IN THIS UPDATE:

• Early optimism in response to vaccine news

• STR INSIGHTS as at 6 November 2020

• Google keyword data – what the big data trends can tell us

• The state of the debt markets

• The latest news regarding the Pfizer/BioNTech, AstraZeneca and Moderna vaccinations has been received with a boost in confidence that an end to the pandemic is on the horizon.

• In terms of economic forecasting, it’s still perhaps too early to project any meaningful changes, but forecasting houses like Oxford Economics have begun lowering the risk of their downside scenario whilst increasing the chance of the upside. The general view suggests that substantial levels of vaccination followed by an easing of restrictions could provide economic benefits by the second half of 2021.

• Capital Economics has suggested that those countries worst hit by lockdowns could be the recipients of a sharper ‘vaccine bounce’, which points to countries such as the UK, over less severely impacted countries such as Germany.

• The stock market reaction to the vaccination news has been encouraging, with many businesses that have been heavily impacted by the lockdowns experiencing a considerable rally in share prices. Companies reliant on travel sentiment, such as IAG, EasyJet, Expedia and TUI, witnessed shares rise in excess of 40% in some cases, exceeding the marginal improvement recorded across the FTSE All Share Index over the same period.

• Similarly, holiday search engines and comparison sites reported an almost instant spike in online traffic for holiday searches next spring-summer. For example, Skyscanner and TravelSupermarket reported a week-on-week bounce in searches of 48% and 54% respectively, in the week following the news of a vaccination.

• While this does present a glimmer of positivity for the sector, it will no doubt be a gradual journey, with temporary lockdowns, rising unemployment and recessionary pressures likely to continue hampering economic growth and international travel in the short term.

• However, once the threat of Covid-19 has eased and restrictions begin lifting, it appears demand for travel will return relatively quickly. The latest International Air Transport Association (IATA) Covid-19 consumer survey suggests that once the threat of Covid-19 has subsided, the vast majority of travellers would be willing to return to their usual travel plans – with some 80% stating that this would be within six months.

• One interesting feature from the IATA surveys is that sentiment regarding turnaround times hasn’t changed drastically since its previous survey in April, which indicates that consumers have not necessarily been discouraged by the prolonged duration of the pandemic.

• The latest news regarding the distribution of the vaccine suggests that some countries within Europe as well as the US could begin administering the vaccine mid-December. While no doubt this is very promising, it’s still difficult to estimate when exactly this might start to ease pressures, considering the complex logistical efforts needed to vaccinate widespread populations as well as the assurance needed prior to easing international travel restrictions. This suggests we could still be looking at a multi-year recovery in terms of demand. Nonetheless, the vaccination news provides some early optimism in terms of sentiment regarding the long-term outlook of the travel sector.

STR INSIGHTS as at 6 November 2020

• As at 1 November, China is leading the way in recovery with actual reported occupancy for open hotels at 66%, up from 58% for the week ending 6 September. Compared with other key regions, Europe’s occupancy was the lowest at 28% as at 1 November and also showed the most significant decline in performance from a peak of 40% as at 6 September.

• At the peak of the first lockdown, hotel closure rates were between 50–100% in most countries around the world. As at 5 November, China has seen almost all hotels reopen, with the USA not far behind. Multiple European countries have or are entering into a second lockdown, however, it is expected that there will be far fewer hotel closures during this second lockdown period. As at 5 November, Spain showed around 30–40% of hotels still closed. In France and Italy, around 10–20% remained closed, while Germany and the UK showed less than 10% of hotels closed (immediately prior to UK lockdown 2.0). These closure rates reflect the nature of the government restrictions imposed for the second lockdown, as hotels are able to remain open in most countries for business purposes only. It is therefore anticipated that only 20–30% of the hotels that were closed in the first lockdown will be closed again. This potentially will pose a more challenging trading environment as the limited demand becomes spread across more hotels in each respective market. We expect the above closure rates to be inclusive of seasonal hotel closures and are therefore somewhat amplified.

• The first lockdown resulted in occupancies in Europe being around 80% down from the previous year, with signs of improvement over the summer months, stabilising at around 50% below 2019 levels. Occupancies however have been trending down over autumn as leisure demand decreases and business demand is still lacklustre. It can be seen that performance is declining in all major European cities, however not at the same pace, as the decline rate is dependent on how the respective governments have enacted lockdowns and also the number of cases prevalent in each country. Occupancies in Germany and France showed signs of decline from the beginning of October and are now down to the low 20%s. As a result of Turkey experiencing late-season leisure demand and the UK having school holidays and implementing lockdowns later, occupancies have remained above 40%, however, we expect to see a decline over the coming months.

• As at 25 October, regional European cities underpinned by leisure demand continued to show resilience compared to gateway cities, with gateway city occupancies being around 10–20% and those for regional cities around 20–30%. As a result of the second lockdown not being imposed until early November in the UK, occupancies remained high at 44% for regional cities and 28% for gateway cities.

• Similarly to occupancy levels in the first lockdown, average daily rates were significantly below the prior year in Europe. The first lockdown resulted in an average rate across Europe being around 40% down from the prior year, with a recovery over the summer months, stabilising at around 15% below the prior year. As leisure demand falls away and occupancies decline, the average rate has shown a decline back to 30% behind the prior year. The UK’s gateway city average rate is 41% behind the prior year, with regional cities 14% behind.

• European country business on the books and pick-up levels are forecast to significantly decline over the next month, with UK occupancy expected to decline to 12%, with a pickup of 1%. Pickup at a country level is expected to be around zero as a result of an increase in cancellations. To ensure occupancies are not diluted as a result of having no business on the books in weeks 3 and 4 of this month, looking at the next 14 days, it is still expected that occupancies at a country level will be in single digits with no pickup. UK occupancy over the next 14 days is expected to be 15% with a 3% pickup. Over 90 days from 2 November, there is a limited number of gateway cities showing business on the books of over 10%.

Google keyword data – what the big data trends can tell us

• Carly Fiorina, former CEO of Hewlett-Packard, once said: ‘The goal is to turn data into information, and information into insight.’ She was right, and with an ever-growing source of information at our fingertips, we explore Google keyword data trends during this turbulent period and what this could mean for the UK hotel and tourism industry.

• It is suggested by some, that should Covid-19 have originated outside of China, it is likely that Google may have been one of the first companies to have detected the possible threat of a pandemic as a result of trending searches for Covid-related symptoms. By delving into a nation’s search data trends there is a wealth of information and important insight that can be extracted. Take for example last week’s ‘Covid Test’-related keyword searches. ‘Jet2 Covid test’ and ‘fit to fly Covid test near me’ have both seen 120% week-on-week increases in search volume. In fact in the top-5 trending 'Covid Test'-related search terms, four are associated with international travel, suggesting a possible change in sentiment and attitude towards travelling abroad.

• With the announcement that the Canary Islands would be added to the UK travel corridor list on 25 October, search volumes for ‘canaries holidays’ increased by 650% over the ensuing 30 days. Interestingly island-by-island searches haven’t seen as great an increase in search volume, ‘Gran Canaria Holidays’ is up 300% MoM (month on month), ‘hotels in Tenerife’ and ‘Lanzarote holidays’ are both up 200% MoM.

• There are two key takeaways that the increases in broader search terms such as Canaries Holidays compared with more-specific island search terms would indicate. Those people who have adopted broader searches are less likely to be returning tourists and have purely chosen the destination as a result of government announcements. It could also suggest that tourists to the Canaries are less loyal to a particular island and may just be looking to escape a cold UK winter. This argument would be strengthened by increases in Canary Island weather-related searches, with examples such as ‘Canary Island weather’ up 260% MoM.

• UK search term trends following the first lockdown demonstrated a different customer search pattern with more domestic-leisure-focused searches tending to trend higher. For the month following the 4 July announcement, top searches included the luxury Scottish ‘Torridon Hotel’ which experienced a 1,300% increase in search volume, ‘Pontins’ up 250% and ‘Blackpool hotels’ up 180%. This search volume increase ultimately fed through to underlying RevPAR performance, as can be seen in the chart below comparing Blackpool RevPAR with Blackpool-hotel-related keyword search volume.

• Whilst uncertainty remains around the extent of the current lockdown, willingness to book domestic leisure travel is likely to remain subdued until current restrictions ease. Current search trends focusing more on international travel suggests that the frustrated domestic leisure demand bounce we saw over the summer may be weaker this time round, with more UK residents prepared to travel overseas. That said, as can be seen below, the search term ‘last-minute UK holidays’ began its upwards trajectory prior to the 4 July announcement, and similar upwards trends can be seen over the last week. Perhaps it’s a keyword hoteliers may want to monitor over the coming weeks and could feed through to the same strong interest we saw in July and August.

• Short-term search trends may also be pointing towards green shoots for London hotels, which have faced significant headwinds over the last nine months. The search term ‘hotels near Trafalgar Square’ has seen an 850% rise in search volume over the last week, and the recent England international football games are likely to have contributed to the sudden uptick in searches for ‘hotels near Wembley Stadium’ up 1,050%. This suggests that even though these games are being played behind closed doors, the associated corporate-led demand will have had a positive impact on overnight stays in the Wembley area.

The state of the debt markets

Cost of Capital and Current Availability of Debt

• It goes without saying that debt is very constrained across the board for hospitality-related real estate due to the overall uncertainty faced by the sector. Of the few banks that are open for business, banks, as usual, are currently offering the cheapest debt, with pricing spreads between 375 to 450 bps over LIBOR. As a result of government and central bank intervention, underlying interest rates fell by circa 0.60% since March so whilst risk premium has increased underlying risk-free rates have fallen somewhat offsetting any increase in risk premium from lenders. That said, bank financing is still relatively hard to come by, with banks only lending on the most attractive investments backed by well-known funds and operators. The assets that banks are willing to lend on had strong 2019 cash flows and debt yields greater than 10%, with future demand drivers skewed towards leisure.

• In the absence of bank lending, debt funds have become the most readily available source of capital and are offering financing rates commensurate with the level of risk posed by the asset in question. There continues to be an increase in the number and size of debt funds operating in the real estate lending space and investors look for interesting risk-adjusted returns on their investments. Liquidity for debt funds starts around 500bps and pricing will step up on each situation depending on the risk profile of each individual transaction. The debt fund’s return requirements is the main driver in determining which grade of asset they are willing to underwrite and, unlike banks, debt funds are prepared to price more complex risk with less historical performance and lower achieved 2019 debt yields.

• The CMBS market in Europe is still currently fairly closed to new hotel loans, and while globally there have been some new CMBS originated over the course of the last few months it is a rare occurrence in this climate.

Banks are still exercising conservative leverage levels for the near future

• As with other sectors currently, banks are offering debt at LTV/LTC levels of 50-55% or lower, congruent with their cautious sentiment, a significantly lower average loan size than has been seen over the past few years. Moreover, banks are being increasingly cognisant of leverage levels per key respective to an asset’s cyclically lowest value in a bid to create a buffer in the capital stack and preserve their full stake in the likelihood of a deterioration in equity.

• Debt funds will stretch leverage up to 75% and are offering variable leverage constraints corresponding to the riskiness of the loan.

Debt funds are expected to surge in a post-Covid market

• As banks retreat private credit is likely to be the most prevalent form of lending in post-crisis situations as a result of reduced bank lending and lower risk appetite. Therefore, we can expect more debt funds to be raised in the upcoming year to support transactions and take advantage of distressed assets as lenders start to take a harder line in 2021. This is reflected by new fundraising where private debt fundraising has already been at an all-time high in the lead up to 2020 – since 2015, $12bn of private debt has been raised for funds investing or lending in real estate globally (Source: Preqin).

• With precedent established from the global financial crisis of 2008, we expect these debt funds to replace the role of bank lenders in the hospitality market for at least the next 18 to 24 months while banks focus on the damage to their own balance sheets with respect to the asset class. Banks will particularly struggle to underwrite hotel loans given the lack of historical operating performance from this year, as hotels will be unable to prove that they can maintain appropriate debt yields and coverage ratios. In keeping with this more cautious approach to hospitality lending, it is likely that banks will continue to lend at reduced leverage levels for the near future (for loans that they do issue), at around 50–55% LTV.

How is the sustainability movement influencing Hotel values?

• The Hotels research team is currently exploring the possible impact of a hotels sustainability on value. We have put together a two-minute survey to add to this research. If you are interested in this topic and would be happy to share your views, please click here and we'll be sure to share our analysis.

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

Savills Covid-19 UK & European Hotel Insights: Vol 8

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