London's Hotel Sector Is Robust Post-Terrorism — And The Secret Weapon Is Brexit

London’s tourism sector is proving highly resilient in the face of recent terrorist attacks, and that is feeding through to hotels. 

There is always a worry that in the wake of terrorist attacks like those in London in March and June that the human tragedy will be followed by a financial hit.

In Paris for example, 1.5 million fewer domestic and foreign tourists visited the city in 2016 compared to 2015, according to the city’s Regional Tourism Committee, a fall of about 1% after coordinated bombings killed 130 people in November 2015.

But initial figures for London are looking good, partly because the city has a secret weapon — Brexit.

Sarah Lim, industry manager for the travel sector at Google U.K., said interest in traveling to the U.K. was down only slightly since the beginning of May, and interest from some countries was up. Google measures searches for accommodation to gauge interest in a destination.

Interest in people coming to the U.K. from Europe has declined 8% year-on-year since the beginning of May, and U.K. interest in holidaying at home is flat, Lim said. But then there has been a big growth of interest from the U.S., which is up about 8% year-on-year.

“I would say terrorism is perhaps having a bigger effect on the European market because there is a shorter lead up time between booking your holiday and traveling. If you’re coming from the U.S you are also perhaps a bit more removed from things in terms of the amount of coverage events like that receive,” Lim said.

Data for bookings following the London Bridge attack in early June are not yet available, but London & Partners, the capital’s tourism promotion body, pointed out that figures from Forward Keys, which monitors travel-agent bookings to London and the U.K., shows that bookings were up around 7% in the two months following the Westminster terrorist attack in March.

Merlin, the listed company that operates attractions like Madame Tussauds, is more concerned. Its trading update on 13 June said that post-London Bridge it had seen “a further deterioration in domestic demand and, given the typical lag between holiday bookings and visitation, we are also cautious on trends in foreign visitation over the coming months”.

But Whitbread, which runs the Premier Inn budget hotel chain, said bookings dipped after the attacks in Manchester and Westminster but rebounded again quickly, and it expected to see the same effect post London Bridge.

It seems that London hotels are one of the few real estate sectors that have been helped by Brexit — the fall in Sterling means that it is cheaper for tourists to visit here.

“The hotel sector has been one of the best-performing sectors in London post-Brexit,” Crosstree Real Estate co-founder Sean Arnold said. “Revenue per available room is up double digits year-to-date across Central London and high single digits on a trailing 12 basis. The end of 2015 and first half of 2016 was not a great period for the luxury sector in particular because of the repercussions of Paris, but the devaluation of Sterling has been a huge boost for London tourism and will continue to drive performance for the foreseeable future."

Arnold has some concerns about oversupply of new hotels in outer boroughs and East London, but believes Central London should remain strong.

“Budget is an area that has seen a lot of supply in recent years, especially on the periphery, but in the central West End core of Camden and Westminster it is still very difficult to add supply due to competing uses and planning.”

The upbeat mood around performance is supporting the investment market, where blockbuster deals are still happening. U.S. firm Ashkenazy is understood to have agreed to buy the Grosvenor House Hotel from Indian firm Sahara for around £600M.

“Although what happened was terrible and severe, terrorism is having no impact at all on investor appetite for London and U.K. hotels,” Eastdil Secured Managing Director Giorgio Manenti said. “Both the investor side and the performance side have been very, very resilient. We are selling Central London hotels at record pricing right now.

“There was some fall off in performance even before recent events, but that was as a result of some oversupply. Visitation to London is still strong, you have had two years in a row of London being the most visited city in the world and the fall in Sterling also helps things a lot.”

This interest is flowing out of London and into the wider U.K. hotel market, Manenti said.

“For regional U.K. hotels, yields have increased and it has gone from a 6% market to a 7% market, but that is getting the market moving,” he said. “Financing is still fantastic so your cash-on-cash yield is phenomenal. You’ve got a 0% base rate so if you borrow at 50% leverage and a 200 bps margin, even if your performance halves you are not going to lose your assets. That is compared to 2007-8, when if performance dropped by 20% you were underwater.”

It is impossible for a city to be unaffected by attacks of the scale experienced by London, especially that at London Bridge. But the inhabitants themselves were remained resilient, and the tourism and hotel sector is following suit. Join us to discuss the London market and more at Bisnow's Big Hotel Reception on 14 July.