UNPRECEDENTED TIMES BUT DEMAND ALWAYS COMES BACK
The COVID-19 pandemic presents unusually severe challenges to the European hotels sector, reflected in current very low customer demand.
Many hotels across the EMEA region remain closed and those which are open are achieving very low occupancy relative to pre-pandemic levels.
A decline between 58% and 78% in global cross-border tourism numbers is expected for 2020. Europe, which typically captures over half of the world’s annual international arrivals, has therefore been severely impacted.
FIGURE 32: GLOBAL INTERNATIONAL TOURIST ARRIVALS, 1950-2019
Source: UNWTO, 2020.
However, the European tourism industry has overcome downturns in the past, with annual average growth of 5.6% in tourism arrivals since 1950. On average, it took just one year for European tourism demand to recover following periods of extended crisis.
Travel numbers will recover, but the high operational gearing of hotel assets is a particular challenge for owners and operators, many of which are experiencing significant financial pressure through this period of low demand and curtailed revenue generation.
FIGURE 33: INBOUND VISITOR GROWTH FORECAST
Source: UNWTO, 2020.
NEW SUPPLY PIPELINE REMAINS SUBSTANTIAL
Hotel performance in recent years has led to high development activity in 2020. Whilst many projects will be deferred or abandoned, those which are already under construction and therefore committed to will most likely materialise, albeit with a delay in some cases.
Most of these projects are concentrated in gateway cities, which are most exposed to the longer recovery expected for corporate and buoyant international travel demand.
FIGURE 34: NET BEDROOMS SUPPLY GROWTH FORECAST
Source: CBRE, STR, 2020.
STATE SUPPORT: SHIELDING THE HOTEL SECTOR
State-backed support such as loans, grants and tax breaks have so far shielded many European hoteliers from the full-force of COVID-19. Nevertheless, the abrupt slowdown in guests has forced many hotel owners and operators to close their properties temporarily.
Furlough schemes have enabled operators to reduce their staff costs, which generally account for the largest share of a hotel’s operational expenses.
As the hospitality sector could be one of the last business sectors to recover, some government programmes are being extended. However, these measures will likely end before hotel revenues have fully recovered, indicating the potential for further financial liquidity challenges.
In past downturns, CBRE has observed hotels competing for limited demand by lowering rates. However, it takes considerably longer for pricing to recover relative to occupancy. That said, the cost of a closed hotel is not insignificant, and despite hoteliers reducing their operating expenses, fixed costs have weighed heavily on the bottom line.
Therefore, despite governments giving the green light for hotels to reopen, some owners and operators have decided to remain closed until a greater degree of demand returns.
A COMPETITION RESET?
Some market observers initially predicted a material and structural decline in demand for private rental accommodation, such as Airbnb, expecting that most travellers would default to traditional chain hotels and their enhanced hygiene protocols.
However, since the easing of lockdown measures, demand for Airbnb remains robust, while there has also been a surge in interest in other alternatives to hotel accommodation, such as campsites. This suggests that the ability to limit contact with others is currently a priority for travellers.
Serviced apartments have performed particularly well through the pandemic. Despite declining occupancy, those seeking accommodation have been willing to pay a significant premium to stay in serviced apartments over traditional hotels.
FIGURE 35: GOOGLE TRENDS SEARCH POPULARITY
Source: Google Trends, 2020.
Whilst long stays commencing pre-COVID-19 may have partly supported serviced apartment ADR since the onset of the pandemic, the chart below shows that the rate premium achieved by serviced apartments in London relative to traditional hotels has increased significantly in recent months. As a result of this resilience, CBRE expects investor interest in the extended stay subsector to strengthen further in the months ahead.
However, travellers will continue to express some apprehension about staying in transient accommodation and coming into contact with others, at least in the short-to-medium term.
FIGURE 36: MONTHLY LONDON ADR, SERVICED APARTMENTS VS HOTELS, DEC-19 TO MAY-20
Source: CBRE, HotStats, STR, 2020.
Some secondary hotels are likely to remain permanently closed and will eventually be repurposed. An inability to access additional credit and the cost of reopening will be further drains on the availability of working capital for owners and operators.
Investors continue to show interest in the sector, looking for large discounts and predominantly focused on core cities and leisure markets. There is currently a delta between owner and investor expectations around pricing, but as the pressure on working capital heightens and the trajectory of recovery becomes clearer, it is likely that the bid-ask gap will narrow, and deal flow will increase.
- Demand recovery will initially be driven by domestic travellers. International travel will take longer to recover due to travel restrictions, flight availability and quarantine regulations.
- Ability to limit contact between customers and hygiene protocols will be the core of the 'new normal' standards for accommodation providers.
- There will be a competition reset between European major actors – Interest in serviced apartments is strengthening across Europe.
- The high number of pipeline projects currently under construction will extend the recovery period in some markets.
- Financial pressure on non-diversified or small owners could induce forced sales.