The Hotel California effect – How the European hospitality sector is looking for people who stay

  • The Covid-19 pandemic cost the European accommodation industry EUR115bn in lost turnover in 2020 following stringent restrictions on leisure and business travel. A stronger summer season helped France and Germany see annual turnover slide by “only” -43% and -44%  compared to -53%, -61% and -64% for the UK, Italy and Spain, respectively.
  • The recovery will be patchy and only partial in 2021 because of a terrible first quarter, but activity will materially improve as most markets should see their population reach herd immunity in the second half of the year. Much like in Q3 2020, the progressive lifting of restrictions on both supply (reopening of hotels) and demand (greater freedom of movement) should allow demand to pick up significantly in the crucial summer season. 2021 turnover will bounce back by +28% in Europe, but still remain -39% below the 2019 highs, with France and Germany leading the pack again.
  •  A full-fledged recovery will take much longer to materialize and is unlikely to happen before 2024 at best, especially because markedly lower occupancy rates will also weigh on average room prices. Because of the different pace of economic recovery among countries and structural differences in local accommodation markets, it will also be felt very differently. 
  • Countries, regions, cities or hotels relying more on international and/or business guests will lag behind peers serving mostly local leisure guests. In addition, hotel companies with the highest capital intensity i.e. bearing the real estate debt burden (debt repayment and interest) are more at risk than those who switched to an asset-light model, focusing on hotel franchising or management instead. Hotels with asset-heavy business models may consider disposing off their real estate assets to shore up their balance sheets and lower their cost structures.
  • While partial unemployment schemes have and will continue to provide relief to an industry where labor costs are the largest single expenditure item, we expect the tug-of-war to continue between hotel owners and hotel managers over past rent payments and the renegotiation of current leases. The deterioration of payment terms and outlook for the industry have already translated into significant asset write-downs for hospitality real estate assets.
  • Looking ahead, weak demand will encourage hotel companies to innovate to find new revenue streams by catering to new demographics or new needs, such as remote workers looking for office space, but it is too early to tell if such initiatives will meet success. 
  • This challenging market environment could translate into greater hotel chain penetration in Europe, a region where independent hotel owners and managers still account for the majority of rooms. Both owners and managers may consider seeking support from chains with greater advertising, marketing and IT firepower to fend off or escape the growing influence of online travel agencies and customer-to-customer vacation rental platforms.

Contact

Aurelien Duthoit
Allianz Trade