COMMENT The hotel sector has undergone something of a face change over the past year. Some may label it real estate’s largest casualty, a moniker a far cry from the sector’s seemingly untouchable status in the late 2010s.
European occupancy rates were down by 54% annually last year, according to STR, while revenue per available room and average daily rates were down by 62% and 18% respectively.
The latest raft of government support measures announced by the chancellor – the type of which are being rolled out across Europe to varying degrees and with varying success – will come as welcome news to operators up and down the country. Yet the harsh reality is that they represent little more than stopgap fixes and do little in the way of long-term, sustainable solutions. The wave of distressed assets engulfing the marketplace is all but inevitable; it’s just a case of when.
Upping the ante
The general feeling among the industry is that investors have been biding their time up until this point. But there are signs that things are beginning to change.
Looming forbearance deadlines, an easing debt market and heavy bottom-line pressures are encouraging investors to up the ante. The past few months have seen a number of high-profile institutions launch funds to this end. Lenders are also getting in on the act, while investment houses like Avignon Capital are ready to deploy capital and have been for some time.
The industry is clearly hedging its bets on a U-shaped recovery. The general consensus is that the hotel market can expect a full recovery by around 2023/2024, although vaccine roll-out programmes, lockdowns and travel restrictions will play defining roles in that progress – recent developments in Germany illustrate just how quickly things can change.
The coronavirus pandemic is truly unique in that sense. The role of nation-state governments in their respective recoveries renders the pandemic both international and intra-national.
Nevertheless, we can still learn from historic economic downturns. Research from Savills, which looked into post-9/11 performance, found that it took 31 months for transaction volumes to recover. Despite being more severely hit in the short term, they recovered more quickly than trading performance.
The EHL Institute of Real Estate Finance and Economics assessed the aftermath of the global financial crisis, revealing that transaction volumes fell by almost 50% between 2007 and 2009 but returned to pre-crisis levels during 2010.
Sale and leasebacks
Our view is that the window of opportunity will become most prevalent in mid to late 2021 and continue for anything between 12 and 24 months.
It is too early to predict the complexion of this imminent distressed surge, and the picture will become significantly clearer in the coming months to a year. There are, however, some early indications as to where things are headed.
We are already seeing larger operators signal their intention to pursue sale and leaseback strategies in response to overwhelming operational difficulties.
That trend will, naturally, be most pronounced in locations reliant on international travel and corporate stays. The latter will play an especially significant role given that they are not expected to rebound any time soon.
Expect those assets to be the subject of competitive bidding wars from value-add investors. They will be in a prime position to benefit from refurbishment and repositioning programmes. It really is a short but potentially lucrative window of opportunity.
Many investors are becoming increasingly inquisitive of the select-service and staycation space, curious to see how long these smaller operators can hold out for. It remains to be seen whether government support will be enough to save the staycation hotels, and if it isn’t, whether that will significantly impact price adjustments.
The late 2010s saw investment in the hotel market climb to an unprecedented €27.8bn (£23.6bn) by 2019. That was up almost 14% from the year before. So if pre-pandemic is anything to go by, investors could be in for an exciting post-pandemic.
Bianca Tristao is senior investment manager at Avignon Capital
