We have had many conversations with business owners, investors, funds, hotel chain representatives, tenants, suppliers, etc. in the recent days. They’ve shown that so far there is no panic on the market. Maybe it’s because it’s still the initial stage of closing down some properties or maybe our partners demonstrate good management competences. However there is a great deal of concern about this previously unknown situation, which might bring effects of an unknown scale. New messages and solutions appear daily and sometimes even hourly.
Most hotels decided to close their business in the upcoming weeks for safety reasons and simply because of the lack of guests. At the same time the owners of short-term rental apartments, restaurateurs and food establishments were forced to close by the government which issuing official bans for part of the industry. Despite the lack of daily operations, many venues focus on handling reservations and amending them these days, as well as maintaining relationships with customers in order to be able to efficiently return to full operation after the state of the national health emergency is over. Restaurants and other food outlets provide take-away meals and deliver orders, trying to make a living.
The key to minimizing losses in the upcoming weeks and months might be history of good management of the venue in the past by i.e. maintaining healthy profitability of services and cash flow, putting aside funds for renovation and investment etc., which not only allow to create a financial backup in a difficult moment, but also indicate that the owning or managing company has not been short-sighted, but working with the long-term horizon in mind. I am afraid though that many facilities in a crisis situation will be forced to cease operations. I’m not only talking about the smaller ones, which are not managed well enough, might be located in regional markets, did not generate sufficient cash flow every year and fought for survival under normal conditions. If the facilities had challenge staying profitable in far less demanding times, i.e. during unfavourable weather in the holiday season, how they can stay afloat with more serious operation challenges these days.
Current conversations and our daily advisory work on various projects show that the main challenge with a lot of parties operating in the hotel industry is the lack of understanding of the specifics and complexity of the industry. Regardless if we are talking about large city venues, guesthouses in the regions or short-term rental units, we could indicate the same shortcomings. There seem to be lack of real business plans, an analytical and critical approach to planning, understanding the market, trends and competitive environment or even elementary knowledge on how to calculate the profitability of a product, service or project. All this means that in an unfavourable situation, not to mention an epidemic, many facilities quickly fall into red line. Therefore, it is important to plan each investment well and if the investor lacks experience in the industry, they should use the help of specialists who have the appropriate knowledge and can share it. In the case of functioning facilities, it is worth opting for strategic and operational audit.
However, based on discussions and analyses, we believe that if the situation will be under control by the end of April or mid-May and restrictions will be lifted, there is a chance that during this summer hotel facilities will be able to earn enough to cover current operations. I deliberately don’t say “make up the losses” here, because hotel and catering products are often referred to as “perishable goods” – it is impossible (without losses) to postpone the use of the product. This means that a room that is not sold today is unlikely to earn twice as much tomorrow to cover the loss.
On the investment market we see currently two approaches among the experienced investors. The first one is to slow down processes for a certain period of time, until it is possible to assess what the market and its prospects look like in the next few weeks. The second is looking for opportunistic real estate acquisition related to the lack of cash flow in some cases or current owners wishing to exit the hotel business.
First signs of potential trouble can be seen among the hotel leases. We have seen already lack of interest or postponing the decision to enter new projects. Some even say it straight – we will no longer offer leases as the future is too unpredictable due to potential financial risks.
Serviced short-term let apartments might have the biggest challenge with finding customers now. Previous downturns have shown that in uncertain times travellers are looking for the safest possible place, which many times will be hotels operating under recognized brands. These properties will also drop their occupancy and revenues but potentially not as much as in the smaller accommodation establishments. Most likely the companies will also rather not send employees on business trips to facilities not officially categorized as safe.
Is the collapse of the hotel or short-term rental market becoming real? At the moment any such statement will be fortune-telling. We still have to wait to see what happens. It all depends on the length of the current situation, what restrictions and changes it will still bring, when the borders will re-open and flights will operate.
During this not easy times, we are still here to support the hospitality and investment in all possible aspects. We are here to help in any way we can.
Author: Andrzej Szymczyk, Associate Director Hospitality Department at Walter Herz
