There is an old joke that says if you ask five economists a question you’ll get six answers. This pretty much sums up what it’s like forecasting the future of hotels at the moment.
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David Neff |
And it is all too easy to be swept up by either blind optimism or extreme negativity. At present in Europe it is negativity that has most support, particularly in the Western half of the continent. The latest economic numbers do indeed look bleak. The European Commission's Interim Forecast, put out in early September, said that in the second quarter the economy of the European Union contracted by 0.1% and for countries in the Euro area contracted by 0.2%.
The Commission radically revised down its growth forecasts, with the UK and Spain both having particularly significant revisions. Overall, the year-on-year growth rates have been slashed a full percentage point for the fourth quarter since the forecast put out in the spring. The Commission’s report remarked that this is a sharper than expected slowdown.
The outlook remains unusually uncertain, added the Commission. It is most worried about the corrections in the residential property and construction markets.
But the negative mood is being amplified by the media. For example, the London Times ran a front page news item in early September that new car registrations were down 18% in August. “Car sales crash as economy skids,” screamed the headline.
It is interesting to note what was left out from the article. In particular, in the year to date, car sales were down just 3.8%. And it did not put into context that August only accounts for 3% of car sales, making the 18% decline almost meaningless in aggregate.
Another example was in the Financial Times last month when it ran a report headlined “Jobless claimants rise at fastest rate for 16 years.” This is true, but is a 2% increase in claimants that big of a cause for alarm? The data in the release on which the report was based shows that there were more people employed in the UK than there has ever been.
Total employment in the UK is now 29.5 million, and the figures showed this rose in the three months of April to June. There are more people with a job in the UK than there has ever been. This does not feel like an economy on the edge of the abyss.
The challenge is keeping sight of the wood from the economic trees. Stepping back and asking “how does it feel?” helps puts some perspective on the issues.
Let me use the UK, the euro economy most closely aligned with, as an example of what I mean.
The UK chief finance minister, Alistair Darling, reckons that we are facing the worst downturn for 60 years – well sort of. The original article in which the quote appears has been somewhat revved up by the retelling in other media outlets.
The last downturn since I’ve been alive was in the mid-1970s. Then, Britain was the sick man of Europe and we had the ignoble sight of the then chancellor, Denis Healey, going cap in hand to the International Monetary Fund for a loan to keep the country going. It certainly does not feel as bad as that now.
The next downturn came at the start of the 1980s when Margaret Thatcher “restructured” much of the UK’s industry. Unemployment rose from one million to three million.
We might be seeing joblessness rise at the fastest rate for 16 years but unemployment is just 5.4%, or 1.7 million. This was a rise of 0.2 percentage points on the previous quarter January to March. And I should stress this is not the claimant count which was 864,000 in June.
If the 1980s recession was blue collar, the 1990s downturn was felt much more widely with white collar workers being particularly impacted. Like now, this recession was preceded by an asset price bubble in property, particularly the newsworthy sector of residential real estate.
But this bubble was pricked by a collapse in underlying fundamentals – unemployment rose dramatically (that is, more than 0.2 percentage points), interest rates shot up – at one stage reaching 15% - and house prices crashed. It is hard to see things feeling as bad this time around.
Then there is the most recent downturn -which for the UK was not even a recession in the broader economy. Thanks to the events of 9-11, the situation for hotels was worse and led to a number of distressed situations, most memorably Le Meridien which went spectacularly bust.
This time, it looks like the UK will see negative growth, but only just. And for hotels, the atmosphere feels better.
The spectacular demand drop-off after 9-11 reinforced the stereotype of hotels being a cyclical investment. This time around, the decline in demand has been gentle. It will quite possibly go as deep, but the perception is not one of hotels dropping at a rate that is worse than for other property sectors. Indeed, thanks to the financing taps being turned off early, new supply has been constrained.
At the same time as we moderate the doom and gloom, we should not be lulled into thinking that this will be a short-term blip. The three years leading up to the summer of 2007 were an aberration and we have now returned to normality. The more seasoned investors already recognise this.
The immediate challenge is persuading people to adjust to the fact that the economic environment is back to how it was four years ago. All other things being equal, more expensive debt that requires more equity to support it will result in asset prices having to adjust markedly.
The real danger comes not from the deterioration in the underlying economy, but in the current stand-off between buyers and sellers. The longer this inactivity continues, the worse will be the outcome for sellers. And the worse will be the outcome for the hotel industry overall.
Andrew Sangster is editor of Hotel Analyst, the monthly newsletter for the hotel investment community. The title, founded and owned by Andrew, draws on more than 10 years of experience covering the leisure industry for other publishers. It is designed to understand, as well as report, the news. See www.hotelanalyst.co.uk for more details.