The UK hospitality sector is likely to see a strong staycation summer once more in 2021, as hospitality reopens to a largely vaccinated consumer market.
But international arrivals will only start to build gently through the second half, warn agents in their outlooks for the coming year. And while there is expected to be increased investment activity, and some distress, there is also expected to be some re-casting of relationships as cash-strapped operators look to their lenders and landlords for support back to profitability.
Agent Christie is expecting a strong bounceback in the staycation market, from the second quarter. There’s good news, and bad news: “Revpar recovery this year will be the strongest ever recorded – but full recovery to pre-covid levels will take several years, influenced by more subdued ADR growth.”
Carine Bonnejean told Hotel Analyst that the transaction volume will strengthen through the year – but that for Christie, domestic deals still held up relatively well in 2020. “We did more business than people thought,” in a market that was characterised by domestic buyers, cash deals and those making a lifestyle investment.
“And it’s continued to be active – we’ve already exchanged on eight properties in January. It shows there’s is a market – and you don’t see a massive discount. It’s quite positive, there is a lot of activity, and we’re working on bigger mandates. There’s a lot more strategic thinking going on.”
On the demand side, she sees a stronger domestic market for the coming season, as “international travel is going to remain complicated. And on the corporate side, I think as we can reopen, there will be travel we will want to undertake.”
Savills is predicting another strong staycation summer for UK hotels, aided by the re-emergence of European visitors, as the vaccine rollout starts to enable cross-border travel once more. “The frustration of extended lockdown measures is likely to further amplify demand,” says Giles Furze, director of hotel valuation, in an outlook report.
“Staycation bookings for the summer are already in motion, driven in part by growing ‘vaccine confidence’. For example, National Express experienced an increase of 185% in coach holiday bookings made by those aged 65 and over, during the first two weeks of January.”
Savills points to VisitBritain estimates which suggest there could be up to 16.9m inbound visitor trips, of which the vast majority will be European arrivals.
Less certain is the pace of recovery for international visitor numbers. The Savills team warns: “A full recovery to international arrivals could therefore be a four-to-five year process on average. Leisure markets are likely to respond in the first place, while corporate travel remains hindered by post-pandemic cost-cutting and questions raised over the necessity for frequent business travel.”
The big question for many, is whether the coming months will trigger a wave of distressed sales. Researchers at CBRE, in their 2021 market outlook warn: “UK hotel capital values are expected to remain lower than 2019 levels. However, the discount will vary depending on the physical and operational characteristics of an asset fit for purpose, limited–service hotels are predicted to exhibit the most resilience in operational performance and movement in capital value.”
Christie’s Bonnejean predicts: “We’re hearing that the banks are starting to look at their books – it’s all in the making.”
While CBRE’s researchers note: “We expect lenders to look more strategically at their existing hotelexposure. So borrowers will need to demonstrate a sustainable business model and suitable plan for recovery. An attempt to restructure and right size loans is likely to trigger disposals. More generally, we expect the bid-ask spread to converge and a material uptick in deal flow. Private equity funds and family office investors are expected to be particularly acquisitive.”
The hospitality sector has seen a raft of changes accelerated due to covid-19. “Out of the crisis has come a decade’s worth of innovation,” says the CBRE report. “We predicted in our previous Market Outlook report that real estate investors would become more active participants in the operational businesses they accommodate- the financial imperative facing many operators, and the prospect of uncertain income for property owners, has supercharged change and collaboration.”
One big change is landlords involving themselves more directly in operational businesses and in the direct activities of tenants, say the consultants. “There has been a realisation that the new approach, free from the traditional lease, is not just for the trailblazers. In the current circumstances….we see real risks for landlords and tenants who are not as proactive or collaborative.”
HA Perspective [by Chris Bown]: At least we now believe that light at the end of the tunnel won’t be another government minister with details of a new lockdown.
But navigating the coming months will be tough. Cash will be tight, and as CBRE notes, a collaborative approach will be the sensible route to ensuring businesses in hospitality get to stay alive and return to profitability.
Unknowns include just how the consumer will behave. While many have lost jobs, plenty of those who are in work will have banked cash or reduced personal debts during lockdown. There seems to be a growing consensus that once free to spend on experiences, many will want to make up for the lost months of 2020.
Additional comment [by Andrew Sangster]: There is a huge amount of capital chasing opportunities in hospitality and the wider operational real estate market.
Data provider Prequin estimates that between 2020 and 2025, assets under management held by private equity firms will increase their holding of real estate by 18% to USD1.238 trillion globally.
This sounds a lot but it masks a significant shift in emphasis. The compound annual growth rate for this period is just 3.4%, down from the 8.9% achieved in the previous decade. Prequin believes this will push fund managers higher up the risk / return profile.
Within real estate, this means there will be a bifurcation between bond-like products for established asset classes that are perceived as less risky and new segments that offer higher potential returns.
Prequin notes that the two largest asset classes – retail and offices – are being hit by a period of demand uncertainty. Despite this, funds are increasing their allocation to real estate. Between 2010 and 2019, average allocations for public pension funds rose from 7.0% to 9.2%. For corporate pension funds the allocation rose from 6.2% to 7.1%. With family offices the increase was from 8% to 13%.
The laggards in this period were insurance companies, banks, government agencies and foundations who all cut back their allocations. Others, such as endowment plans, sovereign wealth funds, superannuation schemes and wealth managers kept their allocations stable.
Overall, trends indicate that this looks to be a propitious time to be in the emerging segments of operational real estate. There is more money about and money that is willing to take bigger risks.