By: William Barney, Director, KPMG - London, Summer 1996

Hotel markets in London and throughout the United Kingdom have seen two full years of strong growth in room yields, profitability, and real estate values, with 1996 and 1997 set to continue this trend.

However, the situation in Continental Europe is not quite so rosy, with the major economics and hotel markets of France and Germany suffering from continued economic recession. This is largely due to the rigors of the European Monetary System and the drive to a single currency. A strong industry recovery is, therefore, not yet evident throughout Europe.

As London’s hotel market is so influenced by overseas travelers, it tends to be dealt with desperately by analysts. London has seen 16 percent room yield growth in 1994 and 14 percent in 1995 with estimates of 25% compound growth for the two years 1996-1997. These growth rates have pushed hotel values up by 15 to 30 percent from their 1992 low point.

Outside London, growth has been slightly less explosive, with room yields increasing by 8 percent in 1994 and 12 percent in 1995. Estimates indicate an average of 8 percent growth for 1996 and 1997. Property values have not grown as fast, primarily because there is far more supply available in contrast with the limited availability and exclusive nature of the available stock in premium areas of London.

In Germany, the recession is continuing to influence accommodation demand. New supply predicated on a post-unification boom has hit static demand in many of the major cities (for example, Hanover, Frankfurt, and Munich). Unemployment is growing, and the pressure of leading the European Unions’s drive to a single currency is restraining the German economy.

France is similarly affected by the single currency drive. Furthermore, Paris hotel performance was damaged in the last half of 1995 by a spate of Algerian bomb attacks. Local hoteliers expect room yields to rise in Paris by 8 to 10 percent in 1996 and a similar amount in 1997. Outside Paris, where the impact of growing overseas markets is lower, the outlook is less optimistic with the government’s deflationary policies slowing the recovery in domestic hotel demand.

Beyond these quantitative trends, watch for the following qualitative trends in Europe.

• More concentration of four-star hotels in fewer companies and the extension of brand and marketing alliances.
• Additional townhouse hotels in London (up to 50 by the year 2000) and other major cities.
• Conversion of London offices into hotels, particularly on the fringes of the City (notably London’s financial district).
• Budget/limited service hotel growth throughout Europe, including city centers.

The Real Estate Report is published by KPMG's National Real Estate, Hospitality, and Construction Practice. © 1996 by KPMG Peat Marwick LLP All rights reserved. For additional information email KPMG.

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