A new report has predicted challenging conditions for Scotland’s hoteliers, as recovery looks set to stall following stronger demand for rooms than expected in 2022 – despite thousands of additional rooms being added across city centres.
PwC’s annual UK Hotels Forecast for 2022-23 stated that hotel performance in Scotland is closely linked to GDP, meaning that after a relatively strong start to 2023, regional performance is expected to tail off and turn negative by the third and fourth quarters, ending the year with occupancy growth of just two percentage points on 2022.
In real terms, the annual daily rate (ADR) is set to fall gradually throughout the year to just below pre-pandemic levels.
Inflation, energy costs and rising interest rates remain major factors impairing the industry’s recovery, in addition to staffing shortages and supply chain disruption.
These challenging conditions for the industry come on the back of Scotland and other UK regions largely outperforming the previously forecasted scenario for ADR and revenue per available room (RevPAR), although occupancy was hit by a softening in demand for staycations during the summer.
Hotels in Scotland, which count ‘staycationers’ as a key market, could be particularly impacted by a predicted softening in UK domestic leisure demand in 2023, in accordance with PwC’s data. A consumer survey conducted by the firm in October 2022 suggests just 21% of people who expect to cut back on holiday spending would switch to the UK instead of going abroad, with 17% revealing plans to take fewer shorter breaks.
And with more than 2,700 rooms set to open in the coming years across Glasgow and Edinburgh, there is a risk of oversupply in the short term given the forecast fall in occupancy levels in the regions for 2023.
This is particularly prevalent for Glasgow, which is set to see 2,200 rooms enter the market - 64% of which are due to open during 2023-24 - representing the largest increase in room supply to the city since 2018.
While Glasgow will see the lion’s share of new rooms for Scotland, Edinburgh has 577 rooms currently under construction and due to open over the next couple of years – equivalent to four per cent of total supply. The bulk is in the luxury segment, with the 2023 opening of the 253-room W Hotel.
Major events moving back to full capacity - including the Cycling World Championships - could offer a boost to Glasgow, while Edinburgh stands to benefit from growing numbers of international visitors taking advantage of a favourable exchange rate, if the pound sterling remains weak against the dollar.
The regions have a forecasted 77.1% occupancy rate for 2023. This could see ADR reach £70.80 and REVPar £54.70 in real terms.
Susannah Simpson, private business leader at PwC Scotland, said: “After what has already been a turbulent few years for the industry, hoteliers in Scotland must continue to demonstrate the same strong resolve to overcome the headwinds of inflation, energy costs and staff shortages that threaten to derail recovery in 2023.
“Overall, there’s a real need for hotels to get back to basics with a clear-cut strategy allowing them to emerge stronger and more resilient for the future.
“Even with a new dimension to running costs thanks to the latest economic disruption, a sound and solid management strategy can still perform consistently.”
The current labour shortage across the market has hit the hospitality sector.
Between July and September, there were 159,000 vacancies in the accommodation and food industry - a 5.7% year on year rise according to the Office for National Statistics.
The shortages continue to fuel wage inflation, with the National Living Wage forecast to rise by 8.6% to £10.23 in 2023.
Mark Addley, property restructuring leader at PwC, said it will be a challenging winter for hotels as energy costs bite, interest rates rise and consumer spending falls.
“It’s vital for hoteliers to engage stakeholders early and identify ways to reduce costs to mitigate the impact of inflation.
“Finding clever ways to resource hotels whilst maintaining quality customer service will increase the likelihood of return visits whether that is in 2023 for consistent business travel or a leisure stay in the years to come.“
Rising interest rates will put further pressure on many hotels that already have high debt levels, including additional borrowing taken on during the pandemic.
Due to debt service capability and potential asset valuation decreases, it is likely that hotels will have a lower overall debt capacity.
PwC's report added that owners may need to consider how to manage cash reserves and overall debt levels - including capital expenditure and potentially asset sales - as well as having alternative financing options.
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