During one of the most disruptive years on record for the hotel industry, government support packages and fiscal backing have provided much-needed assistance to hotels throughout the Covid-19 pandemic. These support packages, which include: the business rates holiday, the furlough scheme and the temporary VAT cut; will be necessarily time-bound and will undoubtedly begin to narrow through the course of 2021. Coupled with this, we’ve also seen unprecedented levels of forbearance from the lending community who have sought to support their borrowers with interest rate and capital repayment holidays as well as CBILs and working capital loans to allow hotel businesses to navigate the disruption. Whilst these life support systems are in place, it is unlikely that we’ll see a significant increase in the level of insolvency activity which has been far more muted than many would have predicted last year.

While we can expect consumer demand to begin picking up again once the restrictions are eased, the reabsorption of payroll costs coupled with business rates and ongoing (in some instances) rent obligations are likely to add financial pressure to an already stressed business. It is likely that these businesses will have accrued more debt during 2020 and yet will be faced with a business that requires time to ramp-up and restabilise its operations. Many operators have been forced to pivot to a much more streamlined business model compared to pre-Covid-19, and it is this restructuring which could provide vital breathing room during the recovery phase.

As it stands, notable insolvencies in the hotel market have been limited bar a couple of well-publicised examples; however, as financial pressures mount across some parts of the market this year, further distressed situations are likely to arise bringing with it opportunities for vacant possession and/or conversion and repurposing opportunities. Notwithstanding this, the nature and volume of these insolvencies remains unclear. The senior lenders learned some painful lessons coming out of the GFC, and, as such, LTVs have been far more conservative in this last cycle and that in turn has meant that the situations that we’ve looked at on behalf of insolvency practitioners and lenders, rarely have we felt that senior debt was impaired.

One factor that further complicates the likely future rate of insolvencies is the reintroduction of Crown Preference that was announced last March and came into effect in December 2020. With the Crown (sic HMRC) now sitting second in the pecking order behind the first charge holder, and with the likelihood that many operators have accrued liabilities to HMRC, any junior or mezzanine debt providers will have a difficult decision to make as to whether or not they try and trade these businesses for a period in order to extract value above the level of the debt, or whether they force an insolvency process that could mean they, in turn, become impaired.

Transactional outlook

What we’ve seen in the aftermath of other macro-economic shocks is a period during which the ‘bid-ask’ spread widens as buyers seek distressed pricing whilst at the same time owners try to navigate the disruption to the business and seek to protect the long-term value of their assets.

Over time this spread narrows and the key to the start of the recovery process is at an operational level. We experienced a glimmer of this in Q3 2020, with a surge in performance and corresponding investor demand for key staycation-led hotels, particularly from private UK buyers.

In typical recessionary manner, the economy/budget end of the spectrum is expected to lead the recovery, in line with an anticipated reduction in general corporate travel budgets and more price-sensitive discretionary spending.

Branded hotels have also historically recovered more quickly than the broader market due to their large distribution systems and loyalty programs which provide them with far greater direct access to the consumer enabling them to readily communicate updated standard operating procedures – e.g. that they offer ‘C-secure’ packages and incentives.

Whilst these patterns have held true across the last three macro-shocks we’ve analysed, these are generalisations, and those operators that are able to align closely with consumer preferences including social distancing and homeworking facilities, are also likely to successfully capture demand in the short term.

So, where do we see the investment market going from here?

Investment demand has never been so high. 2019 was a record year for fundraising within Corporate Real Estate (CRE), and due to the impact of Covid-19, the following year saw the lowest levels of hotel investment activity since 2009 at just £2.3bn or 55% below the long-term average. 2020 also saw very strong levels of fundraising in anticipation of a repricing of the market; while there are deals available in the market, transaction volumes are likely to remain relatively subdued during Q1 and into Q2.

However, the UK vaccine roll-out appears to be progressing at a pace, and as restrictions ease and demand creeps back into the market, operational performance will return, and we expect transactional activity to pick up substantially thereafter.

Following the trends set last year, we expect leisure demand to be strong within the UK, and investment into both core trophy assets and key staycation markets are projected to see robust levels of interest. The expectation is that both hotel guest demand and then values will recover to pre-Covid-19 levels does support the longer-term fundamentals of the hotel sector as a whole. As a result, there is a huge amount of capital ready to be deployed, with multiple large investment funds seeking attractive opportunities across the market.

The maturity of the hotel market in the UK coupled with strong underlying fundamentals bodes well for a strong return to investment activity once restrictions ease. As a result, we’re forecasting a year-on-year increase in UK hotel investment volumes of somewhere between 30–40% in 2021, driven by an acceleration in activity in the second half of the year.

How will this play out in terms of the discount the market appears to be waiting for? Well, I remain to be convinced that we will see the steep discounts we saw after the GFC. There is a weight of capital in the market, and the UK is set to have strong domestic tourism for the foreseeable future, particularly given the announcement last week that international arrivals will have to self-isolate in a hotel for 10 days at a cost of £1,750. We saw some record performance from some of our clients last year in-between lockdowns and there is a high degree of frustrated demand in the market, as evidenced by the forward bookings being seen by many of our clients. Pacing looks strong, and while some segments may take longer to recover than others, the better quality, better-managed hotels are likely to successfully ride out this storm.