Jones Lang LaSalle Hotels

11/27/2001

London Bears Brunt of September 11^th Attacks
London’s hotels continue the slide

London, 21st November 2001 - London's hotels continue the downward slide that started earlier this year and was accentuated by the events of September 11th. Both occupancy and room rates dive and new openings have been put on hold as London hotel operators and investors seek to minimize the damage.

London's hotels have borne the brunt of the impact of the slowing of transatlantic visitors to Europe due to its role as a gateway city. They have been hit by the US economic slowdown (compounded by negative foot and mouth publicity) and corporate caution reflecting uncertainty in Europe.

Occupancy in London's luxury hotels, which has been falling since April, fell by 20.1% during the month of September, and a further 29.8% in October to 60.2%. According to Arthur de Haast, Managing Director Europe at Jones Lang LaSalle Hotels, this comes at the worst time for the city's hotels who normally would be enjoying strong corporate and meetings demand. "September, October and November are amongst the highest yielding months for London's hoteliers, as conference business picks up following the summer lull".

"October was the watershed for the industry" stated Mr de Haast. "Where previously hotels had been able to hold room rates and take the hit in occupancy, October saw room rates start to suffer significantly" he added. London's luxury hotels saw only a 2% fall in room rates during the month of September, aided by the ten days of 'normal trading' prior to September 11th. There was no such buffer in October with rates falling by 10.1% to £213.48.

London's visitor arrivals are expected to show a decline in 2001 of around 10%, the first time overall numbers have been negative since the Gulf War in 1991. London's airports are also suffering, with Heathrow and Gatwick recording falls in passenger numbers of 20.1% and 12.7% respectively during the month of October. While US arrivals account for only 15% of total arrivals to the capital, they have a higher propensity to stay in hotels and when considering London's luxury properties, this percentage moves above 40% of total room night demand.

The lack of supporting demand has meant the capital's supply pipeline has been shortened. "Anecdotal evidence suggests many hotel owners and operators are clamping down on capital expenditure" stated Mr de Haast. "As at August 2001 there were eight hotel developments (1,430 rooms) that were due to open in London before the end of the year. However, since the events of September 11th, all but one of these have been postponed" added Mr de Haast. Delayed projects include the Customs House extension (at ExCel - 156 rooms), Grange Hotel in the City (239 rooms), Crowne Plaza Hotel (203 rooms) at Blackfriars, Threadneedles in the City (70 rooms) and the GWR Hilton at Paddington (355 rooms).

"The reduced supply levels are one element working in London's favour" said Mr de Haast. He names others as the increasing number of Britons who will, in the short term at least, choose to holiday at home rather than overseas. 2002 will see the Queen's Golden Jubilee, for which a £5 million marketing campaign has been developed. In addition, the healthier than expected UK economy and receding threat of a domestic recession offers some support for the London hotel market.

But the balance has to be weighted towards downside risks. "The shrinking US economy and economic uncertainty across Europe, particularly in Germany places London at further risk. Prior to September 11th we expected trading performance to improve in 2002, returning to at least 1999 levels. However now this looks in jeopardy, with double digit declines in room yield expected for the year end 2001 and minimal growth in 2002" stated Mr de Haast. "The medium term outlook is uncertain, but given the strong correlation between GDP growth and hotel performance, the London market should begin to post a recovery in the second half of 2002" added Mr de Haast.

Despite the uncertainty surrounding the trading market, Nick Marsh, Executive Vice President at Jones Lang LaSalle Hotels does not believe this is the end of the investment market. "We saw the Berners Hotel (£51m) and the Heathrow Park Hotel (£13.3m) close after September 11th as well as two smaller properties the Kensington Edwardian and Albany Hotel for a combined price of £7.5 million" said Mr Marsh.

Mr Marsh still believes that investors do have an appetite for London, although lenders are more cautious. "European institutional investors may have an increased appetite for real estate, particularly the German funds given the poor performance of the German stock market, whilst US funds may be more cagey" said Mr Marsh. He adds that "with falls in equity values, it is likely public companies, even those with funds available after recent strategic disposals, such as Six Continents and Whitbread, will concentrate on strategic asset acquisitions rather than take-overs or large portfolio purchases".

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