London's Hotel Market Readies for Gold During Summer Olympics

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According to Jones Lang LaSalle Hotels, London will continue to far outpace the rest of the European hotel market as the city readies itself for the Olympics and Paralympics taking place during July, August and September 2012.

In the first five months of 2012, the London hotel market added 2,000 rooms to its available supply, and revenue per available room (RevPAR) improved by 3.1 percent compared to the same period in 2011, according to STR Global. For the remainder of the year, hotel development activity is anticipated to accelerate with an additional 5,000 rooms, bringing supply totals in 2012 to 114,000 rooms, a 6.7 percent increase year over year, according to AM:PM.

"London's designation as a world class city and global tourist hub makes it a prime location to host the Olympic Games. Going forward we expect London to demonstrate growth in the hotel sector as its economy continues to strengthen compared to other European cities, although market dynamics will soften in the medium-term. We expect the games to generate additional demand for both the London and provincial United Kingdom hotel market during the summer months as various sporting events are hosted outside of the capital," said Jon Hubbard, EMEA CEO of Jones Lang LaSalle Hotels.

Events are scheduled to take place in both London and the surrounding areas. Football will be located in Cardiff, Coventry, Manchester and Glasgow; sailing will be in Weymouth and cycling in Surrey.

The London Organising Committee of the Olympic and Paralympic Games (LOCOG) recently released 8,000 unused hotel rooms to the public market, and additional rooms are expected to be released in the coming months. Occupancy in London during July and August usually ranges between 80 and 90 percent; however, with an estimated 300,000 additional foreign visitors during the Olympic Games, there is expected to be a 60 to 70 percent increase in average daily rate (ADR), compared to the same period in 2011.

"As hotel rooms are released, we expect there to be a slight decline in the room rate premium, which may attract visitors who were previously deterred by a perception of overpriced hotel rooms. At two weeks before the event, there is still availability in all hotel categories with room rates ranging from £60 to over £1,000 per night," added Hubbard.

Both the budget and the upscale segments are growing. The London budget segment is expanding rapidly with operators such as Premier Inn and Travelodge are increasing their representation in the city. Both operators are adding close to 2,000 additional bedrooms to the existing budget bed stock. The upscale segment is also growing, as well as upgrading its product with an injection of capital.  For example, the Savoy recently underwent a £200 million refurbishment that was completed in October 2010 and the Four Seasons Park Lane reopened in January 2011 after a two-year, £125 million refurbishment.

Additional hotel rooms will be delivered later this year:

• Spanish hotel and resort operator, Meliá Hotels International is planning to open the new 173-room ME London at Aldwych, a five-star hotel designed by Foster + Partners

• The 245-room InterContinental London Westminster, situated in Queen Anne's Chambers is due to open in November 2012

• The Wellesley, a 36-suite luxury townhouse hotel in Knightsbridge, is scheduled to open in November 2012

Although London hoteliers could experience a record year in 2012, they may face more challenging market conditions in 2013.  An additional 5,400 rooms are scheduled to come online in 2013, reflecting a 4.8 percent supply increase over 2012. This is a significant increase in supply as the average yearly supply growth rate was just 2.4 percent between 2003 and 2011. Competition will be strongest in the budget segment, which accounts for approximately 50 percent of development activity in 2013 as Travelodge and Premier Inn plan to open a combined 1,590 rooms.

Jones Lang LaSalle Hotels' most recent Hotel Investor Sentiment Survey (May 2012)  ranked London the best market for short term trading, although sentiment for medium term trading had softened as the high demand from the Games period is not expected to be sustained while hotel supply continues to grow.

"London has proven to be a very resilient market, with hotels posting an annual RevPAR growth of 5.8 percent during the last five years despite a financial and economic crisis in 2008 and 2009. RevPAR growth is expected to slow in 2013, but remain robust in comparison to other major western European cities," added Hubbard.