The Impact COVID-19 has had on Hotel Developments Across the Globe
By Korosh Farazad, Founder and Chairman of Farazad Group of Companies
The rapid spread and the increasing transmission rate of COVID-19 has demonstrated how interconnected and globalised our world is. This pandemic has caused unprecedented health and economic consequences around the globe. The governments have implemented strict social distancing measures in their continuous effort to reduce the amount of world's population, which has been infected by the coronavirus and has currently reached over 3 million active cases globally.
The hospitality, travel, leisure and retail industries have never experienced a shut - down before and the effect is not only felt by hoteliers or operators but it is also felt by investors and lenders. The latter are being increasingly reluctant in investing on hotel developments due to the surrounding uncertainty and the new reality. The coronavirus pandemic and the following global lockdown have stalled the expansion that the hospitality industry was experiencing in the beginning of Q1 2020 and have caused an unprecedented downturn with no definitive end.
Developers around the world are facing the same controversial decision of whether they should proceed forward or whether they should abandon development and acquisition of projects. There is no doubt that the rules and the risk profiles of all projects have changed, however there still are developments that are worth proceeding with. There are several key factors within the development cycle that need to be taken into serious consideration before reaching a conclusion for the completion or the suspension of a development. First and foremost, it is appropriate to consider the means of financing where there is limited supply of construction loans for the foreseeable future and on the other hand, the equity is only released for distressed or undervalued opportunities (which would provide a significant upside). Secondly, the development risk, which was present on all ground developments in the past, is now significantly increased due to the lockdown restrictions imposed by the governments around the world. Finally, developers are struggling in reducing the hard and soft costs of a construction project because of the supply - chain risk linked to the materials. Consequently, each project should be treated differently, and it would be much more time consuming in order to reach a justified and mutually profitable decision for all parties involved.
The increased scrutiny, under which each project is going through, has decreased the transaction volume in the real estate sector. More specifically, the transaction volume in London has experienced a decline of 8.8% according to the volume reported for Q1 2020 (£1.15bn) and compared to the corresponding number for Q1 2019 (£1.26bn). At this point it is necessary to point out that a significant share of the reported activity for Q1 2020 is attributable to the Ritz Hotel acquisition, which was completed in the end of March while the UK was in lockdown. Therefore, it is safe to conclude that although the transaction activity is now declining, there is a persistent appetite for trophy assets. On a global basis only 3.7% of the hotel projects have been cancelled, which is a relatively small number if we consider the massive economical effect of COVID - 19. Moreover, researches have shown that 11.1% of the projects are paused whereas the greatest effect is observed on the delayed projects, which have reached 13% of the total hotel projects.
To sum up, the coronavirus crisis has greatly damaged the economy around the world and has brought a new reality to the world. However, as proven from the Ritz Hotel, London case, there is still room for profitable transactions if the adequate due diligence has taken place.
Korosh FarazadMore from Korosh Farazad