 properties, in which the bank has a 50 per cent stake. The group is currently in negotiations with Lloyds about refinancing some £300 million of debt facility due to expire this autumn. But Macdonald is also


looking further ahead than just sorting out its debt: last month (February) it took over the management contract for Swansea’s four- star Dragon Hotel, owned by an investment company, after a £3.5 million refurbishment.


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