IN THIS UPDATE:

• STR UK insights

• A focus on UK airport hotels

• Planned reopening of European borders and hotels

• Global & UK economic insights

• A view from Savills Building & Project Consultancy

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

STR UK INSIGHTS

• As the lockdown continued in the UK through April and into May, there were no signs of improvement for the UK hotel market. For April, the UK reported a 79.1% decline in RevPAR YoY, with the regional markets reporting a lower decline of 78.8% against the 82.0% decline reported for London. Interestingly, however, Aberdeen ranked number one in the UK for Occupancy at 31.9%, with the last time this occurred being prior to the global financial crisis (GFC). The Aberdeen market reported an increase of 11.9% in ADR, resulting in a RevPAR which exceeded the UK average by £5.21. The performance of the Aberdeen market against other regional markets is a result of the market being comprised of a significant amount of long-stay guests with limited options for alternative accommodation.

• With government plans becoming clearer over the short to medium term, we expect to see an increase in domestic bookings on the book for Q3 and more into Q4 as hotels begin to reopen once restrictions are eased in July.

• Domestic leisure demand is expected to recover at a faster rate, especially as it remains unclear as to when border restrictions will be eased. Hotels may need to look to reposition to capture the demand that is available if their typical source of demand is likely to take longer to recover.

A FOCUS ON UK AIRPORT HOTELS

• Even before Covid-19 turned the world upside down, it was apparent that certain subsectors of the aviation industry were facing headwinds. This was evidenced in the sale of Flybe to a consortium led by Virgin Atlantic and the Stobart Group (subsequently entering into administration) alongside the collapse of Wow Air and of course Thomas Cook.

• For airports with a greater reliance on one or all of these three airlines, passenger numbers across the latter end of 2019 and early 2020 saw significant declines. Airports of particular relevance include Gatwick, with passenger numbers down 3% for the first two months of 2020, as well as smaller regional airports, with Southampton and Belfast City (George Best) passenger numbers falling 15% and 14% respectively.

• For the hotels reliant on each of these airports, RevPAR performance at the start of the year experienced similar downwards trends, with Gatwick’s pre-Covid RevPAR performance down 2.1% for January 2020 and 2.7% for February compared with the respective periods in the previous year.

• Alongside the cruise industry and hospitality, the aviation industry has been one of the hardest-hit sectors, with companies such as Flybe falling into administration and significant government bailouts being offered to the likes of Norwegian, IAG and Virgin Atlantic.

• Those familiar with the aviation industry will know that landing slots at some of the UK’s most prominent airports are extremely sought after. In fact, in 2016 $75m was paid by Oman Air for a pair of prime slots at Heathrow Airport.

• While suspended until October 2020, airports operate a ‘use it or lose it’ policy on airline slots. As such, the value of these slots – with a requirement to use at least 80% from October – has resulted in some interesting announcements over the last two months.

• Both British Airways and Virgin Atlantic have taken the decision to close their operations at London Gatwick Airport, a defensive strategy to protect the value of their Heathrow landing slots. Norwegian has also announced the closure of its Gatwick operations until April 2021.

• We may soon be entering a period where post-lockdown international travel begins to return subject to strict social distancing rules. Both airlines and airports are going to face challenges enforcing such restrictions, with particular pressure on Heathrow as airlines consolidate their operations to the airport to avoid forfeiting their valuable slots.

• This is in stark contrast to Gatwick Airport South Terminal which has until recently been predominantly used by British Airways and is likely to remain largely empty for the foreseeable future.

• The benefits of such relocations of airlines for hotels within the Heathrow catchment area are clear, albeit they’re unlikely to offset the impact of the significant bedroom supply in 2020 (1,621 bedrooms). The likely impact on secondary London airports and regional airports, however, is less apparent and will be driven by the airport owners’ ability to replace the lost business in timely fashion.

• British Airways, Norwegian and Virgin Atlantic combined made up 34% of total Gatwick passenger capacity in February 2020 (note that this will fluctuate throughout the year as a result of the seasonal nature of Gatwick Airport’s business). This is marginally behind the airport’s largest operator, Easyjet, generating 38% of total passenger capacity.

• There is, however, some positive news for Gatwick, last week Wizz Air announced its intention to build a base at Gatwick, with the purchase of further slots to facilitate its expansion.

• Gatwick has continued to push forwards with its plan to redevelop its emergency runway into an operational runway for short-haul planes. A detailed proposal has yet to be submitted, but it is expected that the second runway has the potential to accommodate a further 50,000 flights.

• Expect continued announcements and consolidations across the aviation industry in the short to medium term, both providing further headwinds for airport hotels but also providing opportunity for some. The impact on consumer sentiment for international travel is yet to be seen; however, we will continue to report all of the latest announcements in our regular Covid-19 market updates.

PLANNED REOPENING OF EUROPEAN BORDERS AND HOTELS

• While we are uncertain when the UK Foreign Office (FCO) will lift restrictions on non-essential international travel for UK residents, countries across Europe have begun to ease lockdown measures. Across Europe, hotels and borders are beginning to open as nations prepare for the return of both domestic and international tourists.

• On Wednesday 13th May, the European Commission released a communication titled “Towards a phased and coordinated approach for restoring freedom of movement and lifting internal border controls”. The document proposed a new three-phase approach to reopening borders, that brings together member states with similar coronavirus risk profiles. The Commission predicts that the virus is set to cost the global tourism industry up to €400 billion this year, these initial phases represent the first steps being put in place to reopen the European tourism industry.

• The Commission focuses on reinstating the freedom of movement in the Schengen area, while highlighting that the lifting of travel restrictions and internal border controls must be based on the detailed analysis of the epidemiological situation across Europe and in individual member states. Three critical criteria that must be considered prior to lifting border controls are:

• Epidemiological situation – restrictions on travel should first be lifted in areas with a comparable epidemiological situation (advice taken from the European Centre for Disease Prevention and Control ECDC).

• Containment measures, including physical distancing – a pre-condition to lifting border controls is the ability to ensure that containment measures can be adhered to from origin to destination, while crossing borders.

• Economic and social considerations – lockdown restrictions have led to major economic and social impacts and therefore restrictions must be “effective and proportionate” and should not go beyond what is necessary in order to allow the economy to begin to recover.

• We are beginning to see some travel agreements or so-called ‘travel bubbles’ form. Estonia, Latvia and Lithuania are now allowing movement between the countries. Austria has opened all border crossings with the Czech Republic, Slovakia and Hungary. Other European nations including, Germany and France, will begin to ease their borders with neighbouring nations on 15 June.

• While there continues to be a focus on the limitations and restrictions of cross-border/international travel, many European countries have begun to open their hotels to domestic guests. See below a graphical summary of when European governments have allowed/propose to allow their hotels to open:

• As can be seen above, a number of European governments have allowed hoteliers to reopen their properties. The majority of the open hotels are operating with reduced or no food and beverage offering at all and have opened only a proportion of their bedroom stock. As it stands, by 15 June all European nations’ hotels are due to be allowed to open, apart from those in the UK and Ireland.

• Many of the above countries’ hotels are due to be closed for a further prolonged period with many of the envisaged dates being deemed “at the earliest”. Ireland has proposed one of the latest dates to reopen their hotels being the 20th July 2020, which would come 131 days since the World Health Organisation (WHO) announced Covid-19 a global pandemic.

• We were uncertain about the date at which Scotland was going to begin easing their restrictions until Thursday 21st May 2020 when Nicola Sturgeon released their four-stage easing process. Scottish hotels are expected to be the last to open in Europe with the proposed opening taking place in the first week of August. Many of Scotland’s hotels were forced to close by government restrictions on the 23rd March, meaning that many hotels will have been closed for 133 days or four months and 11 days, assuming reopening on 3rd August*.

• Some countries have managed to keep some of their hotels open. Sweden, for example, avoided full lockdown, so its hotels have remained open throughout the pandemic, albeit experiencing reduced levels of demand. Another scenario applies in parts of the UK where, according to a study by HOSPA, 25% of hotel operators have remained open in some capacity to service the NHS, other key workers and the homeless/vulnerable.

^{*Savills interpretation of current phased reopening plan}

GLOBAL & UK ECONOMIC INSIGHTS

• The ongoing impact of Covid-19 and subsequent lockdown measures are having a lasting bearing on global economics, with Oxford Economics estimating that 65% of global GDP was accounted for by countries under lockdown in early Q2 2020.

• Current predictions suggest global GDP will fall by 4.8% in 2020, 2.0pts below the previous April forecasts. For the UK, the continuing impact of the outbreak and the updated government roadmap to easing lockdown has triggered Oxford Economics to revise its forecast downwards, with real GDP now expected to contract by 8.3% in 2020, followed by a +7.8% bounce in 2021.

• However, the current situation does remain highly fluid, with GDP forecasts potentially being revised again in line with any further details from the government regarding the phasing out of lockdown measures.

• Oxford Economics has also released revised unemployment figures and while the UK story doesn’t look too severe compared to many European counterparts, there are still some short-term concerns for individual subsectors. The accommodation and food service sector is forecast to experience the highest fall in total employment of any subsector in the UK in 2020, declining 8.3% YoY while outstripping the -2.1% average across all sectors.

• However, this is expected to be relatively short-lived, with the accommodation and food service sector expecting 10.0% YoY growth in 2021, exceeding the forecast growth from any other business subsector while overtaking the previous 2019 total employment figures.

A VIEW FROM SAVILLS BUILDING & PROJECT CONSULTANCY

• Covid-19 restrictions have understandably resulted in an uptake of clients seeking to undertake early Desktop Technical Due Diligence work remotely, pre-empting future requirements once usual market activity returns. If assets are not fully prepared, technical due diligence (TDD) and building survey instructions can become unnecessarily protracted. Now is an opportune time for clients to ensure that they have their ‘ducks in a row’ ahead of potential sales, acquisitions, financing, or letting/leasing activity later in 2020 and beyond. Our early Desktop TDD involvement can quickly identify fundamental due diligence gaps, risks and ‘paper trail’ inadequacies. The earlier this takes place, the more time there is available to implement solutions and effectively de-risk a future transaction process.

• Pre-Covid-19 our involvement in construction projects through the role of the Development Monitoring Surveyor followed a well-defined path, focused around regular drawdowns and clear procedures, understood by lender and borrower alike. The restrictions placed on the construction industry as a result of Covid-19 have created a new norm, with sites needing to determine how to respond to these challenges and introduce mitigation measures to satisfy all stakeholders, including lenders. The bespoke nature of our industry means that each project has its own particular threats, and it is agility and forward-thinking which sets an experienced Development Monitor apart at these times to make sure all opportunities are considered. Typical examples will be:

• Assessment of alternative supply chains – overseas materials and extended deliveries

• Subcontractor status – up-to-date financial assessment, resourcing and readiness for restart

• Non-site activities for progression – opportunities to de-risk the project, etc.

• Impact of social distancing, new site rules and resultant cost, time and quality issues

• Delays in third-party aspects such as statutory undertakers

• Analytical review of the monthly drawdown valuations in line with evolving site access restrictions

• From our discussions with those in the hospitality and hotels sector, we are receiving feedback from clients/operators/investors that when normality returns, with the impacts of social distancing, there will be changes in how hotels are run and operated. Expectations include a short-term reduction in hotel food and beverage (F&B) requirements, with preference emerging for hotel rooms with kitchenettes and the ability to eat food in rooms along with take-out facilities. We also expect to see a reduced short-term requirement for conferencing facilities, with repurposing opportunities already being discussed to convert these and F&B areas into additional accommodation. The HVAC systems within hotel properties will need to be adapted/replaced to be independent on a room-by-room basis, being fully filtered and cleaned, rather than a building-wide system circulating the same air between rooms. We are seeing some hotels switching off air-conditioning systems and boarding over the vents, reverting back to natural ventilation.

• Among the impacts the sector is experiencing from the Covid-19 virus, consideration should also be given to the safety announcements issued earlier this year by the Ministry of Housing, Communities and Local Government (MHCLG), in which there were significant proposed revisions to its combustibles policy. MHCLG is currently undertaking a review and technical consultation of the ban on the use of combustible materials in and on the external walls of buildings. The Ministry now states that fresh evidence shows hotels, hostels and boarding houses should be included within the scope of the combustibles ban. The consultation regarding this matter is currently ongoing and is due to close on 25 May 2020.

• When hotels reopen following the initial Covid-19 crisis, guests understandably will demand further assurances that their accommodation will have additional, verified health checks and standards in place. Hoteliers have realised that it might not be enough for their hotels and chains – however, trusted and established in their communities – to state that they are safe. Many will seek to reinforce that message with trusted, third-party organisations specialising in health, wellness and cleanliness.