Weakness in the economy translates into weakness in the
hotel industry. That could spell trouble for hoteliers in the United Kingdom
following last week's decision to leave the European Union. "Hospitality
and tourism benefits from a flourishing economy, and any level of uncertainty
will have an impact," British Hospitality Association CEO Ufi Ibrahim said
in a statement.
In May, prior to Brexit, London and regional U.K. hotels experienced
the longest 12-month moving average period of growth in revenue per available
room since the 12 months ending in January 2007, according to STR. May marked a
slowdown in London, where RevPAR decreased 3 percent year over year in local
currency terms due to a 2.7 percent dip in occupancy, but regional performance
fared well, with RevPAR up 2.2 percent and average daily rate up 2.9 percent,
offsetting a 0.6 percent fall in occupancy.
It's too early to know exactly how U.K. hotel performance
will fare after Brexit, but in an analysis released before the vote last week,
STR predicted that a "Leave" vote would cause weakness in the United Kingdom's
GDP, employment rate and consumer spending, which would result in weaker hotel
demand.
So far, the pieces necessary for that prognostication to
come true are falling into place. On Monday, the British pound fell to its
lowest level against the U.S. dollar in 31 years, plummeting more than 11
percent from the pre-vote level four days earlier. Though the free fall of the pound
appeared to have halted on Tuesday, economists suggest that in the long term, its
value will remain lower than it was before the referendum.
Global financial institutions already have revised down
their short-term forecasts for the United Kingdom's GDP growth. Fitch Ratings
shifted its 2016 forecast from 1.9 percent growth to 1.6 percent growth. It
also dropped its previous projections for growth from 2 percent for each 2017
and 2018 to 0.9 percent each. That means that in 2018, real GDP will be 2.3
percent lower than the last forecast Fitch made based on the United Kingdom remaining
in the EU. Goldman Sachs released even lower projections, estimating that 2016
GDP growth will land at 1.5 percent and 2017 growth will stall at 0.2 percent.
STR asserted that the financial uncertainty would curb
business travel in the United Kingdom, which will negatively affect hotel
demand. On the flip side, there is potential for the drop in currency value to
heighten nondomestic tourism demand to London and regional areas.
Real Estate &
Labor
Beyond hotel demand, a couple other factors could impact the
health of the hotel industry.
Capital investment, including hotel investment, could drop
off as a result of the uncertain business environment, according to STR. Since
Thursday's referendum, Fitch Ratings and fellow ratings agency S&P Global
Ratings have lowered the United Kingdom's credit rating, which means the federation
will face higher interest rates when borrowing in international financial
markets.
That likely will impact the real estate side of the hotel
business. "Real estate is a capital-intensive business, and real estate
investors do not react well to uncertainty," stated a note from PwC U.K.
real estate leader Craig Hughes.
Labor, too, will be affected by the United Kingdom's exit
from the EU. In a statement, PwC partner Ben Wilkins said the referendum results
will have significant consequences for immigration, global mobility, social
security, pay and pensions. "The difficulty for all employers and
employees is the uncertainty; the exact implications of the vote to leave
depend upon the government's next steps and the final negotiated agreements with
the EU, which could take over two years," Wilkins stated. "Employers
are used to EU employees currently having the right to live and work across the
EU without restrictions and applying EU regulations on social security coverage
and benefits to EU mobile workers."
According to figures from the United Kingdom's National
Institute of Economic and Social Research, the hospitality industry is one of
the area's largest employers of migrant workers, employing 28 percent of
migrant workers in the United Kingdom in 2014. By those same figures, about one
in five hospitality workers from overseas were employed by hotels. EU workers
made up only about 5 percent of the total hospitality-employed migrant
workforce, but the industry also employed 2.8 million people in 2013, and that
number has since risen.
Hotels could be hit hard if the United Kingdom
fails to establish trade agreements with the European Union to allow for
migrant labor. Similarly, while the country irons out those trade agreements
over the coming years, U.K. hotels may have a harder time recruiting skilled
labor from the EU.