BREXIT - The impact on the hotel sector

Joe Stather

The wider property i​mpact

CBRE’s recent report ‘Heading for the Exit?’ considers the property market impacts of the UK referendum on EU membership. We expect a ‘wait and see’ effect before the vote, as the uncertainty will defer the decision making of investors and developers.

Should the UK vote to remain in the EU on the 23rd of June then we are likely to see business as usual and a glut of investment decisions in the immediate aftermath. However, should Britain choose to leave we can expect a ‘long goodbye’ stretched out over 2 years or more and lingering uncertainty which would ultimately reduce investment in the longer term. A poll of CBRE investor clients in February 2016 found that 73% believe the UK would be a worse place to invest should the country vote to exit. 

The hotel se​ctor impact

UK hotel liquidity, in particular, has been driven in recent years by international inbound capital – a share of which has been seeking security and stability. A vote to leave the EU would undoubtedly dent the perception of Britain as a ‘safe haven’, at least in the short term, and we would therefore expect a decline in the overall appetite to acquire hotel stock.

That said, we do expect uncertainty to have a reasonably positive impact on hotel cash-flows as interest rate rises are deferred until there is greater clarity on the future of the UK economy. A low interest rate environment in recent times has boosted consumer spending. This has had a profoundly positive impact on hotel demand and thus revenue generation. But ambiguity over the future health of UK GDP has caused boardrooms to become unsettled, and the tightening of corporate purse strings will temper the current growth in business and conferencing demand for the hotel sector.

Additionally, the announcement of the referendum date recently sent the Pound tumbling against the Dollar and Euro – we would expect this to be amplified further should the UK vote for exit. This would make the UK highly competitive in terms of pricing for inbound travellers and therefore result in greater overseas demand for hotel accommodation, coupled with the lower price sensitivity of international guests. Hotels located in domestic-driven destinations could also benefit as the increasing expense of travelling abroad drives a British ‘staycation’ trend.

One concern, in the event that the UK votes to leave, would be the implications on hotel staffing. ‘Leave’ campaigners emphasise control over immigration as the most important single thing that leaving the EU would secure. It is recognised that the UK would have to be a long way outside most cross-border institutions before that can actually happen; however, hotels are amongst the sectors most dependent on non-UK EU born citizens and would therefore be most exposed to any form of change (27% of workers in the UK’s accommodation sector and a further 27% in food & beverage services are foreign-born according to the Labour Force Survey). Payroll costs, on average, account for 32% of total hotel revenues in the UK – any increase in this cost resulting from an induced shortage of skills and tighter labour market would directly impact hotel profitability and investor returns. Those seeking exit from the EU argue that a ‘points-based’ immigration system would ensure that skills shortages could be dealt with effectively. 

Revenue and cost centre comparison - fixed-sample, full-service UK hotels, YE 2015, YE 2000, GBP, nominal  

Top ten sectors with highest percentage of foreign-born workers 

At present, a vote to ‘Remain’ looks more likely than a vote to ‘Leave’; however, should the UK decide to ‘go alone’ there will be significant changes to the hotel landscape, of which both challenges and opportunities will surely present themselves.