Looking towards a post-Covid landscape in the Hospitality sector

18th November 2020

From an economic viewpoint there have been few industries more impacted by Covid than the hospitality sector. Globally, tourism has been decimated which has hit Europe badly due to its reliance on the industry, in terms of contribution to GDP and employment. Europe is most visited region in the world and accounts for 50% of international visitors. In Ireland, tourism is also a leading industry with over 11 million tourists in 2019 generating almost €6 billion for the economy, with government supported plans to boost tourism numbers pre-Covid.

Figure 1: Pre-Covid Ireland’s tourism numbers were on an upward trend, (figures 000’s) Source: Central Statistics Office

History points to a recovery, but not equally felt

Covid has had a dramatic effect on the hotel sector globally, with RevPAR since March 2020 being decimated, with many hotels closing their doors. However, looking at previous downturns in recent history tells us that sharp declines in RevPAR were followed by a period of recovery resulting in a cycle of roughly six years in each case, such as 9/11 and after the global financial crisis. Therefore notwithstanding the exceptional decline of RevPar within the industry, history points towards encouraging signs for a recovery within the sector. A successful vaccine will help in accelerating the growth in recovery, with the sector well positioned to return to profitability and one which will likely remain attractive to investors who recognise the long-term earnings potential within the industry.

Some hotels will recover faster than others, depending on their reliance on different segments of the market such as domestic leisure, international travellers, business and events, however others will take longer to recover with some never reopening.

New supply will likely be delayed or postponed

The supply of new hotel beds has always been a factor affecting existing hotels. While the supply of new hotels has remained constrained in many destinations over recent years, pre Covid there were an all-time high of over 878 projects under construction with a strong construction pipeline to near record highs of 1,840 projects. Predictably, the pandemic will likely see developers examine existing pipelines of activity. Projects where construction was well advanced and close to opening will most likely be delivered, albeit with a delayed completion date. Projects which were at an earlier stage will likely be delayed or abandoned completely, particularly that sourcing finance may be difficult. Overall, the supply of new hotels is expected to slow down until demand and confidence is restored. This may take a number of years and may be influenced by emerging trends such as greener and more sustainable tourism.

Managing cashflow and liquidity will remain key

As hotels start to reopen their businesses they will need to focus in particular on cashflow and ensuring profitability is maintained due to the limited number of guests allowed on their properties and the rising operational costs including PPE, training, repurposing and cleaning. In terms of liquidity, many hotels have arrangements in place with their banks, while others have sourced alternative sources of financing. These arrangements may come under pressure as time evolves however, and it is likely that at some stage there will be distressed assets on the market which would likely offer investors a significant discount to pre-Covid prices. Ultimately until an effective vaccine is successfully rolled out, the hospitality sector will continue to be one of the most severely impacted sectors, at the mercy of unpredictable cycles of lock-downs and reopening’s.