Hard days for the best hotels, but good nights for the customers

Economic downturn and foot-and-mouth has kept business trade and tourists away in droves

Business travellers and tourists could soon get luxury hotel rooms in London at bargain prices because of the impact of the economic slowdown and the foot-and-mouth crisis.

The pressure on hotels caused by American businessmen and tourists staying away or trading down, is becoming so great that the smart traveller is increasingly able to bargain over the cost of rooms.

A survey by property consultants Jones Lang LaSalle says the occupancy rates of hotels have fallen and room rates have also dipped. The average cost of hotel rooms has fallen 1.2 per cent for the seven months to July to £225.99. But occupancy rates in expensive hotels in the capital have fallen by 2.9 per cent to 75 per cent for the year to the end of July, the study shows.

"When volumes start to decline, hoteliers begin to examine other market segments and their pricing policy, which can lead to falling room rates," said Arthur de Haast, managing director for Europe, at Jones Lang LaSalle. This might be good news for customers, but is this the beginning of traumatic times for hoteliers who invested heavily in the key London market? "Profits for hotels in London will fall and this will continue into next year," said Virginie Lannevere, an analyst at HSBC.

At the end of August, the Hilton Group, which owns Hilton Hotels and Ladbrokes, reported a slightly depressing trend on revenue per available room, the industry's profitability yardstick. After a first-quarter rise of 7.1 per cent, growth was cut to 1.6 per cent in the second.

Thistle Hotels, London's largest hotelier with 22 hotels, also noted a drop in the number of visitors in the second quarter. The group said sales in the second quarter were flat, after increasing 12 per cent in the first quarter, as visitors stayed away from the UK. The second half has started slowly.

Hotels are suffering because of the decline in American tourists, a section which makes up a significant proportion of demand in quality hotels. The main cause was the image problem the UK suffered because of foot-and-mouth. The crisis, with its television pictures of piles of corpses, was at its height when holidaymakers in the key US market were deciding where to visit.

But more significantly, demand which has been high in recent years, has also been dampened because of the battering the financial services sector has suffered, particularly in America. Financial business travellers, such as bankers and analysts, have traditionally been high spenders in the London hotel market but have been trading down to cheaper hotels or staying in less luxurious rooms because travel budgets have been cut.

Although most hotel companies have been hit to some extent, the result is that the top-tier hotels like The Savoy or the ultra-chic Metropolitan, are being hit hardest. The mid-market is doing comparatively well because it is capturing customers trading down.

But, although top-tier hotels are feeling the pinch, many of their most expensive rooms standing empty, the small hotel groups are likely to run into the greatest financial difficulty, Ms Lannevere said. They are far more likely than the big groups to have balance-sheet problems and they are more likely to have to sell up. "The market is cyclical and the upside has been going on for so long. The downturn was inevitable."

But the outlook for the sector is not all doom and gloom. Jones Lang LaSalle expects a gradual recovery in the corporate sector in 2002. "There continues to be good interest in the London hotel market because of the strategic importance of the City," said Mr Haast. "The fundamentals of the London market are still sound."

London is seen as a key market, the European financial centre, and hoteliers will continue to want to own and invest in property in the City. Mark Wynne Smith, the executive vice-president at Jones Lang LaSalle, said: "It is a key location for hotel companies and that isn't going to change."

Hoteliers continue to want to invest in London. For instance, Strategic Hotel Capital, a Chicago-based firm that buys and invests in hotels, has $1bn (£684m) to spend and wants to add a British name to the portfolio.

The drop in rates and occupancy could even push down the buying prices and lead to better deals for investors with spare cash.

"We are not talking about a crisis here," said Mr Wynne Smith. "We are having a difficult time but there won't be significant fallout. Out of every downturn there is opportunity."