HRG Report Show Strong Hotel Growth

Updated: 21st Feb 2008

HRG Report Shows Strong Hotel Growth

Despite difficult market conditions and ongoing concerns over the global credit crunch, Hogg Robinson Group (HRG)’s full year hotel survey reports strong rate growth in 2007 across key global cities. Reflecting the increasing importance of the emerging economies, Moscow was highlighted as the most expensive destination worldwide for the third consecutive year, with the Russian capital posting a staggering 93% rise in average hotel rates since 2004.

Other trends noted by the international corporate services company include:

• US market reported mixed results, in part due to weak dollar exchange rate and economic concerns, particularly in the last quarter. New York retained its position as the second most expensive city worldwide
• All international markets outside the US demonstrated steady average room rate growth
• India continues to exhibit exceptional growth potential with its financial capital Mumbai achieving a 37% average room rate increase - the highest of any city surveyed
• Some companies are adding serviced apartments to their accommodation mix as an option for long stays with the average length of stay standing at 7.25 nights in 2007
• The role of the international corporate services provider becomes ever-more valuable as companies look to maximise their return on expenditure and control costs during times of economic uncertainty.

Margaret Bowler, Director Global Hotel Relations at HRG, says: “The hotel industry has shown a strong performance throughout 2007 - although not to the levels of 2006 with many key cities achieving single as opposed to double digit growth.”
The strength of the British Pound has clearly benefited UK corporates when travelling to certain overseas markets over the last 12 months, helping to cushion the impact of significant local currency room rate rises. For example, a substantial 24% local currency rate rise in Johannesburg equates to a more affordable 10% when converted to GBP.

Only five of the 50 cities surveyed for the global average room rate listing recorded a decline in rates in 2007, largely attributable to maturing local markets or a significant increase in room capacity and availability: rates in Bangalore and Philadelphia decreased by 5%, Tokyo and Bristol were down 2% and Liverpool fell by just 1%.

HRG’s full year survey is based on a combination of industry intelligence, actual room nights booked and rates paid by its UK clients during January to December 2007 compared to the same period in 2006.

Part 2: In-depth analysis

Top 10 most expensive cities worldwide:

January – December 2007

While Moscow’s increase of 11% year on year is markedly lower than its 2006 growth rate (when average room rates in the city grew by 25%), this figure represents a total 93% rise since 2004. The slower growth rate in 2007 illustrates the city’s increasing maturity as a business destination. However, the cost and availability of land in central Moscow, restricting the development of new hotels, is set to result in continued room rate inflation into 2008.

Dubai continues to achieve strong growth in room rates. Despite the massive construction programme currently underway, continued high demand is forcing up prices, with the city rising from seventh to fourth place in the listing. Paris also showed steady growth, moving up one spot to third place with an annual rise of 8%, buoyed by the Rugby World Cup and the Paris Air Show.

Increased corporate activity in New York’s banking and finance sector has fuelled exceptionally high occupancy levels and as a result, the average room rate in US dollars was up 11% from 2006 to US$384 per night. However, this equated to a mere 2% when converted into GBP, softening the blow for UK corporates. With persistent worries surrounding a potential US recession, it remains to be seen whether the resilience of New York’s room rates will continue into 2008.

London, which is recognised as a long term occupant of one of the Top 10 slots for the most expensive cities for business travellers, has fallen two places in the 2007 ratings and now stands at tenth position.

Top 10 average rate rises/decreases: January – December 2007

Active IT and banking sectors in Mumbai, combined with India’s ‘open skies’ policy and an undersupply of hotel rooms in the city, continue to drive rates skyward.
Barcelona enjoyed an impressive 18% rise in average room rates, as it played host to a number of sporting, cultural and business related events during 2007. Strong rate growth in Munich was driven in part by major exhibitions for the construction industry.

A slight drop in 2007 average room rates in Liverpool is attributable to increased room capacity, following the completion of a number of hotel refurbishments and new openings in preparation for its status as 2008 European Capital of Culture.

Five year average room rates by region: 2003 - 2007

HRG has seen consistent growth in average room rates across all regions worldwide since 2004 – the last year to experience a dip in average room rates. Eastern Europe, largely driven by Moscow’s continued development as a business centre, has reported the highest rate growth (58%) over the last five years. Exceptional rate growth in MEWA (Middle East West Africa) in 2007 was, as previously mentioned, led by Dubai.  The most consistent growth during the full five year period was experienced in Central and Western Europe

Emerging economies – BRICs (Brazil, Russia, India and China)
Average rate by country 2006 – 2007

The increased accessibility of the BRIC countries via international airlines and low cost domestic carriers continued to benefit the hotel industry in these markets.

Brazil
Average room rates within the BRIC economies grew fastest in Brazil at an impressive 15.8% during 2007. Rio de Janeiro was the strongest performing city in Brazil, with room rates soaring by 28%, buoyed by the city’s popularity as a destination for international conferences and trade events, as well as the Pan American Games in July.
Sao Paulo has experienced a surge in hotel supply over recent years, particularly in the budget and luxury sectors. As a result, the city has an over capacity of rooms, which is reflected in its more restrained 9% average rate rise.

Russia
At £247.99, Moscow again recorded the highest global average room rate. Hotel accommodation in the city is dominated by the top end of the market as demonstrated by the opening of another 500 room luxury hotel in the Moscow World Trade Centre in September. A shortage of land combined with high land values in the city centre is hindering further development with the market approaching saturation. However, there is scope to develop the budget and mid market sectors on the outskirts of the city, which would open up the market to more affordable business travel.

India
India continued to play a dominant role in the Top 10 most expensive destinations, with Mumbai (the country’s banking and commercial centre) catapulted to seventh place, up from twenty-eighth. With a staggering rate growth of 37%, Mumbai outperformed all other major cities worldwide. In part, this increase is indicative of the dominance of the luxury end of the market and restricted availability of room options in the city; both Mumbai and the country’s political centre New Delhi suffer from scarce availability of land for development combined with high land prices. Average room rate growth in Bangalore slowed in 2007, following an increase in new openings in the maturing city and growing competition from other cities across India.

Margaret Bowler says: “Overall, India has seen strong average rate growth during 2007, driven primarily by an increase in activity from the IT sector, as companies relocate to the market to take advantage of lower infrastructure costs. However, occupancy levels have declined in certain cities as the rate of development from outsourcing companies has plateaued and as some organisations develop their own ‘hostel-style’ accommodation for staff to avoid paying exorbitant hotel rates – this is particularly evident in Northern Bangalore.

“India suffers massively from an under-supply of hotel rooms (current estimates put the shortage at around 100,000 rooms). With just 10-15,000 additional rooms being developed each year it could take 10-15 years for the market to reach saturation.”

She continued: “We can expect to see more development in the up and coming city of Pune and Hyderabad, the country’s second Silicon Valley after Bangalore. India is definitely a country to watch.” 

China
Growth in average room rate in China is comparatively low, with the market lagging behind its BRIC counterparts. Significant hotel openings, particularly in the country’s financial capital Shanghai and in Beijing, have served simply to ‘mop up’ increased demand from Western hotel brands, with occupancy rates falling marginally as a result in many cities. This effect is expected to balance out as the country gears up for the 2008 Olympics.  

Margaret Bowler comments: “The Chinese market operates very differently from other markets; Chinese business travellers prefer to stay in branded hotel chains that they recognise. As such, Western hotel chains are scrambling to establish a presence in China to encourage the growing number of Chinese business travellers to stay in their hotels whilst travelling overseas.”

Country focus: UK
The UK market was a consistent performer, with most cities showing a steady growth. Bristol and Liverpool experienced fractional declines of 2% and 1% respectively. The latter was a result of significant new hotel openings and refurbishments in preparation for its 2008 status as European Capital of Culture. Similarly, Manchester’s rates remained static due to significant new hotel openings in the city. With a further 700 rooms expected to be introduced before the end of 2008. London, which is often used as a benchmark city, grew at a modest 4%.

Average rates – UK cities

In Scotland, Aberdeen, Edinburgh and Glasgow enjoyed strong demand as corporate destinations. Aberdeen’s growth is directly linked to demand by the oil industry, however, average room rate growth in the city is expected to suffer in 2008, as oil exploration in the North Sea is cut back. Glasgow benefited from a strong year in terms of conference activity, keeping average rates buoyant.

Country focus: France
Despite a general election, considerable social unrest and 10 days of strikes by public transport workers causing significant disruption for corporate travellers, France achieved average room rate growth of 11.5% in 2007. Rates in Paris grew by 8%, proving its continued popularity as a corporate travel destination and spurred by the Paris Air Show in June, in addition to hosting five key games and the final of the Rugby World Cup.

The Rugby World Cup effect

A focus on room rates across France during the 2007 Rugby World Cup in September and October, compared to the same period the previous year, demonstrates the knock on effect of a major sporting event on the corporate travel market. The country benefited from an overall average growth rate of 21.5% during this period, whilst in Marseille rates leapt by a staggering 78% as the limited supply of hotels struggled to cope with the exponential growth in demand during this period.

Room availability

Analysis of denied bookings: January – December 2007
As the industry continues to grow there is a marked increase in the shortage of rooms with availability posing an ongoing challenge in certain cities. In addition, there is a growing trend among hotels to deny clients the opportunity to book their negotiated rates. This situation is perpetuated in cities where demand is high and where clients have negotiated what appear to be highly competitive rates without last room availability. Inevitably this leads to higher costs with the client forced to book best available rate on the day.

Margaret Bowler comments: “A 67% increase in the number of bookings being denied due to the chosen hotel being genuinely full demonstrates the current strength in the hotel industry. This only serves to emphasise the ever more important role of the international corporate services provider. HRG successfully secures competitive rates on behalf of clients as a result of our analysis and management of room allocations, ensuring maximum availability and controlled costs for our clients.”

Minimum stay restrictions have been an established feature of the global hotel market for some time. However, HRG has also observed a concerning trend of hotels introducing early check out fees (first introduced in North America and now making an appearance in other regions such as  Europe). This allows hotels to capitalise on high demand and counters the practice by some business travellers of booking more nights’ accommodation than they need and cancelling the ‘spare’ nights on arrival. Increasingly aware of this ’loophole’, many hotels have introduced cancellation fees, which might vary from the cost of one night’s accommodation, through to payment for the entire original booking.

Global average booking lead-in times: 2006 - 2007

While year-on-year more bookings are being made over two weeks in advance, HRG’s data shows that business travellers continue to make travel arrangements at short notice with almost 10% of bookings made on the day of arrival, up from 8.8% in 2006.

“As such, business travellers continue to risk paying a premium rate for their accommodation. We recommend that our clients book as far in advance as possible and seek last room rate availability in popular locations in order to control costs,” says Margaret Bowler.

Average length of stay by property type: January - December 2007

“With the ongoing shortage of accommodation, it is important for our clients to be aware of alternative accommodation options. Contrary to general belief, many serviced apartments don’t impose a minimum stay period and can provide a useful alternative - even for shorter business trips,” says Margaret Bowler.

“However, our data shows that while serviced apartments are available for one night stays, the average booking across HRG’s client base was for 7.25 nights in 2007. As some of the major hotel chains start to offer more spacious, self-catering apartments for longer stays, offering business travellers a combination of the independence they expect from serviced apartments with the high levels of service offered by hotels, we can expect further competition in the serviced apartment market in the future.”

Global hotel star rating analysis: 2006 – 2007

Average room rates have increased year on year across all star ratings, reflecting the continued growth in the global hotel industry. Although more budget hotels have opened over the past 12 months, HRG has noted that often the price per night is very close to that offered by full service hotels and in certain city centre locations better rates can be negotiated by opting for a full service hotel.
“We are also seeing a trend as the large international hotel groups expand their ‘budget’ offerings overseas,” added Margaret Bowler. “This will introduce yet more competition in the lower star rated hotel sector whilst the luxury end of the market will continue to achieve steady growth.”

Part 3: Summary

“Our 2007 survey has highlighted the resilience of the global hotel market, with all regions recording average room rate growth. Concerns over a global recession may continue to preoccupy many industries, however it is clear that the interconnectivity of world markets makes corporate travel a necessity which businesses cannot ignore and we anticipate some growth in 2008,” says Margaret Bowler.

“Although Moscow retained its position as the most expensive corporate travel destination worldwide, the growth rate has notably reduced. Elsewhere, a similar situation can be observed in several other emerging markets, such as Bangalore and Tokyo which, having enjoyed rapid rate growth over recent years, in 2007 saw average room rates reduce for the first time as they enter maturity. However, as development expands, new markets are opening in cities such as Mumbai where growth continues at a staggering rate. However, a lack of budget accommodation continues to prevail across most emerging markets.

 “The Beijing 2008 Olympic Games are expected to provide a catalyst for growth in hotel occupancy levels in China and this could potentially have a ‘knock on effect’ in the corporate travel market. However, it is more likely that corporate travellers will avoid visiting Beijing during the Olympic period. China is continuing to experience a wave of expansion in the international hotel industry as large Western hotel operators scramble to establish a recognisable brand presence to encourage brand loyalty when Chinese business travellers stay overseas.”

Margaret Bowler concludes: “We anticipate that 2008 will be a year of further growth for the global hotel industry, although some markets may experience a temporary slowdown in the growth of average room rates. However, suppliers are expected to maintain average rates as supply and demand balance out; hotels are indicating that even if occupancy levels dip slightly in the short-term they are looking to protect average room rates through aggressive yield management.

“The benefit felt by the strong British Pound, which has substantially benefited UK corporates throughout 2007, is unlikely to continue to such an extent throughout 2008. As a result, business travel may become more expensive for UK corporates and HRG’s role as a corporate services provider will become more important than ever in helping to control business expenditure.”

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