This may be the perfect time to buy into the hotel sector

Of course, the situation at the moment for hotel operators is purely one of making it through the crisis. As Shaun Roy of research firm Knight Frank says: “We are currently in an enforced lock down, where the focus for the hotel market remains one of survival, with cash conservation and liquidity of immediate concern.” One can easily see how this environment could lead to many businesses seeking a buyer.

So, how might this mooted recovery pan out? And, should there be a surge in the market, where and when are opportunities likely to arise?

The short term impact
Anyone who’s been paying attention to the business world, or even to daily news headlines, in recent weeks will have noticed the uptick in administrations and liquidations that coronavirus has brought.

The hotel sector has of course been at the sharp end of this and the coronavirus lockdown has come at the worst time of year for the industry. As good weather returns and several bank holiday weekends fall within a short timeframe, late spring would normally be a boom time for hotels. But, with most people staying home, this cash flow has disappeared.

The first place this squeeze will hit is likely to be small, independently managed businesses, creating a window for larger companies or cash-rich entrepreneurs to acquire hotels at a cut rate price. GlobalData Travel and Tourism Analyst Ralph Hollister forecasts that “M&A activity is likely to increase as smaller providers are backed into a corner.”

He adds, “COVID-19 and its seismic impact on hotel revenues and occupancy rates are almost certain to present investment opportunities for major players as the pandemic progresses and most definitely when it is over. […] Smaller hotel companies will have no choice but to listen to offers from their larger competitors, as cash reserves deplete at a staggering rate.”

According to Paul Smith, Managing Director, Restructuring Advisory at Duff & Phelps, many small operators could look to become part of a hotel franchise as they seek the financial backing to survive the current crisis and subsequent recession.

Smith says: “Hotel occupancy levels are at record lows, with many now closed, staff furloughed and businesses now effectively mothballed. But the challenge many still face is the lack of working capital to cover creditor costs and many may not have enough to survive.”

“Arguably now is the time for many to consider becoming part of a bigger family, one based on the franchise model to help prepare the business for the end of the lockdown. There are clear benefits to joining one of the bigger global franchise groups, including access to key money designed to be invested in facilities to get them up to an expected standard, but also to the marketing power of these groups.”

Will demand return and when?
As coronavirus remains stubbornly persistent in the UK and the threat of a second wave remains very present, all we can do is speculate about when life might return to some kind of normality. That said, research firm Knight Frank has forecast a particularly strong resurgence in the London hotel market.

Providing that hotels are able to return to business by mid 2020, Knight Frank has forecast that investment volumes could see a surge towards the end of this year and that London’s hotel market could see a full recovery by the final quarter of 2021. Based on studying how the UK hotel market has fared following other significant global events, such as SARS, Knight Frank have tracked a particular resilience in the capital.

Shaun Roy, head of hotels and specialist property investment at Knight Frank, says: “We predict that the market will bounce back following the relaxing of travel restrictions and the containment of the virus, leading to a potential full recovery in London and a gradual recovery in the regions as well as an uplift in investment volumes nationally.”

Another factor is currently giving some hotels in the capital and other urban centres a boost that could be key to an early recovery: Those located near to hospital are benefitting from demand generated by the NHS and wider healthcare sector, as many workers at hospitals dealing with coronavirus patients self-isolate in hotel rooms when not at work.

A slight caveat should be added here, that Knight Frank’s research dates from the beginning of April, and works on the assumption that coronavirus restrictions could be lifted by the end of June, which seems somewhat optimistic at this date. As some form of social distancing seems to be a certainty until there is a covid-19 vaccine, a total return to normality seems a way off still.

Also, as Knight Frank themselves point out, the biggest impact to the sector is likely to come from the subsequent economic downturn, which will squeeze corporate budgets and, if widespread unemployment occurs, could see disposable income hit, which would hamper the hotel market.
However, it seems inevitable that the passing of the virus will see an uptick in consumer sentiment, as people seek to make up for lost time spent locked up indoors and embrace the opportunity to do things that they haven’t been able to for months. The hotel sector, in particular, will be well primed to benefit from this resurgence and, as a result, anyone who currently has the cash to buy a business and see out the current crisis could stand to do very well in future.

For Knight Frank, recovery will take place in a “V-shaped, stepped” way, with slow growth in occupancy in the initial months following lockdown, with weekend spikes. This, they forecast, will then be followed by stronger growth as travel confidence returns, before a full rebound in RevPAR (revenue per available room) when international borders fully reopen and long-haul visitors return.

Where should people with money to buy into the hospitality sector look?
As we’ve mentioned, smaller hotels and B&Bs in regional and rural parts of the UK are likely to be the first to take the hardest hit from coronavirus. With many relying on government grants to survive, quaint and historic businesses in picturesque parts of the UK could be readily available. Moreover, while these businesses are struggling now, they could be among the first to see uplifted trading.

Depending on when schools return and if children are given the traditional summer break this year, the summer holidays could feasibly be extended into September. If, on top of this, there is a sufficient relaxation of social distancing measures by July/August/September to allow people to travel for leisure, rural and coastal hotels and B&Bs could conceivably benefit.

That may sound like a lot of “if”s, but it seems a relatively safe assumption that rural parts of the UK will see plenty of visitors as people who have been cooped up in cities and large towns for months on end seek quieter, calmer pastures for a weekend away. These weeks while the pandemic is near its height could be the ideal time to invest in a business that could start to provide a return sooner than some might think.

Looking on a slightly bigger scale, Matt Maley, Chief Market Strategist of Miller Tabak in Boston, US, forecasts that small- to medium-sized hotel chains will be ripe for M&A once trading activity resumes. Maley predicts that the hotel industry could see consolidation on the same scale as the airline industry has since the early 2000s. Furthermore, according to Maley, the dire straits that many hotel operators will find themselves in could force the US government to adopt a more lenient approach to regulating M&A, in order to help chains survive.

Such a favourable M&A environment could even see big hotel chains examine the possibility of consolidating. While Maley is discussing the US market in particular, it wouldn’t be surprising if this kind of environment pervades the UK industry as well. Indeed, there are some recent signs of the current crisis biting medium-sized players in the industry.

In late April, 16 Hospitality, which operates four historic pubs and hotels in Cheshire and Anglesey, appointed administrators from Grant Thornton UK to find a buyer for the businesses. Joint administrator Sarah O’Toole said: “We are hopeful that we can find a buyer for the businesses despite the current challenges facing the pub and hospitality sector.”

16 Hospitality’s four businesses could represent an ideal acquisition for someone looking to enter the hotel and hospitality space by acquiring a distressed business. All four are historic locations with considerable reputations, an existing customer base and the potential to be resurgent post-lockdown. Located in picturesque towns in close proximity to big cities, they are exactly the kinds of businesses that could benefit in the wake of the crisis.

Another industry player that has been experiencing particular difficulties during the coronavirus lockdown is Lawrence Kenwright’s Signature Living hotel group. Six of the company’s hotels have entered administration within the past two months, including Cardiff’s Coal Exchange and Liverpool’s Shankly Hotel.

Signature Living specialises in high-end city-centre hotels, often in recently renovated historic buildings and featuring themed rooms. Such hotels could offer perfect acquisition opportunities for entrepreneurs with the money to see out the tough times. Or, for those thinking on a slightly bigger scale, it is possible that hotel groups like this could be ripe targets for M&A.

The recent collapse of Specialist Leisure Group Ltd highlights an insolvency situation that enables companies to cherry-pick profitable businesses. In this case the group owned over 50 brands in the travel industry across hotels, coach holiday businesses and travel agencies. Some of the hotels within the Bay and Coast & Country brands were very profitable before the COVID-19 crisis and will undoubtedly continue to be so once people are able to travel more freely. These establishments are being picked over right now by opportunistic entrepreneurs and hoteliers, who are negotiating to pay substantially less than what they would have if the hotels were currently operating.

It may seem bizarre to be encouraging people to explore buying a business like a hotel in these times. But, for those with the money, the acumen and the determination, it could prove an incredibly savvy move. After all, the current situation can only last so long. While the end of the coronavirus crisis may seem forever away, everything must pass at some point. When things return to normality, hotels will offer so many of the things that people are missing the most at the moment.

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