The Brexit Opportunity

The decision by the British public to leave the EU was decided via a very simple in-or-out vote, but the effects of their choice are anything but simple.

The difficulties of stopping free movement and trade between the UK and EU countries will put a huge spanner in the works for many powerful vested interests, both corporate and political. In my view, the Brexit negotiations – which will take several years to complete – will result in a very watered down version of the withdrawal promises made by the likes of Messrs Johnson, Gove and Farage, all of whom have rather abruptly exited stage left after their dramatic act. This is even more likely to be the case with Theresa May, who was firmly in the Remain camp and is the current favourite to be the next PM – in charge of negotiations.

In the interim there is uncertainty for all hospitality sectors, but let’s not forget that despite geopolitical tensions and increased terrorist threat, people are travelling more. Serviced apartment providers are not managing decline as are other industries like high street retail or print media for example, and the serviced apartment industry is growing apace and one of the nimblest and innovative I know. There are significant opportunities to benefit from the situation. As leaders within the serviced apartment, aparthotel, extended stay and short term rental sectors prepare to meet in London this week for the Serviced Apartment Summit, it’s time to accentuate the positive, and look at what we have to gain.

From a broader hospitality and travel perspective, as soon as the referendum result was announced and the value of the pound began to fall against other currencies, the likes of Travelzoo saw a big rise in UK hotel searches from the US and a “huge spike” in interest from China. The likes of Cheapflights and Hipmunk, saw a similar phenomenon.
 
Nick Varney, chairman of the British Hospitality Association (BHA), told the recent BHA conference that Brexit is a great opportunity: “I think it is a good thing that the pound is devalued relative to the euro. If we had voted to remain, putting all other issues to one side, we would have been left with a very uncompetitive currency from the view of exporters and the tourism industry in general. What I think we have to do is lock that competitive advantage in so we get to sort of pick up with renewed vigour the whole argument for cutting tourism VAT on accommodation and on attractions. Tourism and leisure can continue to grow under Brexit. Initially, a weaker pound will encourage visitors and also exports will flourish.”

Speaking more specifically about the extended stay sector, Eduard Elias, managing partner of Cycas Hospitality, said: “The Brexit situation may have a positive impact on the extended stay property market in the UK. The lack of abundant supply and the small percentage of anticipated supply growth in the segment offers both near- and long-term potential for the properties that specialise in the long-stay sector of the overall lodging industry.”

Elias also pointed out that even if there are stormy waters ahead for the wider economy, the extended stay sector is still in a strong position, and that historically, extended stay properties outperform regular hotels during times of recession. Elias said that Cycas witnessed this in 2008, when its Liverpool hotel opened and traded successfully as the economic crisis badly affected other areas of the hospitality industry.

A weaker pound will also invariably result in more overseas investment in UK properties, and we will more than likely see new entrants investing in UK serviced apartment assets. Within a few days of the Brexit vote Hong Kong-based Magnificent Hotel Investments paid £70.3 million for what it described as an “undervalued” 408-room Travelodge hotel in London’s King’s Cross. They are surely the first of many.

Business travellers represent a huge market for UK serviced apartments, and in this sector too, there are reasons for optimism. Jennifer Conneely of the DCC Forum, says: “Hotels based in the UK can expect a bounce as business travellers upgrade their hotels and spend more during their stay, with perhaps a higher proportion of cardholders opting to use dynamic currency conversion to lock in today’s more favourable rates.”

Of course there are negatives to the Brexit result, including increased caution from lenders, uncertainty over the future of EU workers (who make up a large proportion of the UK hospitality workforce). The potential relocation of corporate offices away from the UK is a concern but I do not believe many will instigate a move with still the prospect of increased contagion affecting Europe. The Bank of England has a huge part to play with consumer confidence, mortgage availability and the proposed loosening of monetary policy in the UK but so does the European Bank. Some argue that Europe’s biggest problem isn’t Brexit, it’s Italian bank risk which surged last week as capital needs fueled bail in concerns.

Ever since the UK voted to leave the EU, economists have been busily downgrading their forecasts of UK growth for the year ahead. Nobody forecast a fantastic year to start with, but now the consensus is for a recession in the region of 1% of GDP. Barclays expects negative growth in the third and fourth quarters of this year. Goldman Sachs and Credit Suisse, for example, expect a contraction of up to 1.8% and 1.0% of GDP respectively.

Moneyweek argues that standard economic models for forecasting output are useless in a situation as volatile as this one, and those predictions are just as likely to be wrong as right. In fact, the case for arguing that Brexit will lead to a recession is very weak. And we haven’t left the EU yet – we haven’t even started the process by passing Article 50, which triggers the formal process of withdrawal.

Whatever readers make of the above, I’m no economist. I enjoy leading a relatively young and dynamic media company. Our approach is to make the most of the result, turn this into an opportunity and be prepared to capitalise on whatever the unexpected. I’d encourage serviced apartment providers to put their best foot forward and do the same. I look forward to seeing you in London on July 12th and 13th.