The Impact Of Coronavirus: A Look At Hotels & Hospitality
COVID-19 has changed nearly every aspect on an individual and business level.
What can we conclude from the market observations in the hotels and hospitality industry?
What can we count on and what should we prepare for?
Here’s an insight prepared by the analysts at Colliers International.
Although the COVID-19 outbreak started in China, the rapid global spread of the virus is starting to have an impact on tourism and hotel markets everywhere as both domestic and international travel is increasingly restricted.
Italy is clearly feeling the brunt of the European impact given the national lockdown in order to contain COVID-19. The US banned all travel to Europe from the US, which is likely to see occupancy rates drop markedly as a result and future bookings are rescinding.
History tells us that there will be a recovery, but the big uncertainty is when.
COVID19 is not proving to be as lethal as SARS or MERS before it, but it is far more widespread. That said, as the SARS outbreak came under control, the tourism and hospitality market recovered quickly, and occupancy was back up to normal within 6 months for the markets most affected.
The hotel industry is accustomed to seasonal fluctuations in income and demand, and the previous SARS epidemic helped prepare the industry to adapt in such circumstances. The ability to rapidly reduce operating costs is one short-term measure, providing 30% flexibility in OPEX – less cleaning during lower occupancy, and servicing of utilities are some of the measures to reduce risk.
Equally, many hotel operators and landlords have enjoyed profitable times in the preceding years, and we anticipate many will have cash buffers enabling them to survive a downturn in activity for around three months. This would take us to the summer season in Europe.
“If the virus can be contained by this point in Europe, and globally, we would expect to see a sharp rebound in demand and occupancy in the latter half of 2020.”
If the outbreak is not controlled, impacting the summer season, then there will be a much slower recovery and more significant business contingency implications for hotel brands, operators and owners alike.
It is advisable to consider the contractual agreements you have in place and how any cashflow risk can be managed. Whether you have a standard lease agreement or management agreement will alter the onus of the responsibility to take action. One should also be wary of contracts in markets governed by case law, which can significantly impair any recourse to contractual agreements in the payment of rents and revenue.
The markets most exposed to an immediate downturn are those most dependent on international air and sea travel.
Markets that are supported by a greater proportion of domestic, car-based tourism will probably be most resilient to any downturn in activity, especially those offering an outdoor experience – provided business and personal travel restrictions are less stringent.
Before we look at the immediate and potential impact of the Covid-19 outbreak on the tourism, hospitality and hotel industry, it is worth putting this in the context of the fact that occupancy and ADRs had been steadily expanding in Europe for the last few years, even though growth rates were slowing in 2019 in response to additional room supply coming to market.
That said, occupancy rates were at very healthy levels for the vast majority of European city markets at the end of 2019, based on analysis provided by CoStar (STR).
THE IMMEDIATE IMPACT
The immediate impact of the Covid-19 outbreak, however, has been significant.
With major business events being cancelled, many more cancellations on the horizon and a moratorium on business travel for the rest of Q1 and most of Q2 the tourism and hotel market is going to suffer a significant shock.
Analysis provided by STR/CoStar shows that occupancy has already been severely curtailed in several major European markets – all those shown below have seen occupancy fall from 17th Feb to March 2nd.
While ADR rates have been holding up better, even gaining in price in some locations over the same period, a prolonged decline in occupancy is clearly going to hit the industry hard.
The hotel market in Italy has been badly afflicted, with RevPar dropping significantly.
TOURISM & TRAVEL DEPENDENCY
While the short-term impact of a downturn in tourism will be flat everywhere, some markets look more exposed to it than others.
As international air travel is curtailed, markets more prone to demand from international air travel are most likely most exposed to a sharp downturn.
“The markets that can function on domestic car based travel are probably the most resilient.“
There is, of course, a significant seasonality element to factor in here. Markets in the UAE may also fare reasonably, despite the drop in business travel demand, given that their holiday season is coming to a close.
If the COVID-19 virus can be controlled over the next quarter, then the European summer season destinations of Greece and Croatia, in particular, could recover.
If the Covid-19 virus is controlled, but travel remains restricted within borders, then countries that are driven more by car-based, domestic tourism are likely to be more resilient locations for business.
Whilst it is too early to talk about a recovery while so much remains uncertain, a look back at the recovery of the infected markets during the SARS outbreak of 2002 gives an indication.
“For the most infected cities of the time in China/Hong Kong, occupancy rates dipped significantly from the start of the outbreak in Feb/March 2003, but had recovered by September of that year.”
What this looks like for Europe in 2020 is uncertain, but there is a likelihood that some hotel projects are delayed as occupancy and REVPAR come under significant pressure.
Markets in the bubble currently represent those countries most exposed to tourism as the driver of the national economy, and those currently most exposed to a downturn enforced by the spread of COVID-19.
As the virus spreads, more markets will be exposed, some with more significant implications for the broader economy.
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The analysis has been prepared by Colliers International.
Last updated: 17 March 2020.
Disclaimer: The analysis and findings reported in this article is based primarily on Colliers International data, which may be helpful in anticipating trends in the property sector. However, no warranty is given as to the accuracy of, and no liability for negligence is accepted in relation to, the forecasts, figures or conclusions contained in this report and they must not be relied on for investment or any other purposes. The outbreak of the Novel Coronavirus (COVID-19), declared by the World Health Organisation as a “Global Pandemic” on the 11th March 2020, has impacted market activity in many sectors, creating an unprecedented set of circumstances on which to base a judgement. This report does not constitute and must not be treated as investment or valuation advice or an offer to buy or sell property. Given the unknown future impact that COVID-19 might have on real estate market supply, demand and pricing variables, it is recommended that you recognise that the research and analysis above is far more prone to market uncertainty, despite our endeavours to maintain our robust and objective reporting.