London hotels saw a strong performance during the summer season, but it’s the luxury hotel market that has driven the industry’s recovery post-pandemic, with a boost to average room rates and revenues per available room across London.

Whilst occupancy levels still sit behind pre-pandemic levels, many cost-conscious consumers are also trading down to budget hotels, according to the RSM Hotels Tracker: Focus on Asset Classes.

Average daily room rates of luxury hotels in London reached £488.61 in the peak of the summer season this year (July), falling to £387.93 in August. In the same period, rates of London’s middle market hotels were £231.54 in July and fell to £187.99 in August and decreased from £128.86 to £105.78 for budget hotels.

While luxury hotels have always been able to charge much higher room rates than the budget market, the gap has widened, with London’s luxury hotel prices being 279% higher than the city’s budget hotels in July 2023, when compared to the pre-pandemic peak season at 237%.

Similarly with gross operating profits (GOP), luxury hotels in London are benefiting the most, with GOP (per available room) reaching £221.99 in July but dropping to £127.43 in August. Despite this decline, GOP of the luxury market remains significantly higher than the middle market (£119.53 in July, down to £75.71 in August) and budget hotels (£54.89 in July, down to £26.10 in August). GOP has fallen across London’s hotel sector in August 2023 when compared to the same period in 2019 – with the starkest decrease in budget hotels (down 40%), followed by the luxury market (down 10%) and the middle market (down 3%).

When looking at occupancy rates it’s the lower end of the market that comes out on top. Occupancy of London’s budget hotels was 86% in August (down from 89% in July), compared to 83% (down from 87%) for the middle market and 74% (down from 79%) for the luxury market. Across the board, occupancy is lagging behind pre-pandemic levels, at 88% for budget hotels, 87% in the middle market and 82% in the luxury market during August 2019.

Chris Tate, head of hotels and accommodation at RSM UK, said: ‘It’s clear the lion’s share of the growth in room rates is in the luxury market, as the gap between luxury and budget hotels in London widens. In addition, with the recent opening of new ultra luxury hotels such as Raffles and the Peninsula, this gap is likely to widen even further in the coming years. Since the pandemic, people have prioritised trips away, and with the return of international travel, the luxury market is thriving. This looks set to continue as high-end consumers are less likely to be impacted by cost-of-living pressures, so demand is unlikely to tail off during an economic downturn. However, occupancy rates are trailing behind pre-pandemic levels, which may be a result of the removal of tax-free shopping impacting international travel plans.

‘Due to the cost of living, those that traditionally stay in budget hotels and the mid-range tend to be more cost-conscious consumers, so with the cost of goods, interest rates and inflation remaining high, many are opting for more affordable options. This is boosting occupancy levels, but rising costs in the sector are having a detrimental impact on the bottom line of these hotels.

‘With a great deal of uncertainty still hanging over the UK economy and an unlikely boom in consumer spending over the next year, this trend looks set to continue which could eventually put a large swathe of quality mid-range hotels under pressure.