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Hospitality: Operational challenges, mothballing & future thinking

Jonathan Hubbard • 07/04/2020

Two months ago, the conversations around the UK hospitality sector were focused on exciting new brands, the undisputed positives of long-term global demographic and tourism trends and how best to package product to satisfy the increasing appetite from institutional capital seeking to capitalise on the secure long term income provided by the sector.

There was some short term caution regarding supply growth in some markets and more critically whether staffing needs could be adequately satisfied post Brexit, but those concerns now seem insignificant to an industry facing a major short term challenge in responding to the almost total closure of the UK hotels as a result of first business and then government enforced travel and operating restrictions.

The storm will pass and the long term trends will re-establish, but the focus now is on experienced investors, lenders and operators, who can best survive this unprecedented trading hiatus and create value in the future. 

What we have witnessed in the last 2-3 weeks has been a very rapid decline in operating performance, moving from positive year on year growth in revenue per available room (RevPAR) for the first two months of 2020.

Now the spectre is of a drop in occupancy of over 90% since the second and third weeks of March, with the expectation of further falls as hotel closures filter through.

These have swiftly followed the UK government’s directive on 24 March to commence temporary closure of hotels, with exception of those that are providing support accommodation for emergency and other essential workers, acting as temporary hospital facilities or which are required as interim residences.

The major urban areas such as London and Edinburgh have been most impacted as international visitation declined, with those less affected currently being properties near major airports, such as Heathrow, that still cater to crew business and stranded passengers.

Regional hotels, which initially benefited from some staycations, are now similarly impacted as the latest government advice has shut off that demand source. 

Compared to other countries in Europe, UK hotel market was initially the least impacted, but this is changing rapidly.

Faced with the revenue tap being turned off, owners and operators are understandably focusing on minimising operating costs, implementing a multitude of mitigating measures, principally focused around staffing, which typically accounts for 35%-50% of total costs.

This includes cancelling casual contracts, initiating redundancies but mainly seeking to take advantage of government support for furloughing jobs, as well as benefiting from tax deferral and abolishment of business rates

More significantly for landlords, whilst some tenants, such as Premier Inn took a positive stance and made all rental payments (thereby enhancing their covenant strength) many tenants made the decision to defer March quarter rent payments, providing themselves with short term relief but opening up fresh dialogue which could ultimately define the future of the asset.

In some cases, whilst facing a short-term income hit, this could release increased value to landlords when the assets reopen, if the tenant forfeits.

However, with the hope for a recovery starting in the second half of the year, and to avoid business casualties in the meantime, owners, operators and banks are discussing various temporary solutions, such as fee reductions or deferrals, reduced rent payments or rent holidays, as well as loan payment suspensions and new credit lines. 

In terms of transaction activity, some advanced deals are still progressing, especially forward sales or forward commitments for development projects, where investors and banks can see beyond the current situation.

The reported sale of The Ritz Hotel in London is a great example of an investor taking a long term investment decision, undeterred by short term issues.

Nevertheless, the majority of transactions are being put on hold but there is no doubt that equity rich, agile capital is lining up to get involved in cash strapped operations, offering the ability to recapitalise or acquire. 

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