While some economies are gradually opening up, many countries are still in lockdown with strict social distancing measures imposed. The majority of governments continue to advise citizens to cancel all non-essential travel. As a result, the hospitality and leisure (H&L) markets, in particular, are currently suffering from little-to-no demand (domestic and international).

Near-term performance to be driven by domestic recovery

The decline in revenue per available room (RevPAR) during 2020 has been largely driven by a lack of corporate and international travel and therefore likely to be under pressure for some time. It would appear that hoteliers are unwilling to enter into price wars; instead, they are focusing on generating break-even levels with lower occupancy.

While travel restrictions are being eased in some markets, they still remain in place for many countries and it’s likely that lower consumer confidence will be a further drag on demand. Therefore, we expect near-term performance to be driven mainly by domestic demand – in particular, holiday peaks during the summer (although not enough to offset the lack of international travel). Social distancing measures, lower consumer confidence and travel restrictions feed into lower overall demand for restaurants and bars too.

That said, our base-case assumption of a reverse J-shaped economic profile suggests a phased global recovery. Consequently, we expect markets to perform differently. Key gateway markets, for example, that rely heavily on international leisure and corporate demand will take longer to recover. In terms of segments, apartment hotels and economy/limited-service hotels are likely to be more resilient. Luxury hotels and those with lots of amenities will struggle more, given their greater reliance on ancillary services.

Greater focus on cleanliness and online-ratings reviews over the medium term

Although cleanliness has always been an important element for both operators and the end-consumer, it’s likely that operators will put a greater emphasis on this in the future. Indeed, we’ve already observed multiple operators pledging to apply stricter routines. This links directly to online ratings reviews and it is likely to have a greater influence on consumers in the future.

The way in which food and beverages (F&B) are provided will fundamentally change for the hospitality market, with a move away from the current reliance on buffet services. That is particularly challenging for luxury operators and those heavily exposed to amenities, given the significant contribution F&B make to their respective income streams. For the leisure market, confidence around bars and clubs will remain subdued for a prolonged period of time, given the close nature of socializing in these spaces. Moreover, we’re likely to see consolidations as smaller operators struggle with increased running costs.

The effects of Covid-19 could accelerate the demand for apartment hotels, particularly for longer stays. Not only do they appear to be a cheaper option, but consumers are likely to have greater confidence in these facilities as all the necessities are in the apartment (e.g. kitchen, bathroom, bedrooms) with little or no communal space. Furthermore, we expect that the corporate market will take a larger share, such as block rentals, to serve travelling staff.

Years to recover pre-outbreak trading levels

Longer term, we’re likely to see lower demand from corporate and leisure travelers. We expect the RevPAR recovery to be slower than in the past. The consensus suggests a recovery by late-2022/early-2023. That said, a recovery is likely to be phased and it will differ between countries and markets.

In order to help the recovery, we will see enhanced health and safety measures applied by H&L providers. Major brands have already launched programs as part of their key unique selling points. This will translate into more positive online reviews, which we believe consumers will trust more in the future. Operators with weaker covenants and those that are less well-capitalized are likely to become insolvent, implying that there could be several consolidations in the market.

Overall, we expect to see a greater risk premium attached to H&L assets, particularly for the traditional hotel/hostel market. This is likely to be the case for standalone leisure schemes, and for single food and beverage assets. Apartment hotels are not immune, but we expect these properties to take a larger share of the market as they benefit from reduced corporate travel budgets and stronger consumer confidence.

Investment considerations: market and asset specifics

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