Sunnier Times for Hotels in 2014, but Hoteliers see OTA Costs as Clouds on the Horizon

14 February 2014 - The welcome positive outlook for the hotels sector that accompanied the start of 2014 may be marred by concerns arising from online travel agents (OTAs), according to leading hotel operators, banks and investors at the annual Hogan Lovells and CBRE Hotels conference. 

Over 150 delegates were surveyed about their confidence in the future of the UK hospitality industry at the event held in London last week exploring the current and future state of the hotel market.

According to the survey, industry optimism has increased significantly from 2013:

  • Levels of confidence have soared: 94% of respondents were now optimistic or very optimistic about the prospects for the UK hospitality industry for the coming year, a huge jump from 50% in 2013.
  • The same optimism prevailed for REVPAR: 76% thought REVPAR would increase in London in 2014, up drastically from 30% who responded to the same question at the start of 2013.
  • An even greater proportion (86%) thought the UK's regional REVPAR would increase – the figures having confounded the pessimists last year – in early 2013 less than a quarter (23%) of respondents had expected an regional REVPAR to increase in 2013.

A warmer operating climate was also reflected in the changes in expected areas of activity in 2014, although opinions remain divided over the most likely sources of transactions over the coming year:

  • those expecting that restructuring and forced/distressed sales would remain the primary source of deals were now in a minority (49%), down from 71% in 2013,
  • 27% anticipated it would come from normal investment activity,
  • 17% from refinancing,
  • a small minority expected development to take off in 2014 (7%).

However, a panel of industry leaders warned of the impact of the recent closure of the Office of Fair Trading (OFT) price-fixing investigation into the practices of online travel agents (OTAs), Expedia and IHG.

Although it only applies to those parties, the OFT intends to widen its Decision to the UK hotel industry generally:

  • OTAs will be free to discount from commission for existing members of a "closed group"
  • Hotels will be free to discount for closed group members
  • OTAs (and hotels) can publicise discounting and the level of discounts.

The result is that brands need to work harder to prevent their value being eroded by the creeping dominance of OTAs. The combination of OTA charges (sometimes as much as 30% of room rates), brand fees and credit card charges was described as having a "toxic" effect on revenue.
Jackie Newstead, Global Head of Hogan Lovells' Real Estate practice and partner in the hotels, leisure and gaming practice, who surveyed the conference delegates on the outlook for the hotel sector in 2014, said:

"The hotel conference is attended by representatives across the hotel industry, so it offers the perfect opportunity to gain a balanced view of the market in the current climate from industry experts. It is very pleasing to see the performance figures for 2013 and the strength of optimism which bodes well for the hotel investment market in 2014, however there is a concern regarding the impact of OTAs following the recent OFT decision".

Jonathan Langston, Senior Director of CBRE Hotels, added:

Despite these concerns regarding payments flowing out to OTAs, brands and other charges, a brand can add substantial value, particularly in secondary or tertiary markets, although delegates felt the position is less clear in places like central London where demand levels are high across all market levels."

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