There is no doubt that the Covid-19 pandemic has had a dramatic effect on the hotel industry throughout Europe, and words such as ‘unprecedented’ and ‘unique’ have been used liberally to describe the situation. Performance data from STR comparing the first half of 2020 with 2019 reveals the extent of the impact on the hotel sector, with revenue per available room (RevPAR) nosediving since March 2020 and many establishments closing their doors permanently.

Reflecting back on previous downturns in the past 20 years has enabled HVS to recognise that the sharp declines in RevPAR after the 9/11 attacks and the global financial crisis of 2008–09 were followed by periods of recovery, resulting in an overall cycle of some six years in both cases. The various terrorismrelated atrocities in 2016 in many European cities had a much less devastating impact on hotel performance. HVS is encouraged by this resilience and predicts that, notwithstanding the exceptional decline in business during the second quarter of 2020, the hotel sector in Europe will have re-established its 2019 RevPAR performance by 2024.

These projections are generic and illustrative of how the company expects the European hotel sector to recover from the effects of the pandemic. Domestic leisure tourism is expected to lead the way, followed by corporate demand, with international cross-border travel picking up as airlines resume service and people feel more comfortable flying. The meetings, incentives, congresses and exhibitions (MICE) industry is likely to be among the last segments to recover. Clearly, there are some hotels that will recover faster than average, but likewise there are others that will take longer and may never achieve their 2019 revenue levels again.

Open for business

Supply growth has always been a factor in the performance of individual hotels, to the extent that new establishments entering the market can result in a dilution of the available demand. One outcome of the Covid-19 pandemic is the likelihood that the pipeline of new hotels will come under increasing scrutiny by developers, investors and lenders. Projects that were well advanced in their construction programme and close to opening are expected to do so, albeit with a delayed schedule. Those that were at an earlier stage – perhaps not fully funded or yet to begin construction – are likely to be postponed further. Some may not go ahead at all if their viability is now questionable, as sourcing bank finance for new development in the coming years will be challenging. On balance, the supply of new hotels is expected to slow down significantly until industry confidence is restored.

Some existing hotels may find it difficult to open their doors again, especially if the cost of providing guests with the reassurance they require is considerable. Important aspects of the reopening process include cleaning and hygiene measures, enforcing social distancing rules, providing staff with PPE and appropriate training, limiting touchpoints between guests and staff, and repurposing restaurants.

Many hotels will come under increasing cash flow pressure as they resume business with only limited guests and rising operational costs, depending on how effectively they manage their staff’s return to work regime. It is quite likely that many hoteliers will realise that their staffing needs have changed since the lockdown, which will result in some permanent reductions in team sizes.

Hotel operating companies will also have to look carefully at whether their brand standards can be relaxed to ensure every establishment’s profitability is at an optimal level. There is no doubt that operators are seeking to make some of the recent reductions in costs permanent and to benefit from the positive operating leverage, which in many instances has seen a 2% change in profitability for every 1% change in revenue. As hotels reopen and start to build back their businesses – unless they had been able to remain open, such as those accommodating key workers – hoteliers will need to focus on profitability and maintaining a positive cash flow. Many will have reached an accommodation with their banks, but this may come under increasing pressure as the months progress. Currently there are no distressed hotels, but plenty of distressed hoteliers, and it is likely that as we move towards the end of 2020 some of these hotels will be placed on sale. The level of pressure from lenders and other parties will indicate the degree to which a sale needs to happen; there appears to be no shortage of potential buyers and a so-called ‘wall of money’ is there to support this. Bargain hunters are seeking to buy at less than replacement cost and at a significant discount compared with pre-Covid-19 prices – and any inkling of industry distress will only serve to encourage buyers to decrease their offers further.

Buying and selling post-Covid-19

Therefore, there are some factors worth taking into account by those looking to buy and sell, which have both a downward and upward pressure on hotel prices. Downward pressures include the unprecedented decline in revenue and EBITDA; worldwide economic recession; a longer recovery timeline for MICE businesses; continuing uncertainty regarding normal travel patterns; the potential for a prolonged recovery period and a second wave of the pandemic; and ongoing cash drain forcing hotel owners to sell.

The major potential upward pressures, however, are improved business operating models established off the back of the current crisis; a return to positive operating leverage; yield-hungry funds in the market creating competition; a continued low cost of capital; and some lenders waiting for values to rise before losses are recognised.

HVS has continued to carry out hotel valuations during the current pandemic and has considered all of the aforementioned factors, in addition to hotel, market and location-specific characteristics. In the absence of a wealth of recent comparable transactions, HVS has also developed a scenario analysis to illustrate the various conditions a hotel might have experienced in this period. The company then compared this with a ‘base case’, demonstrating how business ought to have fared in the absence of the pandemic, based on the performance of a typical European hotel.

In each scenario, HVS applied a higher discount rate in 2020 to reflect the current conditions, which diminishes as the market is expected to recover – albeit at a different pace – assessing how a hotel’s value could evolve under three different scenarios and the base case, the starting point of which is the price of a typical European hotel as at the end of 2019.

The best-case scenario for a typical European hotel is a decline in value of 5–10% in 2020, and a recovery to 2019 EBITDA levels by 2024. The worst-case scenario would be a value decline of 20–30% and a recovery in EBITDA by 2025, although in some cases this could take longer. For context, HVS’s annual Hotel Valuation Index publication showed a 23% decline in value in the downturn that followed the global financial crisis.

Cautiously optimistic

The first half of 2020 has seen some unprecedented changes in the hotel sector with dramatic declines in RevPAR, permanent closures and the furlough of hotel staff. Government support has been available for both staff and owners in many countries but, as these measures are eased, there are likely to be permanent job losses throughout the sector.

As hotels reopen their doors, establishments benefitting from drive-to leisure demand have seen encouraging levels of performance in recent months. However, hotels that are reliant on international visitors may take longer to see a return to satisfactory levels of business, and those dependent on MICE demand will take longer still. The development of a vaccine would help to accelerate some of this growth but, in any event, HVS is positive that the hotel industry will eventually produce strong returns again and remain attractive to investors who recognise their long-term revenue potential.