Hotel Real Estate in a Turbulent Macro-Economic Environment
Would you invest your money and time in a hotel project? Once more, the world is hit by a crisis, a pandemic this time, which affects all world economies. Many industries are suffering in particular the hotel industry.
What is the problem of hotels and hotel real estate in times of Covid19 virus? Hotels are a capital-intensive business and require a lot of capital to build, buy, maintain, operate or renovate. In particular, a luxury hotel project on a favourable location, such as big city centres or top tourist destinations, require a big wallet. Secondly, any new hotel project or hotel renovation consume a lot of time to organise, often several years. Imagine now it is your money and your time, how well would you sleep if you were planning a hotel real estate investment during a downturn of macro-economic activity?
Knowing in advance the long term risk level and expected return of a hotel investment will give a better night rest, in particular in case the capitalization rate (how well your asset can generate future income) will be above the market average. In our own professional experience at EHL Advisory Services, we have seen that external macro-economic variables play a very significant role in the long-term capitalization rate of the asset. Some examples of macro-economic variables we consider are economic recessions, socio or geopolitical factors, currency rates, politics, consumer trends, global disasters, technology disrupters, financial markets, country GDP, flight routes, legislation, destination management, etc.
In relation to the subject, I have found an interesting report on macro economic variables and hotel performance (2016) that measures the correlation between hotel market performance indicators (ADR, RevPAR, Expense and Profit), Gross Domestic Product (GDP), Unemployment, and Consumer Price Index (CPI) over a 60-year period. The results of the study conclusively demonstrate:
- A strong correlation around 90% between unemployment or GDP and hotel KPIs.
- A zero lag time between macro-economics and hotel performance.
- A progressively strengthened relationship-correlation over the last 60 years.
- A support that hotel investments being an inflation hedge (CPI).
The results of the study point out that the increased mobility of assets, increased communication and the internet has led to a zero lag time and give managers less time to alter their operating activities. Therefor investors must be more aware of the macroeconomic environment and more vigilant of how macro changes impact the operations. Secondly the role of the macroeconomics impact progressively hotel performance.
According to an article by Stuart Pallistar on hotel investment trends in Europe, recent investors have become more risk adverse and feel attracted by safe havens with economic and political stability with excellent credit ratings like Switzerland or Germany. As well, stable growth markets such a Croatia have gained interest.
In addition to the macroeconomics, each specific location is different and therefor part of a second investigation "to get the right product, at the right time, at the rights place, at the right time and to the right person". At the end, the consumer is the one who brings the money. This analysis, part of the microeconomics, is at least as important as the macroeconomic investment investigation. As hospitality consultants, out of our professional experiences, EHL Advisory Services understands well the macro and microeconomics of hotel projects. We advise investors to secure their project success with help of a proper analysis prior to counting the expected returns.
