Direct message to UK hotel owners from Magnuson Hotels CEO
Thomas Magnuson, CEO
If it were a stable world, we would understand why UK hotel property owners would submit to the current CVA proposal.
But since it’s not, UK hotel property owners need to think past the temporary comfort of accepting a new rental review. It is our premise that the British lease, with its upward-only rent review structure is unstable.
The rapid compression of economic conditions in the hospitality, retail and leisure sectors are burdening tenants with rents they can no longer afford to pay. Landlords will be left with commercial properties that are unable to rent.
Retail and high street are being replaced by online (15% UK market share). Travel restrictions and health concerns have decimated international travel, especially in the leisure sector. Domestic leisure travel was a small bright spot last summer, but not a sustainable business segment.
Because of Zoom etc, worldwide workers have been liberated from the mandatory office regime/commute. Companies are reducing costs by no longer requiring employees to travel for business, meetings and conferences.
A previous PwC analysis has shown that over half of CVAs are unsuccessful, with the business ending up in another insolvency procedure. And it’s often because the core business model was already in decline.
Even though this week’s Pizza Hut CVA will allow 200+ landlords to continue with a reduced rent, it won’t change the fact that consumers can have higher rated pizza at lower cost in the comfort of their own homes, rather than a Pizza Hut.
The price of failure is often largely borne by landlords. They suffer an initial loss of rental income, further detrimental impact to investment value, and then increased liabilities. And then the CVA fails to resuscitate the business that was already struggling.
This week, Whitbread has warned that 6,000 staff could lose their jobs. London hotels have been hit with an occupancy low of 37% in August, compared to the usual high 80s. To survive, hotels have slashed rates down into the £20 range.
With 77 London properties, how will this impact Travelodge’s earnings, will it soon cause another CVA?
Researchers project another 4 years before hotels regain 2019 performance, but there will be bright spots.
Because Magnuson Hotels has successfully operated for decades through 9/11, 2008 and the present, we know there is investment upside for hotel assets facing CVA decisions, just not under the current rent structures. If asset owners transitioned to a business owner role and assumed control of their hotels with transparent professional management/branding, the outcome will be a growing long-term secure income stream.
No matter how hard UK hotel property owners look, there will be no more complete guarantees. But there certainly is the prospect of higher long-term asset revenues by taking control of one’s own destiny.
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