Storm clouds are gathering over buoyant hotel sector - Players will need to be fleet of foot to weather the significant inflationary headwinds.

All would appear well in the hotel world. Indeed, from an investor perspective, you could be forgiven for thinking that Covid and Brexit never really happened, with agents reporting asset sales exceeding all expectations, with an anticipated £1.5bn of transactions in the last four months.

Two years of pent-up consumer frustration and a desperation to get away has resulted in pretty much every hotel, regardless of geography or classification, posting outstanding results, with both rate and occupancy getting close to, or exceeding, 2019 performance.

Unsurprisingly, London is the standout location. With its grade A status as a gateway city on the global stage, it is leading all locations across the UK in terms of recovery. However, Edinburgh isn’t far behind and anything resembling a staycation hotel or resort is trading its socks off. The Lake District, rural Scotland, anything on or near the coast, properties that have a spa and wellness offering, all have been a genuine draw for the lockdown-weary consumer.

Bumps in the road

But let’s take a moment to reflect on the troubling economic waters we now find ourselves in.

Hotels are businesses whose income correlates 100% with the trading within the property. If there are material bumps in the economic road, it is usually hotels that are first to get the shudders. Covid, without a doubt, caught every sector off-guard and left very few feeling unscathed.

While the various governments’ Covid support schemes were financially helpful during the imposed lockdowns, they were not a total panacea as other “keep open” costs still had to be funded despite the skinny cash reserves that many had going into the pandemic. Consequently, sponsors were required to either dig deep to recapitalise their companies and/or secure working capital lines from their banks.

To be fair, the banks were amazing and, as far as I’m aware, there were no foreclosures on properties that weren’t already destined to fail pre- Covid. Despite huge regulatory pressure and rising debt margins, banks have largely stood by their customers in the face of numerous loan covenant breaches.

But now other road bumps are looking to derail the much-needed, postpandemic recovery.

• Staff shortages – other than the worsening post-Brexit terms of trade that are causing havoc with supply chains, it is now the lack of staff that is particularly hurting businesses. Not only are businesses struggling with availability of talent, the competition for the most talented is fierce, driving salary demands higher. Equally, the challenge of retaining staff is pushing the payroll bill higher as the sector seeks to stave off being understaffed and unable to deliver a service.




• Interest rates – pretty much every investor in the space has debt of some description and while interest rates are still low, their relative increase has been huge and swift, and exacerbated by lending margins also moving out. Inevitably, with a consequential correlation between interest rates and investment yields and without huge leaps in operational profitability, valuations must soon start to tail down, if they haven’t done so already. On occasion, property yields have been lower than the “risk-free” equivalent interest rate, without any compromising factors such as embedded income growth. That is not sustainable.




• Utilities costs and inflation – without question, this is the most significant economic pressure we are facing as a nation and, indeed, globally. For reasons outside of our control as an economy, prices at the pumps and monthly household energy bills are at eye-watering levels. Most of the population is already, and will increasingly be, hugely financially impaired and will struggle from these unprecedented price rises. While that is hugely troubling for anyone with a social conscience, the economic impact of this inevitable slowdown and impending recession will hit everyone and every business in the pocket.




• Supply chain – hotels need to be well invested in to keep the tills ringing, but with the inevitable reigning in of the purse strings during the pandemic, capex was put on the back burner. Even if businesses now have the cash, supply chain issues don’t just hit capex programmes; they impact everything, from availability of food stuff to laundry costs, impacting profit margins.

Given the severity of these issues, it would be all too easy to be a doommonger. However, that would be missing the point and could mean missed opportunities. No one said that owning operational real estate was easy, and the next few months and possibly couple of years will test several owners, including their relationships with banks and consumers.

However, social and economic change, which we have already felt and will continue to witness on an almost unprecedented scale and swiftness, will also throw up incredible opportunities. The way we work, travel, relax, our life priorities, will all present new market niches that businesses can embrace.

While staffing levels, rising business costs, inflationary and supply chain inefficiencies will all be challenging, it is now more than ever that, as owners and asset managers in the hospitality sector, we need to be ready and willing to embrace whatever lies in store next for us. We need to be creative and commercially astute, to embrace technology, to work with stakeholders, invest in the core product as well as expand in new business areas.

There will always be bumps in the road, and the next year or so will be no different, but that is no reason to shun one of the most prolific sectors of real estate – after all, it is the hotel sector’s ability to correlate with the economic mood most directly that makes it one of the most compelling to be in.

Those players that are the fleetest of foot and commercially savvy during the significant headwinds that now threaten will be the ones that survive the course and emerge as the real winners.