This year didn’t start off very promisingly weather-wise. We had a grim winter, and a miserable, wet spring.
But at the last minute, the sun poked its head out and we’ve all been enjoying one of the best summers in a long time.
That’s been great news for the British tourism industry. People who had been preparing to drag themselves and their families abroad for some sunshine decided to stay put instead.
But it’s not just about the weather. There are several long-term factors that look set to boost the number of tourists in Britain for years to come.
And one sector in particular looks well-placed to profit.
Britain’s tourist industry is doing surprisingly well
The British hotel business has been booming this year so far. According to industry studies, occupancy rates across the sector increased sharply.
The Office for National Statistics suggests that some areas may even be returning to their pre-crisis peaks. And a survey by the website TravelClick suggests that occupancy rates are up by 4% on last year.
More importantly, this growth hasn’t been driven by discounting. According to travel website TripAdvisor, hotels around the UK – including London – are charging a lot more than they did last year. For example, the price of a decent hotel in Birmingham has shot up by nearly half.
That’s pretty impressive, given that last year London hosted the Olympics, which drew millions of people from around the world to Britain. Beijing, Sydney, Athens and Atlanta all saw big downturns in tourist numbers the year after they hosted the games. There was also the extra bank holiday, thanks to the Diamond Jubilee.
Squeezed incomes and recovering confidence = ‘staycations’
There are two reasons why this growth is likely to continue.
First, as Britain shows signs of recovery (however short-term it is), consumers feel more confident and willing to spend. But at the same time, their wages are falling in real terms (ie, after inflation).
So rather than shell out on expensive holidays abroad, they are more likely to compromise with a ‘staycation’. (Admittedly, this can be a false economy – Britain is not the cheapest country in the world – but there’s definitely a perception that staying at home, rather than taking a plane somewhere, is cheaper.)
Secondly, there’s a more general growth in tourism around the world. The main reason for this is that the global middle-class continues to expand. Much of the growth in overall tourism numbers will come from Asia – especially China.
Even though China’s economy is slowing, wages are still growing as its supply of cheap labour runs out. While this is bad news for firms, since growing labour costs erode China’s cost advantage, it also means that an increasing number of Chinese can afford to travel abroad.
Indeed, there are signs that this shift is already taking place. Previously Chinese travellers tended to come from small numbers of affluent tourists travelling in groups. However, the latest surveys now suggest that a majority now travel individually.
And less-affluent Chinese are now taking more trips abroad too. An increasing proportion of Chinese overseas travellers earn less than £11,000 a year. As our editor-in-chief Merryn Sommerset Webb points out, if the government can sort out the visa system, then this could become a major growth area.
The hotel group to buy now
So how can you profit? There are a number of publicly-listed hotel groups, but one particularly interesting one is PPHE Hotel Group (LSE: PPH).
PPHE owns, develops and runs two upscale hotel chains: arthotel and Park Plaza (it also has a stake in a Croatian group). It gets two-thirds of its revenue from the six UK hotels (four of them in London) that it owns, and the three others that it has a stake in through part-franchising and part-ownership agreements.
These hotels are targeted at business travellers and tourists who are willing to pay a bit more for a better location and good quality, but don’t want to pay luxury hotel prices. So while their rooms are about 25% more expensive than the average hotel, they still have relatively high occupancy rates.
The company plans to expand its London portfolio further. It has bought sites close to Waterloo East railway station and Luton airport, both important transport hubs.
It has also been experimenting with the idea of introducing upscale restaurants into its London properties, with the Italian-themed TOZI in Victoria proving a big hit.
PPHE has also been tweaking its international hotel portfolio, selling unprofitable operations and re-investing the funds elsewhere. For instance, it completed the sale of a complex in Thailand and recently bought two Berlin Hotels, with the aim of upgrading the facilities and increasing the number of rooms.
Turnover has nearly tripled since 2007. While this rate of expansion won’t be maintained, revenue is still expected to grow by a further 10% to £265m by 2015.
The stock has had a good year, but it remains cheap on a price/earnings ratio of only 6.6. It also trades at just 57% of net assets, and the discount remains substantial even if you exclude intangibles such as goodwill. Finally, it also has a healthy dividend yield of 3.4%.
• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.
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