2006 has been a great year for the UK hotel industry with double-digit revPAR growth across the capital, and healthy increases in the regions.

Looking ahead to 2007, I expect this strong performance to continue. For London, I am confident that 2007 for most hoteliers will mark another year of good revPAR growth - underpinned by a reasonable outlook for the Euro zone. As in 2006, hoteliers at the top end of the market will be wearing the biggest smiles.

The picture is somewhat different in the regions, but with 2006 proving more robust than our previous estimates due to the strengthening UK economy, I expect further positive growth in 2007. The performance of the regional UK hotel industry is primarily influenced by domestic economic conditions. However, with the UK economy widely expected to exceed Gordon Brown's forecasts, I anticipate further revPAR growth driven by improvements in average room rate which we expect to reach £50.

Focus on the travel experience
The increasing emphasis on the hotel brand and the continuous development of hotel products will be a key focus for the UK hotel industry in 2007. As increased competition means most gateway cities are reaching saturation point, brand, long held as the most important value driver in consumer business, is receiving the industry's full attention. The changes in customer lifestyle, demanding experiential stay, will mean that brand choice, as opposed to location choice will lead the way in the future.

In the constant battle to differentiate themselves from the competition, I expect hotel groups to continue to seek out major fashion houses to help them build their brands. Currently no branded chains are really competing in this space in the regional UK market other than Malmaison and Hotel Du Vin. Rezidor SAS has made movements to develop and operate a lifestyle hotel brand through a partnership with Italian fashion house Missoni with a hotel set to open in Edinburgh in 2008.

One of the most talked about brands set to make their debut on the UK hotel scene in 2007 is YOTEL. Drawing its inspiration from British Airways first class and Japanese capsule hotels, YOTEL is hoping to revolutionise business travel when it opens its first hotels in Spring 2007 - inside Terminal 4 at Heathrow and South Terminal at Gatwick. In addition, not to be out done, it would not surprise me if easyHotel which by the close of 2006 will have three hotels in the capital, will start to roll out its brand to regional UK locations in 2007.

Asset lite still in favour
With the flurry of transactions that took place in 2005 and 2006 I expect the UK hotel industry will continue to change shape in 2007, as companies continue to strive to become ‘asset-lite' and divest themselves of their real estate interests. I expect Hilton to continue to divest of their assets and demand will continue from the private equity sector to invest further.

The government introduces the Real Estate Investment Trust (REIT) as a new pooled property investment vehicle from 1 January 2007. This will bring hotel ownership to the masses as individuals (other than high net worth) will take a stake in the industry for the first time. Watch the impact on yields!

Put bed tax to bed
After dominating the headlines for most of 2006, next year I hope we can finally put the issue of bed tax to bed. The industry has been active in voicing its disapproval of the government's proposal to add 5-10% tax on room nights across the UK and rightly so. If a bed tax is introduced across the UK, the industry can expect to lose out in customers and revenue. Not only would it deter domestic travel but it would make the country even more expensive for overseas visitors. This couldn't come at a worst time; currently the imbalance of tourism payments is more than £16 billion, with Britons spending more than £30 billion on overseas travel. Research by Nottingham University suggests that a 1% rise in prices relative to other countries leads to a 1% decrease in international tourism. On this basis, a bed tax applied across the UK could reduce international tourism revenues to the UK by about £220m.

Smoking stubbed out across the UK
Another hot topic that will continue to dominate the headlines in 2007 is England's plan to follow Scotland's lead and introduce a smoking ban in all enclosed public places in July 2007. Scotland became smoke-free on the 26 March 2006 and three months later the comprehensive smoking ban was deemed a success. Starwood has already responded to calls from customers to stub out smoking at its three London restaurants in advance of the pending UK government legislation.

With more and more customers requested non-smoking rooms, I would not be surprised if at least one major UK hotel group followed operators across the Atlantic and banned smoking in rooms in 2007. Marriott has recently announced that all of its 2,300 hotels in the United States and Canada will be 100% smoke free from October 2006. This is largest move in the industry to date, affecting over 400,000 rooms. For hoteliers, the benefits outweigh the possible loss of bookings from smoking guests. Smoking rooms incur more costs for cleaning and repairs of burned furniture and carpeting. Also, having all rooms designated as non-smoking simplifies tracking available room inventory.

Marvin Rust is Global Managing Partner, Hospitality at Deloitte

Tina Wanstall
HotelBenchmark
+44 (0) 20 7007 0981
Email: twanstall@deloitte.co.uk

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