IN THIS UPDATE:

• STR UK insights

• Value Added Tax – Will the VAT cuts for UK Hospitality be enough to bolster balance sheets and reignite demand?

• Google mobility data – A deep dive into UK movement trends and how it could benefit hotels

• UK economic overview

As you’re aware the situation remains highly fluid with downside risk, particularly as the big unknown in terms of how long the situation will last remains. Therefore any views expressed below are only valid for a short amount of time.

STR UK INSIGHTS

• Despite demand still remaining low in keys cities around the world, the majority of global hotels are now open and occupancies have started to show signs of improvement. For the week ending 19 July, Europe’s actual reported occupancy for open hotels increased to 35%, up from 21% for the week ending 14 June. For the same period, occupancy including those hotels which still remain temporarily closed rose to 24% (up from 16%). Regional markets are leading the recovery in Europe with ADR notably showing more resilience, whilst the main European cities lag. For the week ending 19 July, the UK was positioned in the middle of the pack of major European markets, with a reported occupancy for open hotels of 33%, up from 24% for the week ending 14 June. Occupancy including those hotels which still remain temporarily closed in the UK increased to 23% (up from 5%).

• As a result of the UK easing government restrictions, July saw around 62% of UK hotels open in comparison to 25% in June. As a result of lower international demand and group cancellations, London has seen a limited number of hotels reopen, reporting a total of only 41% open in July, whilst regional UK markets reported a total of 54% of hotels open. Due to the reduction in demand for London hotels, the gap between the classes of hotels has widened, with demand for hotels positioned as mid-scale/economy increasing at a faster rate. As a result of the demand gap, ADR for the London market saw a large reduction year on year, however, we expect to see growth in ADR as more luxury and upscale hotels continue to reopen.

• Demand for regional UK markets over the London market is reflected in the ADR gap between the two markets. Whereas the ADR gap in July 2019 was £96, by July 2020 it had reduced to only £21. This is further reflected in occupancy levels as regional-UK’s occupancy saw an increase up to 18 July from the start of June, whilst London realised a decline for the same period for open hotels.

• Domestic leisure demand is leading the recovery of the UK regional hotel market. High weekend occupancy levels have been reported for various coastal and country markets, with occupancy reaching up to 50% in markets such as the Portsmouth Area, the Lake District and Blackpool. We are aware of individual hotels operating at over 80% in some coastal locations. STR is currently forecasting peaks in demand to continue to occur on the weekends as leisure demand continues to strengthen.

Value Added Tax – Will the VAT cuts for UK Hospitality be enough to bolster balance sheets and reignite demand?

• On 8 July Rishi Sunak announced that from 15 July until 12 January 2021, the VAT rate for hospitality and tourism has been cut from 20% to 5%. Since the introduction of VAT (replacing Purchase Tax) when the UK joined the EU in 1973, such drastic reductions have never been implemented. As hotels reopen, the initiative will be very much welcomed by their owners and operators. This initiative which is expected to cost the government in the region of £4.1 billion and is intended to boost the part of the economy hardest hit by coronavirus.

• This is by no means the first time the UK government has cut VAT rates to stimulate consumer spending. We just need to look back to the GFC and the blanket reduction in VAT from 17.5% to 15%. During this period almost four in five businesses reported passing the saving on to their customers according to the Treasury, resulting in a 1.2% increase in consumer retail spending.

• Studies on VAT rate changes have shown asymmetric movements on prices: cuts are retained by the vendor; rises are passed onto the consumer.

• Wider European VAT cuts targeting tourism and hospitality have demonstrated such results. A reduction in VAT rates for French restaurants from 19.6% to 5.5%, aimed at increasing consumer spending, was almost entirely retained by the business owners.

• Whilst the current government invention should help to stimulate demand, existing market conditions have resulted in a relationship between pricing and demand which is perhaps not as elastic as it may have been pre-Covid. As such we would anticipate many hoteliers being able to retain demand levels by passing an element of the VAT savings across.

• Similar results were experienced when Irish tourism VAT was cut from 13.5% to 9% following the Euro currency crisis in 2011. With hoteliers holding (if not pushing) gross ADR levels, the Irish market experienced a 10.2% increase in net RevPAR for the 12 months following the July 2011 reduction. Even stronger levels of growth were experienced across Dublin with RevPAR rising 12.5%, driven by a 3.2% increase in occupancy and a 9% uplift in ADR, hopefully providing some green shoots of optimism for UK hotel owners.

• Upon release of the original announcement, some restaurant chains such as Nando’s and Pret A Manger, announced they would be passing the VAT saving on to their customers. Whilst the hotel brands have been slower to make announcements, perhaps as a result of their predominantly asset-light operational models and third-party ownership of the hotels, a number of brands have made similar announcements. These include Accor, IHG, Marriott and Best Western.

• The UK isn’t alone in providing a VAT lifeline to the hospitality industry with four other countries reducing tourism VAT rates. Whilst already starting from lower bases, Germany has reduced tourism VAT from 7% to 5%, Belgium from 12% to 6%, Austria from 10% to 5% and Cyprus from 13% to 9%.

• The lower levels of tourism VAT across these four markets leads on to further discussion of whether the UK current pre-Covid VAT rate of 20%, which is the second highest in Europe, should be permanently reduced. The argument is simple: all but two other countries in the EU (Denmark and Slovakia) have reduced VAT through some combination of hotel accommodation, theatre/cinema admissions, visitor attractions and restaurant meals.

• With strong headwinds expected across the tourism industry for the short-to-medium term, the argument for permanently reduced UK tourism VAT rates has never been stronger. We’ll wait to see whether the possible wider economic benefits of a lower tourism VAT rate could result in a structural shift in UK Value Added Tax (with potentially more flexibility post Brexit).

Google mobility data – A deep dive into UK movement trends and how it could benefit hotels

• Footfall across the UK on average has been improving week on week since the height of the lockdown in April. The reopening of non-essential retail and hospitality on 15 June and 4 July respectively sparked two of the most pronounced weekly improvements to UK footfall.

• Google mobility data outlines movement across retail and recreation locations throughout the UK, indexed against a baseline 5-week period from 3 January to 6 February. Average mobility for the UK remains down 34.7% on the rolling seven-day average to 19 July, compared to pre-pandemic levels.

• What’s notable from the data is that leisure-led locations such as Cornwall and areas of the North West including Blackpool and the Lake District, have experienced very strong levels of recovery, particularly since the reopening of the hospitality sector from 4 July. This mirrors what we’re seeing from a number of hotel operators, with occupancy rates in regional holiday locations outperforming those of larger urban centres. This is undoubtedly driven by pent-up demand in the domestic leisure segment.

• The feed through to larger cities appears to be somewhat delayed, with movement in Manchester, London and Edinburgh all remaining below the UK average since the height of the lockdown, primarily due to the reliance on workforce populations, international tourists and the necessity for public transport usage.

UK economic overview

• The prolonged lockdown period is expected to have significantly impacted Q2 GDP volumes, with estimates suggesting year-on-year decline of nearly 22%. Despite a return to quarter-on-quarter economic growth from Q3, the significant falls experienced during H1 2020 are expected to drive down year-end figures. Oxford Economics has revised its forecasts downwards again, with latest projections expecting UK economic output to contract by 10.9% followed by a bounce of 10.3% in 2021.

• The significant growth in GDP next year is expected to bring the UK’s level of economic output back in line with pre-Covid levels by early 2022. However, this is still largely dependent on any further development of the pandemic and timing of a vaccination.

• Despite ONS revealing that unemployment rates remained unchanged at 3.9% in the March–May period, it’s widely anticipated that this will increase substantially once the Government Job Retention Scheme winds down in October. Some forecasts suggest year-end unemployment rates will reach close to 7%. While this doesn’t quite match the post-GFC peak of 8.4% in Q4 2011, it’s still a considerable uptick compared to pre-civid levels.

• Meanwhile, and in line with previous periods of economic uncertainty, household saving ratios have spiked, with Bloomberg Economics predicting that average household saving reached over 21% of disposable income in Q2, up from 8.4% in the first quarter, impacting spend across both the retail and hospitality sectors. While economic uncertainty and precautionary saving will continue to hinder spend to an extent, the recently reviewed VAT levels from 20% to 5% for hospitality might generate short-term spending hikes within some parts of the market.

If you would like to read our previous editions, click on the links below:

Savills Covid-19 UK & European Hotel Insights: Vol 7

Savills Covid-19 UK & European Hotel Insights: Vol 6

Savills Covid-19 UK & European Hotel Insights: Vol 5

Savills Covid-19 UK & European Hotel Insights: Vol 4

Savills Covid-19 UK & European Hotel Insights: Vol 3