June 2022

London, UK


Covid-19: impact and implications

Published 05 March 2020

As featured on the Hotel Analyst

The new Coronavirus, Covid-19, is a “public health emergency of international concern” according to the World Health Organisation, a status it awarded on 30th January.

The Global Business Travel Association estimates the total damage to European business travel at USD110bn. This is calculated based on the cancellation of 8% of forecast travel in 2020. It seems likely that significantly more travel will be cancelled before the pandemic is contained.

The cancellation or postponement of three big events in the hotel and real estate investment world – ITB (cancelled), IHIF (moved to early May) and Mipim (moved to the start of June) – shows just how seriously normal business is being impacted.
The UK Government today (3rd March) issued its action plan for dealing with the virus. The document cited a study in the medical journal The Lancet as evidence of how dangerous Covid-19 is proving.

The study in The Lancet showed that deaths were overwhelmingly among people aged 65 or more. The median age of patients who had died was 70. But there are impacts from people falling ill who do recover. The UK Government warned that up to 20% of the workforce may be absent during peak weeks in the event of a widespread pandemic.

The UK Government has a phased response planned: from contain; to delay; to mitigate. At each stage there will be different actions. Under the mitigate phase there are various measures planned to enable continuity of services. For businesses, there will be measures to delay paying tax with HMRC considering requests on a case by case basis.

The governor of the Bank of England today (3rd March) told a parliamentary committee that he expects the economic impact of the virus to be less than that following the 2008 financial crash. But some economic models in the City have the economic impact at 5% of UK GDP, only just shy of the 6% impact of the 2008 crash.
Globally, central banks have already started cutting interest rates. The US Federal Reserve today (3rd March) cut rates by 50 basis points. There have also been cuts in Australia and Malaysia.

Covid-19 is often compared to the 2002 to 2003 outbreak of SARS. There appear key differences, however. Firstly, Covid-19 appears much less deadly with proportionally less people needing hospital treatment and mortality rates significantly lower.
However, Covid-19 seems much more contagious and easily spread. It proved possible to contain SARS but it is looking increasingly unlikely that Covid-19 will be contained. A much wider impact can thus be expected.
Russell Kett, chairman of the HVS London office, said that European hotel markets are likely to suffer not just from a loss of international travel but also from domestic travel.

The impact of SARS was comparatively short lived. Data from STR shows that in impacted areas hotel occupancy dropped to almost 10% but only for a month. The peak was May 2003 and by July occupancy had recovered strongly.
In mainland China, occupancy was back to 70% by July in Guangdong, where the outbreak originated, and to 60% in Hong Kong. In August 2003 Hong Kong occupancy was back to 75%.

Covid-19 may well have a more prolonged impact given the likelihood of more widespread transmission. The UK Government was today (3rd March) making noises that it expects to be unable to completely contain the virus.

Much hinges on whether Covid-19 behaves in a fashion more similar to seasonal flu than to previous Coronavirus outbreaks. If it is more like the former, then the impact can be expected to diminish rapidly with the onset of summer in the Northern hemisphere. There is too little data at present to predict now which outcome is likely.
Europe’s largest tour operator, Tui, is a good proxy for how the travel and tourism industry has been impacted so far. Its share price is down 40% from mid-February (at close of trade on 2nd March, it was recovering slightly today, 3rd March).

Tui said that it is “highly uncertain” what the full impact will be although so far the impact had been “marginal”. Analysts at Bernstein said that if the impact of the virus outbreak is short-lived, which was defined as over by Easter, then there will be limited effects. But if the scenario remains or worsens beyond Easter then there will be a material effect on earnings.

There are mixed views on the investment outlook. For some, the current dips have been a buying opportunity. These bulls believe the financial stimulus measures being put in place by monetary authorities will compensate for the short-term impact of the virus. A V-shaped recovery, as with previous pandemics such as SARS, is forecast.
However, most travel-related stocks are being left out of the current rally with many of the major names in the travel and tourism sector seeing ongoing falls.

There are also a number of bears regarding the current investment environment with Mohamed El-Erian, chief economic adviser at Allianz, among the most high-profile. He is advising against “buying the dip” as he thinks the virus is going “to paralyse China” and “cascade throughout the global economy”. He is forecasting a prolonged U-shaped recovery.

Probably the key to which way events will evolve is to watch the debt markets. If debt finance begins to severely tighten, then a major meltdown looks likely in what are, on most measures, toppy real estate prices.

On the other hand, the gap between real estate yields and bond yields looks substantial. If monetary conditions are further loosened then this gap could grow wider, underpinning real estate prices and making real estate an attractive asset to be holding.

Nassim Nicholas Taleb, in his book The Black Swan, focuses on the impact of rare and unpredictable outlier events. Covid-19 seems to fit the bill well. Taleb has criticised the financial system for its failure to build robustness into its structures to enable them to withstand unpredictable events. The current situation looks set to be a profound test.

[This is a commentary by Andrew Sangster, as featured on https://hotelanalyst.co.uk/]