… With this in mind we examined what areas in the UK could be the initial beneficiaries of this recovery once lockdown eases and hospitality is able to reopen. Although continued social distancing and capacity constraints may limit this demand and read-through to hotel performance.

IN THIS UPDATE:

• European hotel transaction volume and deal activity

• STR UK insights

• What areas in the UK could see the strongest surge in domestic leisure demand when lockdown eases?

^{(Any views expressed below are only valid for a short period of time)}

EUROPEAN HOTEL TRANSACTION VOLUMES & DEAL ACTIVITY INSIGHTS

• Hotel transaction volumes in Europe totalled an estimated €4.71bn in Q1 – down 1.3% on the same quarter in 2019. Considering that many European countries began entering lockdown from mid-March, this relatively small decline highlights the strength of investor appetite in the early part of 2020.

• Confidence in the longer-term fundamentals of the hotel sector remains; interest for development sites in core destination markets continue with a number of investors seeing the current situation as an opportunistic play. Despite this, we will see a significant decline in transaction volumes over the course of the year. This was already apparent in monthly transactions with European March volumes down 77% on the three-year average for March, with April volumes down 63%. This suggests year-end transaction volumes could be at or below GFC levels with an improvement in volumes forecast for 2021.

• While recent activity has declined significantly, we have seen some acquisitions complete within the last two months. Dalata Hotels agreed the sale and leaseback of its Clayton Hotel Charlemont in Dublin, Ireland, to Deka Immobilien for €65 million (Savills advised Deka on the transaction). In addition the Porto Carras Grand Resort in Halkidiki, Greece was acquired by a Russian HNWI for a reported €205m and is reported to be the largest hotel deal to take place during the lockdown in southern Europe.

STR UK INSIGHTS

• While the UK did not enter lockdown until the end of March, the impact on hotel demand was already being felt by mid-March. As a result, the impact of Covid-19 on RevPAR was very much apparent in RevPAR performance for the month. The UK reported a 55.3% decline in RevPAR YoY, with the regional markets reporting a lower decline of 48.6% against the 63.6% decline reported for London as the latter was more exposed to the shrinking in international demand seen earlier in the month. Interestingly, however, occupancy levels in London of c.20% for the week ending 20th April outperformed those of other European destination cities (based on those hotels that remain open).

• In line with our expectations, and what we saw during the GFC, serviced apartments in the UK have been showing a greater degree of resilience to the current crisis. Daily occupancy as of the 11th April for UK properties was 28.5%, 29.4% for London, with Manchester reporting 36.2%. Daily occupancy has held close to this level, and marginally improved in the case of Manchester, since the beginning of lockdown. This relative resilience has been supported by the longer length stays typically associated with this sector. The fact that properties are self-contained, with lower levels of required servicing, means that they also appeal from a social distancing perspective. Considering that social distancing is likely to be required once the hospitality sector is allowed to reopen, we expect it will be serviced apartments that could see an earlier recovery in demand.

WHERE IN THE UK COULD WE SEE THE STRONGEST SURGE IN DOMESTIC LEISURE DEMAND?

• The consensus is that domestic leisure demand will be the first to see recovery as travel restrictions and continued social distancing significantly reduces overseas travel over the remainder of the year. Assuming a relaxation in lockdown that will allow for domestic travel after June, domestic leisure demand could increase by 80% equating to 38 million trips in Q3. This is based on the volume of domestic holiday trip numbers typically seen in Q3 and the fact that a significant share of the 17 million UK residents who tend to travel overseas on holiday in Q3 will look to domestic destinations. However, capacity constraints, including continued social distancing, in popular domestic holiday destinations in the UK may mean a sizeable volume of this increased demand is unlikely to be satisfied.

• The question is then, where in the UK could we see the highest surge in domestic leisure demand? We expect it to be the those destinations that have historically attracted large numbers of domestic holidaymakers will be the primary beneficiaries. Although, capacity and pricing constraints in these markets could see demand overflow into other less popular destinations.

• Across the UK regions and major cities, the South West is likely to see the greatest surge in demand considering that it typically accounts for 19% of domestic holiday demand, followed by the North West (12%). In terms of the major destination cities against the various regions, London ranks fifth (accounting for 6% of historical domestic holiday trips) and Edinburgh 17th (2%); see chart below for the top 10 regions and cities in terms of share of UK domestic holiday trips in 2018. While London and Edinburgh have been key destinations for domestic holidaymakers historically, concerns about social distancing may mean a potential surge in demand will be muted particularly as many of the features that make city destinations popular, such as restaurants, nightlife, cultural and leisure activities are likely to be reduced due to continued closures.

• Taking a more granular look at the local authority districts that may be primary beneficiaries, excluding the major regional cities and based on historical demand trends, we expect Cornwall, Snowdonia, The Highlands, Scarborough and the Lake District to be the primary destinations for an uptick in domestic demand. However, the ability to capitalise on this surge in demand will be dependent on accommodation capacity, but also the nature of accommodation, as the preference is likely to be for self-catering accommodation that allows visitors to maintain a greater degree of social distancing.