26 May 2022

Opinion from Adrian Leopard & Co

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Hospitality – terrible contortions in the market. Plenty of empty hotels
Adrian Leopard 295

Hospitality – terrible contortions in the market. Plenty of empty hotels

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As the country moves towards the opening up of trading, business pressures will pile up. What will the new normal be?

The end of full furlough means that businesses everywhere are having to make serious decisions now – continue with furlough and start paying part of it, bring your staff back into work and hope that you have enough business to pay them or take the nuclear option and make them redundant. As the months now advance towards October when it all comes to an end, the making of these decisions is going to become all the more difficult.

The hospitality industry as part of our domestic economy has been dealt serious body blows, of that there is no doubt. The trade press is littered now daily with decent restaurants and restaurant chains taking the nuclear option and deciding to close with all the ramifications of that, entering into insolvency processes, the making of serious redundancies and the inevitable consequences which flow from that of the hospitality market being something quite different within a few months.

Little cheer is gained by noting that only about 50% of central London offices are expecting to re-open in full this side of the new year. That may be good for employers and employees but will bring no optimism to the tens of thousands of hospitality businesses in London, ranging from take-away sandwich shops to posh restaurants and hotels. It has been well known for a couple of months now that major hotel groups are looking at mass redundancies over the next month or so.

Search in Tripadvisor for restaurants in London, England and you will be faced with the heady choice of in excess of 19,500. Mind you it might take a time to decide on which one you intend to eat at tonight! There are nearly 4000 hotels as well.

The commercial property market is also taking its share of pain. Many of the restaurants closing are doing so because they have been unable to negotiate positions with their landlords whereby they can continue and afford to pay the rent. One restaurateur who is closing one or more of his restaurants said that his landlords just dug their heels in and it is as if they would prefer to have their properties empty rather than have them occupied by businesses which cannot pay them what they what. This seems a strange approach by landlords – not only will they get no rent for the void periods but they will have to suffer the consequences of void rates as well, a charge which would fall on the restaurateur if he remained in occupation. There must therefore be a case for letting the property even at a zero rent rather than starting to pick up bills for rates and the concomitant costs faced by owners of empty properties.

In the pubs, restaurants and hotels for sale field there is going to be a huge problem. The number of new properties coming on the market is considerable across the country and by monitoring the sites of the commercial property agents, there are many properties coming back on to the market described as “unexpectedly re-available”. This is “trade speak” for “the last sale fell through”. I have my views on why which I will return to in a moment. Then we have properties which were on the market prior to the lockdown. Surprisingly the market was reasonably buoyant over the past year or so but it has been plain to see that prices have slowly dropped as market pressures have had their effect. But now big reductions are being seen – one Midland town hotel on at £2,750,000 reduced its price by a princely £600,000 this week. That is high but there are plenty more reducing their prices all of the time by tens and often hundreds of thousands of pounds. Clearly they are getting no offers. What is worse is that in our opinion having studied the market closely in recent years, they are still asking too much and this is not so much a case of supply and demand although that is a factor. Simply based on the profitability of the businesses, they cannot support the sort of mortgage finance which would need to be obtained in a sensible commercial environment. This is truly a major pointer to the value of a hotel.

But this is old hat and has been the case for some time. However there is now a new factor which the market has been reluctant to recognise – real head in the sand stuff. That is quite simply the wholesale drop in confidence in future revenues brought about partially by social-distancing requirements but secondly by confidence in the market generally on the part of customers. The chancellor’s eat out to help out scheme is a bold move but what will happen at the end of August when it finishes?

The reality is that the pundits in the market reckon that it will be three years before revenues return to pre-Covid-19 levels; a few predict it will be earlier but it would be a brave purchaser who relied on such predictions. Three years seems reasonable but all assuming that Covid-19 can be reduced to a point where it is not significant. Revenues are anticipated to be such that in the first year of an acquisition, a buyer can almost certainly expect to make a significant loss. That could turn to break-even by the middle of year 2 with revenues getting back to “normal” by the end of year three. The problem is that this means three years at an overall breakeven so the loss of expected profit in that period can be nothing other than negative goodwill.

But you do not need me to tell you this. Just think – when do you think it is going to be possible once again to have a standard wedding and reception at a hotel without social-distancing? Weddings business is a staple diet for much of the industry.

It is said that there is a massive amount of cash out in the market available to acquire hotels but of course canny operators are not going to be paying top dollar when they can see significant trading losses and also a glut of properties in the market and, as we know, it is the owners who have to sell who effectively determine market price.

It looks like London, ironically, could be hit harder in proportionate terms than the provinces and this would come down to the issues of lack of public confidence in public transport. Whether that lack of confidence is justified or not is uncertain – only each individual can make his own assessment but the quiet streets of London at the moment themselves testify to the problem.

The day is young – there will be many more serious contortions over the coming months. When businesses run out of money, they will be forced to decide what to do.

Adrian Leopard 06-08-20

Photo Ashley Ross

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