Hotels ponder the Brexit question
Amid all the ‘unknown unknowns’ of Brexit (as former US Secretary of State Donald Rumsfeld might have had it), the UK’s hotel sector – an estate worth around £25bn in total according to figures from the Investment Property Forum – may have the hardest challenge in reading the runes.
“The UK hotels sector is facing a period of real uncertainty,” says Julien Allen, partner in Trowers & Hamlins’ London office, “but it’s far from doom-and-gloom at the moment. What it is, though, is very tricky to get an accurate and verifiable handle on. There are so many moving parts that we’re not alone in finding the future hard to predict.”
“The sector was already a little off its recent peak (which occurred in 2014, according to a report by the Hospitality and Leisure group at accountant PwC),” he explains, “and because the value of a hotel, in the longer term, is essentially a function of its occupancy – assuming good management of course – if that was to turn into a sustained downturn, that could prove problematic for investors.”
Allen sees the greatest possible challenge to the sector as a result of Brexit is on the employment front. “The sector is very heavily-reliant on low-cost, multi-skilled labour from Europe,” he says. “If people choose to go back to their country of origin, or are dissuaded from coming here because they don’t think they’re welcome, that is going to exacerbate recruitment shortages hotels are already experiencing and inevitably push up operating costs.”
“That will put pressure on the management agreements, and that in turn will mean a squeeze on institutional yields from the sector. That in turn could reduce sector values and reduce the availability of finance. We could – in the worst case - be looking at a Brexit ‘crunch’,” he concludes.
Increased pressure in the sector could have other consequences, though. “A crunch of this kind is likely to hit the least agile operators hardest,” warns Allen. “Single hotels, especially in the upper mid-market and even at the ‘trophy’ end are vulnerable because they have no way to defray management costs. Small, undifferentiated chains will also face a challenging time, but this could lead to a few distressed opportunities for institutions looking to invest. We could have a bit of a shake-out in the sector.”
He also sees opportunity in regional devolution, where Trowers & Hamlins – with a longstanding reputation in the public sector – is heavily-involved both on the regulatory side and in commercial ventures.
"Airport City Manchester is one of the key components of the North West development project,” says Allen, pointing to one example where Trowers has been active of late.
Hotels will be central to the new, £800m ‘urban quarter’, which is the first major infrastructure development in the UK to involve equity investment from China. “One new 480-key hotel is planned next to the airport itself,” he adds, “though we expect it’s going to be the first of several, to meet increased demand related to the new direct flights from Manchester to the Chinese mainland.”
Allen believes the government should give specific support to the hotel sector as the UK’s new role in the world becomes clearer. “A decision has been made that the UK should carve more of an independent role on the world stage,” he says, “and a large part of that is going to be opening up new export markets and encouraging new foreign investment. Having a top-end hotel sector, able to host at a high level of quality close to transport hubs and to key areas for investment will be a vital part of the jigsaw. We have a lot of experience in helping stakeholders among investors, operators and local authorities to deliver landmark projects but – to paraphrase again – the hotels of Rome were not built in a day!”