IN THIS UPDATE:

• STR UK insights

• UK Budget March 2021 – What is the impact on the UK's hotel sector?

• Staycations just received another boost

• Opportunity on the High Street

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

• As at 23 March, it was officially one year since the first national lockdown commenced in the UK. When we look at trading performance over the past year the sector clearly saw substantial declines in year-on-year performance with partial summer improvements followed by further declines through winter.

• Year to date February 2021 saw actual reported occupancy for open hotels in the UK at 26% (down 61%), with regional UK markets reporting occupancy at 28% (down 58% YoY) against London at 22% (down 70% YoY). During the national lockdown, those hotels that have remained open for essential business have contributed to weekday occupancy premiums. In addition, various regional markets which are comprised of a higher proportion of longer-stay accommodation have contributed to stronger overall performance, with Aberdeen, Milton Keynes, Norwich and Plymouth all reporting year-to-date occupancy over 33%.

• Similarly to occupancy over the past year, average daily rates also saw significant declines. Year to date February 2021 saw the UK’s average rate down 42%, whilst regional UK markets reported a decline of 28% against a decline in the London market average rate of 55%. We are unlikely to see any improvements in average rate until the national lockdown is lifted and travel restrictions are eased for those cities which are highly dependent on overseas visitors.

• The successful, rapid vaccine roll-out in the UK has allowed for the government to set out its phased road map to recovery, along with key dates for removing various restrictions. The government announcement confirmed the reopening of self-contained accommodation from 12 April followed by all other accommodation as of 17 May, sparking an almost immediate increase in holiday booking.

• As a result of this announcement, key events scheduled for this year saw positive increases in business on the books. In June, the British and Irish Lions are scheduled to host Japan at BT Murrayfield Stadium for the Vodafone Lions 1888 Cup. Business on the books for this weekend is already at occupancies of above 63%. In addition, the UN Climate Change Conference is scheduled to occur between 1–12 November in Glasgow. Business on the books for Glasgow shows occupancies of nearly 90%, with nearby Edinburgh expected to host overflow attendees, with occupancies at 40%.

• In the week following the announcement, EasyJet flight bookings from Britain surged 337% compared to the week prior, with key summer trips to holiday destinations such as coastal Spain, Portugal and Greece accounting for a large portion of the growth. Thomas Cook experienced a 75% increase in website traffic, with bookings trebling on the day after the government road map was confirmed. Similar announcements were made by Ryanair, TUI and Jet2holidays.

• However, the more recently announced fines imposed for non-essential international travel will no doubt dent international outbound travel bookings at least in the very short term, while simultaneously boosting the staycation market. Forward booking data from Sojern states that hotel bookings made in the two weeks to 14 March (for trips within the next 11 months) were up by 33.9% year on year, representing the first positive year-on-year volumes in bookings since pre-Covid.

UK Budget March 2021 – impact on the hotel sector

Eviction moratorium

• First and foremost, perhaps the most pressing issue for many commercial tenants is the mounting rent arrears and threat of eviction. The government has extended the ban on commercial evictions until 30 June at the earliest, with a phased removal of current protections thereafter, with the aim of protecting those most severely impacted by Covid-19.

• While the specifics of this process are still in the works, it will hopefully go some way to protecting those most at threat of eviction through Covid-induced rent arrears and debt build-up, while encouraging tenants who are able to pay rent to do so.

Business rates delay

• The business rates holiday in England has also been extended until the end of June, when there will then be a reduction of two thirds for the rest of 2021. However, this is capped at £2 million per business for those that have been forced to shut; lower for those able to remain open.

• The rates holiday will undoubtedly provide an element of relief for many operators, however, it does still fall short of the year-long business rates holiday that UK Hospitality campaigned for pre-Budget. It’s worth noting that this has been achieved in Wales and Scotland, where the business rates holiday has been extended in full for another 12 months, until April 2022.

• The £2 million cap has the potential to hinder some larger companies during this period of recovery alongside reduced demand and could therefore dent cash reserves after 30 June.

Reduced VAT rate

• The reduced 5% VAT rate for hospitality and tourism industries has been extended until the end of September, followed by an interim rate of 12.5% for the remainder of the financial year before returning to 20% from April 2022.

• This stepped return in VAT is aimed at helping businesses manage finances through the recovery period.

• There is also growing pressure for the interim 12.5% rate to become a permanent fixture as of the Budget next April, which would bring UK hospitality VAT rates closer in line with those established across European counterparts.

UK Coronavirus Job Retention Scheme (CJRS) & employment initiatives

• The government furlough scheme has been extended once again, until 30 September.

• However, this does include a partial repayment process, whereby businesses are due to contribute 10% from July, followed by 20% in August and September.

• The extension will provide some respite for employees currently on furlough, however, there are still question marks over the true impact on employment once the CJRS does wind down. The minimum-wage increase, while massively beneficial to employees in terms of personal finances and spending, will add further pressure on cash flow for some hotel providers.

• This is pertinent during a period when many EU nationals – on which the hotel market is ordinarily heavily dependent – have returned home. Workers from the European Economic Area accounted for 31.3% of jobs in the accommodation and food service sector across London in 2019, with only 30.6% comprised of UK workers. Upon reopening over the next few months, some operators may therefore face headwinds in terms of refilling some of these roles and being forced to pay higher average wages, impacting cash flow.

• The government has announced a number of employment-focused initiatives to help towards mitigating such issues. For example, the apprenticeship incentive has been doubled, with businesses receiving £3,000 per new hire in a bid to encourage upskilling and a broader homegrown talent pool.

Recovery Loans & Grants

• The existing CBILS (Coronavirus Business Interruption Loan Scheme) is due to be replaced with the Recovery Loan Scheme as of 6 April, with 80% guaranteed by the government on loans of up to £10 million.

• Grants of up to £18,000 (labelled ‘Restart Grants’) are available across the hospitality sector for those businesses that have been forced to temporarily shut during the lockdown to help with the reopening process over the course of this summer.

Staycations just received another boost

• Whilst many things have remained unclear since the start of 2021, one area of certainty is the fact that some UK regional hotel markets are likely to experience exceptional performance over the prime summer months. As seen in 2020, achieved ADR levels in traditional leisure markets across England, including Cornwall, Devon and the Lake District, outperformed the same months in 2019. With accumulated consumer savings reaching record levels and government intervention criminalising international travel, we explore the impact that these dynamics may have on leisure-driven UK destinations.

• As we’ve highlighted within our regular Covid Hotel Market Updates, a lot has certainly changed over the last 12 months. Disease and lockdowns provided what some have described as the ‘perfect storm’ in creating the worst annual drop in output for more than 300 years. It is also the most uneven economic downturn over the same period, with pharmaceutical, online retail and delivery services growing strongly, while output across travel and hospitality buckled. Likewise, workers in higher-paying jobs, such as professional occupations, commonly continue to operate from home, with younger and lower-paid workers more likely to have lost their jobs or been furloughed.

• The graph above, highlights the significant contraction in consumer spending through 2020, and whilst post-tax income fell during the same period, it is now ahead of pre-Covid levels. This has resulted in more than £160 billion of accumulated bank savings through the same period, helped by reduced spending on travel, dining out and commuting.

• Whilst the data is suggesting that, on average, consumers have more funds than in a pre-Covid world, there are still numerous restrictions preventing consumers from simply spending this money. One such restriction is the recent announcement that non-essential international travel will be banned until 30 June 2021 (unless significant changes are made to the current road map). This was originally expected to be in place until 17 May 2021 under the original road map published on 22 February 2021.

• Further uncertainties as to whether the restriction on international travel may be delayed has caused liquidity concerns for some international operators. It is understood that TUI is currently burning through c.5% of its market cap each month and is sitting on just 5–6 months of liquidity. Clearly, a further continuation of travel restrictions into peak summer could see another intervention from the German government to bolster its liquidity position.

• This time 12 months ago, the majority of the 17 million UK residents who travel overseas for their summer holidays had already booked. As we entered the period of uncertainty, there were a huge number of unknowns. It wasn’t until the end of the first lockdown that UK residents began to consider the possibility of being able to travel again. Most chose to holiday far closer to home as demonstrated by the keyword search data for the word ‘staycation’.

• Fast forward to today and it would appear that UK residents are beginning to plan their holidays again with a focus on staying in the UK. With longer lead-in times compared with last year, consumers who have significantly more accessible savings year on year, a population which has been subject to three national lockdowns, incentives such as VAT cuts and business rates relief a favourable trading environment for hotels situated within key leisure destinations should result.

Opportunity on the High Street

• The Covid-19 pandemic has sped up changes to the ways in which we live, work and shop. Even before the pandemic, people were shopping more online and less on the high street. They were also tending more towards out-of-town retail parks. As a result, eCommerce now accounts for 30% of total retail sales (18.6% in July 2019) according to the ONS. Whilst increased vacancy rates have presented difficult circumstances, the high street and end-of life-cycle buildings are providing exciting opportunities for multiple uses at the heart of communities. The introduction of new planning changes such as the E-class will also help provide greater flexibility for landlords to encourage a wider variety of uses back on to the high street.

• Understanding the characteristics and market dynamics of new opportunities is key to achieving a successful hotel solution. This includes reviewing the macro/micro-location and consideration of the local hotel market supply/demand. Assessment of the property’s future ESG credentials is now high up on investors’ agendas when considering investment into new schemes; therefore ensuring that a project will create environmental and social benefits to the community in which it is based is now more vital than ever. What has been evident is that many large floor plates associated with department stores can prove costly through conversion to hotel use, given the need for double-loaded corridors and natural light. As such, the creation of light wells is often a key consideration, therefore careful attention should be made as to which opportunities are most cost-effective for hotel use. Further points include title arrangements, accessing, servicing and the interrelationship the hotel plays with other uses.

• The type of income stream (whether fixed or variable) will influence the type of operator that uses the space and will ultimately depend on the developer/owner’s aspirations to hold/exit the property and their risk profile. The Savills Hotels team works alongside other teams across the Savills business in order to determine the highest residual values on a per sq ft basis to help deliver the most commercially viable solutions for the owner. From a developer’s perspective, the time frames associated with delivering these schemes also mitigate the cash flow risks some operators may experience over the next few years as the effects on domestic and international tourism begin to ease. A successful example of a new development which Savills recently advised on was the letting of a prime new 221-bedroom hotel in Brighton to Dalata Hotel Group on behalf of Topland Group. The proposed Maldron-branded hotel will be let on a 35-year lease and will benefit from the strength and resilience of the Brighton hotel market.

• Further repurposing examples include: Debenhams store on Princes Street, Edinburgh being converted into a new 210-bedroom luxury hotel and city centre hub; the former Boswells store in Oxford being converted into a new 101-bedroom luxury hotel and co-working space and; Fenwicks in Leicester, being converted into a 133-bedroom aparthotel which is due to open in Q4 2021. A common theme among each of these schemes is that they incorporate a combination of co-working and flexible office space and additional amenities such as retail, gyms, bars, rooftop areas and restaurants, each of which helps to create a ‘hub’ environment and focal point for city centres. The diversification of uses and income streams to good covenants can prove an attractive proposition as the uses are symbiotic and help one another through the various forms of demand and business that they create.

If you would like to read our previous editions, view them all here.