14 minute read
A Market in Flux
from Sleeper 97
As London emerges from lockdown, the hard-hit hospitality sector reviews performance, profit and pipeline in the hope of a post-pandemic rebound.
Words: Catherine Martin
When a little-known virus began its spread across a far-flung city in China, the rest of the world could be forgiven for passing over the news item with little concern for their everyday life. Back in the early part of 2020, no-one could have predicted the impact that SAR-CoV-2 – now commonly known as Coronavirus – would have. Not in living memory has there been such a deadly, disruptive turn of events.
Away from the devastating cost to human life and the personal challenges so many have faced, the impact on business has been far-reaching. The hospitality sector has been particularly hard hit. In fact, it’s been catastrophic. In the UK, lockdown after lockdown has seen businesses encourage working from home, dramatically reducing footfall in major cities and therefore demand for high street dining; mixing with others was banned, causing bar and restaurant bookings to plummet; and holidays have been cancelled, forcing hotels to scale back services or close their doors altogether. It came as no surprise then when analysts and hoteliers declared 2020 the worst in living history. What should have been a record year for performance and new supply, became record-breaking for a very different reason. A VALUABLE ASSET
With its shopping, sporting events and worldclass tourist attractions, London has long been on the bucket list for travellers. From heritage sites and royal connections to some of the mostvisited museums and galleries in the world, the UK capital has plenty to offer the leisure traveller, while exhibitions and conferences cement its place as a hub for global business. In 2019, London welcomed a record-breaking 21.7 million inbound visitors, accounting for 53% of all visits to the UK. Tourist spending also hit a new high with accommodation and dining amongst those benefitting. As such, the value of the sector to the economy shouldn’t be underestimated. According to UKHospitality – a trade body that represents independent hotels and large multi-national groups as well as bars, restaurants and visitor attractions – the wider sector has a £130bn turnover representing 5% of GDP – a greater contribution than the automotive, pharmaceutical and aeronautic sectors combined. It is also the UK’s third largest employer with 3.2 million workers – that’s 9% of the total workforce.
These figures, coupled with the fall in spending, has prompted action from Mayor of London Sadiq Khan, who has pledged to use all the powers at his disposal to tackle the challenges facing the city’s hospitality industry. “Getting our world-leading hospitality industry back on its feet will be vital for London, but also the UK’s economic recovery as we emerge from lockdown,” Khan said in a statement regarding staff shortages.
UKHospitality has been vocal on the impact the pandemic has had on business too, and has been busy producing guidelines and FAQs to help those struggling to navigate the changing regulations. CEO Kate Nicholls was hugely disappointed at the recent delay to easing restrictions, stating: “The hospitality sector has already lost more than £87bn in sales in the pandemic leaving businesses deeply in debt and at risk of suffering economic long-Covid without further support. Hospitality is desperate to get back to what it does best and can play a key role in the economic recovery of the UK.”
POOR PERFORMANCE
Steady growth in tourist arrivals over the past decade has been the driving force behind new hotel development in London, and despite an increase in supply, the city has historically performed well in terms of the key performance indicators. According to data from STR, occupancy has stayed above 80% for the past decade, peaking at 83.4% in 2019, while RevPAR averaged £115.99, again recording its highest rate (£128.44) in 2019.
KATE NICHOLLS, UKHOSPITALITY
But in 2020, with the pandemic in full swing, numbers tumbled dramatically across the board. Findings from the Office for National Statistics make for bleak reading. Monthly air passenger arrivals to the UK fell from 6.8 million in February 2020 to 112,300 in April 2020, a fall of 98.3%, while accommodation and travel agency businesses saw sharp declines in turnover, falling to less than 10% of their previous levels.
Hotel performance took a hit too, particularly in London, which has seen a greater fall in occupancy than any other UK region. STR data shows that, in one of its worst months, the capital recorded just 20.4% occupancy in July 2020, down from 90.2% in July 2019. For the same period, RevPAR tumbled to an eyewateringly low £17.14, down from £157.49 the year prior.
There was nominal growth in August, September and October due to temporary easing of restrictions, but London’s poor performance has continued into 2021 due to slow recovery in domestic business trips and the leisure traveller favouring coastal and countryside destinations over the city.
PROFIT MATTERS
On a number of occasions over the past 18 months, hoteliers have been faced with the difficult decision of whether to open or close. With hotels generally being a 24/7, 365-daysa-year operation, this was unprecedented, and even when government-enforced regulations eased, there was no standardised solution for getting back to business. Those fortunate enough to have outdoor space have been able to operate socially-distanced dining while guesthouses and B&Bs have pivoted to private rental. Some have supported NHS workers or vulnerable people while others have closed their doors temporarily, the cost of operating a hotel with only a handful of guests not stacking up.
In its annual Profit Matters performance review for 2020, HotStats reported that hoteliers were running a break-even analysis – an exercise that shows what hotel occupancy needs to be achieved in order to be profit-neutral – to determine the best course of action. “The analysis showed that hotels managed to break even at a 35% occupancy on average prior to the pandemic, but after, with cost reductions in effect, the break-even point has been lowered,” the report explains. “There are two main factors that impacted the break-even levels in various global regions: the ability to strip out the costs and the level of government support.”
Taking into account both fixed and variable costs, HotStats also tracks the GOPPAR (gross operating profit per available room) of the hospitality sector, collecting data from more than 10,000 hotels and 1.7 million guestrooms worldwide. In May 2020, the firm reported that the virtual shutdown of operations translated to a 115.7% year-on-year fall in GOPPAR to a record low of -£10.94. The opening months of 2021 haven’t fared much better, with March GOPPAR stuck in negative territory at €-8.45 for Europe as a whole.
DOING DEALS
Hotel performance hasn’t been the only thing to suffer; 2020 was a slow year for M&A activity too with European transaction volume down by 69%. According to the annual European Hotel Transactions 2020 report published by HVS and its brokerage and investment services division HVS Hodges Ward Elliott, hotel transaction volume reached €8.5bn last year compared to a record €27.1bn-worth of deals in 2019. Despite the drop-off, 2020 figures remain significantly ahead of those seen in the global financial crisis, with 2009 seeing only €3.1bn in transactions. According to HVS data, the UK retained its position at the top of the European table, recording £1.8bn-worth of transactions, of which £1.4bn were London-based. In fact, London posted the highest investment volume of any city in Europe, the most notable deal being that of The Ritz in Mayfair, which was acquired by Qatari tycoon Abdulhadi Mana Al-
SHAFFER PATRICK, HVS
Hajri for a sum thought to be in the region of £800 million, making it the highest price-perroom transaction ever recorded. The iconic property is expected to undergo significant renovation over the coming years.
Of the UK’s 35 transactions recorded by HVS, almost all were single asset deals. Other deals worth a mention are Vivion Capital’s acquisition of the Sanderson and St Martin’s Lane hotels, and the sale of The Zetter Group to Orca Holding, a specialist hospitality investor owned by Laith Pharaon. The sale includes the original Zetter hotel in Clerkenwell as well as the Zetter Townhouse brand, which they plan to retain and grow in London and beyond.
Although 2021 was off to a slow start, HVS expects that the second half of the year will begin to show signs of transaction volume recovery. “The full impact of the pandemic is expected to affect the transaction market later this year with an increase in distressed debt and opportunistic investment ahead of a gradual market recovery,” comments Shaffer Patrick, Associate, HVS Hodges Ward Elliott. “However, the majority of volume recovery is expected in 2022 as immunisation programmes are completed and the leisure and corporate travel sectors start to recover.”
Real estate consultancy Knight Frank believes that the UK, and London in particular, will continue to attract strong demand for hotel investment once the pandemic eases, while JLL anticipates private equity groups and high-networth individuals will be most active through 2021, with both looking to acquire the distressed assets expected to come to the market. POST-PANDEMIC REBOUND
With the UK’s vaccination programme making good progress – over 85% of adults have received their first dose – there’s finally some early signs of movement in the market. In England, indoor hospitality spaces were allowed to reopen on 17 May, resulting in a significant rise in restaurant and bar bookings. Early reports show increased demand for overnight stays too, with the UK’s rural and seaside locations more popular than crowded cities.
London however is still struggling due to limited business travel and a lack of international tourists, and the amount of new supply coming to the market as evidenced in this issue of Sleeper could well impact occupancy, though figures are likely to be balanced by the number of properties that have closed their doors permanently. While a handful of hotels did open as planned in 2020, the majority were delayed to 2021, with May’s easing of restrictions marking D-day for a flurry of new ventures. It is hoped that the newcomers – helped along by pent-up demand and chaos surrounding travel abroad – will create a buzz around holidaying in the capital, and a number of initiatives have launched in support. Hotel Week London for example took place in early June and saw 45 of the city’s venues – including 45 Park Lane, Browns, Kimpton Fitzroy and The Standard – offer discounted room rates and value-added packages. London & Partners meanwhile has joined forces with the Mayor of London to launch a campaign developed to drive consumer spend and footfall across London’s tourism, retail, hospitality and cultural sectors. Supported by Marriott and Hilton, Let’s Do London is targeting locals, domestic daytrippers and overnight stays and also aims to encourage businesses to bring their events, conferences and meetings to London to help protect jobs in the hospitality industry.
The government is also playing its part with the recent unveiling of its Tourism Recovery Plan. In the short-term, the objective is for a swift recovery back to 2019 levels of tourism volume and visitor expenditure, with the action points being reopening safely taking a scientific and evidence-based approach; supporting businesses across the sector; and stimulating demand, particularly in gateway cities such as London that rely on inbound visitors. Longer term, the aim is to recover annual domestic overnight trip volume to 99 million and spend to £19 billion by the end of 2022, and for inbound visitor volume to return to 41 million and spend to return to £28 billion by the end of 2023.
The initiative has been welcomed by business leaders, some of whom feel the sector has been short-changed in the handling of the pandemic. “We are delighted to see the government recognising the key role hospitality and tourism plays in the UK with this new plan,” explains UKHospitality’s Kate Nicholls. “The people and businesses in these sectors will be the power driving the UK’s recovery, in levelling-up, and in building back better as we emerge from the pandemic. The sector is a huge employer of people and investor in local communities and will pay forward any support it is given.”
SIGNS OF RECOVERY
Without wanting to downplay the impact of the pandemic, there are some reasons for optimism. Thanks to the successful roll-out
ROBIN ROSSMANN, STR
of the vaccination programme, economists are predicting a quicker, stronger recovery than first feared. The Organisation for Economic Co-operation & Development for example has upgraded its outlook for the year, with UK GDP now forecast to grow by 7.2% in 2021, the fastest rate since World War II. Projections for 2022 are also healthy with the figures showing 5.5% GDP growth, revised from 4.7% three months ago.
EY has upgraded its growth predictions too, and believes that the UK is well-placed for recovery; according to a report published in April, it expects the UK economy to return to pre-2020 levels in the second quarter of 2022, six months earlier than previously forecast. KPMG meanwhile is forecasting 6.6% UK GDP growth for 2021 and expects a robust recovery ahead. Its latest Economic Outlook report, published in June, does however warn that recovery will vary by region and by sector. The good news for businesses in London is that analysts expect stronger growth in the capital, outperforming the national average by 2.2 percentage points. There’s also hope for the hospitality sector, with KPMG predicting a busy summer for restaurants, bars and hotels, as measured by forward bookings. In fact, a closer look at the forecast by sector shows that GVA growth for hotels is greater than any of the other 60 sectors listed.
The data is pointing in the right direction too. In its latest webinar, STR presented data for the first week of June, revealing that occupancy saw a dramatic improvement owing to the mid-term school holidays. “When we look across Europe, we can see major countries really still bouncing along the bottom, averaging occupancies of 20-30% during May, improving slightly into June,” explained Managing Director Robin Rossmann to the virtual audience. “But there’s one exception – the UK,” he continued. “Within the space of teo-to-three weeks following the official opening of hotels to both leisure and business, occupancies for open hotels – so that’s excluding temporary closures – bounced to 65% for the UK as a whole, which is really quite spectacular.”
Breaking down the data does show that regional UK occupancy (60%) is far stronger than in London (35%), with the latter more reliant on business and international travellers. An optimistic Rossmann went on to say that he expects UK occupancy to stabilise at around 50% before recovering further into the summer months, adding that business on the books is underpinned by weekend leisure travel, though regional UK is set to outperform London by 1020 percentage points.
HOSPITALITY INSIGHT
With the data beginning to show signs of recovery in the short-term, questions are again being asked about the sector’s longterm prospects. In order to gauge sentiment, Deloitte has conducted a number of surveys over the past 12 months, asking senior figures in international hospitality their views. The most recent survey, dated March 2021, found that sentiment towards disruption and recovery has shifted longer term. Of the 101 respondents, 65% of whom operate from the UK, the majority (71%) expect disruption to last beyond 2021, a marked increase from the findings of the October 2020 survey (59%). A quarter of respondents now believe that disruption will last until at least 2023. Sentiment on pace of recovery has also shifted further, with 90% believing that performance will not return to pre-Covid-19 levels until at least 2023; more than half (52%) expect 2023 to be the year of recovery, while 38% forecast it to be 2024 and beyond.
THE FUTURE
So the question on everyone’s lips: what does the future hold for the hospitality industry in London? It’s a mixed bag, that’s for sure, and there’s no quick-fix for a return to business once all restrictions are lifted. In spite of the successful vaccination programme in the UK, it’s looking increasingly likely that Covid-19 is here to stay, becoming a seasonal illness, much like flu. For hotels, it could mean that the temporary measures and enhanced health and safety protocols will become part of daily life, and the coming months will see everything from the technology to the size of the guestroom put under the microscope. Designers will be faced with the challenge of creating spaces that are both safe and aesthetically pleasing, while operators have a major task on their hands in instilling customer confidence and rebuilding their front- and back-of-house teams as a staff shortage looms. On the upside, pent-up demand and a rebound of consumption will continue to push performance in the right direction, and longer-term, London’s appeal amongst owners and operators – and of course the overnight guest – is unlikely to fade.
Don’t just take our word for it; the following pages feature insight from London’s leading operators.
