TravelMole Guest Comment: The state of the global hotel industry

Last week the Hogg Robinson Group (HRG) unveiled its hotel survey for the first six months of 2010. Charles Davis, managing economist at Centre for Economics and Business Research (CEBR), analyses the results:

"The survey showed that room rates have started to increase since the global economy emerged from recession in 2009. Average room rates across the 12 key global focus cities surveyed grew by around 5% over the second quarter of 2010.

The global economy shows signs of a multi-speed recovery with emerging economies such as India and China experiencing higher levels of economic growth than the western economies of the US, Europe and the United Kingdom.

The difference in the pace of economic growth is reflected in the contrasting rates of room rate growth observed in world regions. Over the period from January to June, Asia posted a 3.1% year-on-year growth in rates compared to flat growth in the US and a 2.7% decrease in Europe.

Following the financial crisis, the Middle East has seen a downturn in financial and property markets. As an oil-based economy, the region has nevertheless benefited from increased oil demand as global production gathered pace.

Despite the recent pick up in economic activity, the financial crisis has hit the region particularly hard. A high level of corporate insolvencies and a fall in tourism has applied downward pressures on rates. Further, the continued development of hotel sites in the region’s major cities, i.e. Dubai and Abu Dhabi, has exacerbated the dive in room rates.

Economic growth in Europe remains weak relative to other regions; Eurozone GDP grew year-on-year by 0.6% in Q1 2010, compared to growth of 1.2% in Japan and 2.7% in the US over the same period.

The uncertainty surrounding the sovereign debt of a handful of countries in the EU, e.g. Portugal, Italy, Ireland, Greece and Spain, has reduced investor confidence and contributed to the sluggish growth seen in recent months. This has been evident in the falling room rates observed by HRG in Q2 2010 in Madrid (-1%) and Dublin (-9%) over the last six months.

Room rates in the US have stabilised since the economic downturn, although the picture across the states is mixed. Financial hubs such as New York and Chicago have experienced relatively flat growth as the banking and finance sector grows sluggishly. Cities such as San Francisco, which are dependent on tourism have suffered as leisure travel is cut from households’ budgets.

Despite the Obama administration’s fiscal stimulus, the US economy has shown signs of weakness as consumer expenditure has remained flat. In recent months, high structural unemployment and low bank lending growth have been persistent, suggesting that the economy is still in a fragile state.

According to ONS, the UK posted a 1.1% quarter-on-quarter growth in Q2 2010 which was above consensus expectations, but the HRG survey shows that UK room rates posted a year-on-year decline of 1.2%.

The year-on-year decline in room rates indicates that rates have not fully recovered from the effects of the economic downturn. The decline in rates has particularly affected regional markets outside London, for example year-on-year growth in Manchester and Liverpool showed a decline of 5% and 1% respectively.

The fall in rates in the UK’s regional markets is symptomatic of low demand caused by high unemployment and reduced business travel. However, there is evidence to suggest that rates have stabilised as the economy continues to recover.

Looking ahead, the effect of public expenditure cuts will disproportionately affect some of the UK’s regional cities.

The London market has been boosted by the resurgence of the financial services sector over the last six months. The renewal of growth in the banking sector, as well as the attractiveness of a weak pound to tourists and leisure seekers has contributed to the growth in room rates.”