June 9, 2020
While the COVID-19 health situation continues to improve, an unprecedented economic crisis appears to be emerging. Experts predict a 10% recession for France, with a much stronger impact on certain sectors, such as the catering and hotel industries.
Investing in hotel real estate or tourism might therefore seem like madness!
However, the experience of previous crises shows that the economy hotel segment has always proven to be the most resilient. Let's therefore explore why now might be an opportune time to invest in funds dedicated to economy hotels.
An unprecedented tourism crisis?
While tourism accounts for approximately 8% of the national GDP, all experts agree: this sector will be severely impacted by the upcoming economic crisis.
With the lockdown, some hotels and restaurants saw their activity cease overnight, while still incurring costs.
Today, many uncertainties remain: even though we know that hotel-restaurants are gradually resuming their activity, it's hard to say when they will regain their pre-Covid-19 occupancy rates.
Despite unprecedented economic support measures, it is estimated that many catering establishments and hotels could become insolvent and go bankrupt.
Given this observation, a hotel investment might therefore seem completely unreasonable.
We believe this statement is inaccurate for at least two main reasons.
According to the well-known maxim of a seasoned investor: buy to the sound of cannons and sell to the sound of trumpets! Indeed, investing during a crisis can provide excellent opportunities.
In the coming months, the best management companies will be those capable of identifying potential failures, analyzing them, and deciding if an acquisition is financially opportune. Undervalued hotels are indeed the weakest structures, with an underlying structural and/or management problem. If the location is good, a quality hotel renovation combined with dynamic management can then significantly improve a hotel's financial performance and thus its resale value.
The second reason is that many hotels do not primarily rely on tourism: this is particularly true for economy hotels, whose clientele is primarily professional. Investing in economy hotels therefore makes sense, insofar as their economic results are largely uncorrelated with leisure clientele.
With the major subprime financial crisis (2008/2009), the 2013 attacks, and to a lesser extent the Yellow Vest crisis, the French hotel sector has already experienced major upheavals. But in all these crises, the economy hotel sector has shown superb resilience, always experiencing a slight, temporary dip before bouncing back stronger.
Taking the biggest financial crisis of recent years (2008) as an example, the figures are indeed undeniable: 1-2 star hotels experienced a temporary RevPAR (Revenue Per Available Room) decrease of barely 2.3%, whereas 4-star hotels faced a more sustained RevPAR decline of over... 16.2%.
This resilience of economy hotels therefore allows for a confident approach to medium/long-term investment. It is actually explained by two essential characteristics specific to entry-level hotels: their clientele and their management.
Specifics of Economy Hotels
- A clientele that is more professional than tourist
Generally speaking, economy and super-economy hotels welcome a domestic clientele, largely made up of professionals: transport professionals, construction workers, sales representatives, etc.
Since the lockdown was lifted, these customers are quickly returning to their habits.
It's even possible that a sector like construction, specifically targeted by the upcoming recovery plan, will quickly see a resurgence in activity.
For other economic sectors grappling with the crisis, it's also possible that pressure on overheads will lead managers to reduce travel expenses, which would be to the detriment of mid-range hotels and, conversely, to the benefit of budget hotels.
As with previous crises, resilience should be significant, with a real rebound in 2021/2022, years when many experts are already predicting a recovery.
- A complementary tourist clientele
Until now, the tourist clientele helped to offset the decline in business clientele during the summer, particularly along the Rhône-Mediterranean axis or the Atlantic basin.
It was mainly a national family clientele, most often passing through.
Even if there will inevitably be a decline in 2020, several factors are positive for the future.
For summer 2020, the end of the lockdown should make many French people want to take a few days off. These particular holidays, a transition between a health crisis and an economic crisis, will however be taken with reduced budgets, which should benefit 1 and 2-star hotels.
While public transport and trains may experience a lasting disaffection, French people will favor cars, promoting overnight stays along major routes: this is a key target for super-budget hotels.
Finally, countries known for being inexpensive destinations (Morocco, Tunisia, Spain…) will be deserted for some time.
It's not impossible that some of this family clientele will turn to affordable and suitable hotel options; it's up to professionals to do what's necessary to capture this new market if needed.
Despite an otherwise difficult situation, there is therefore a regular clientele for entry-level hotels that should return, and new potential growth drivers.
- Controlled management
Many budget hotels belong to recognized franchises and brands with high visibility, such as B&B Hotels, Comfort Hotel, Ibis, and Hôtel F1 On the Road (Accor group).
Any manager of these budget hotels is by nature accustomed to rigorous expense control, ensuring strong financial profitability.
Proactive, efficient management, closely connected to the teams, is essential during a crisis, especially since it's necessary to manage turnover and subcontracting.
This synergy between the operating platform, directors, and teams is one of the keys to success, allowing for the subsequent development of an even more relevant and targeted marketing strategy.
All these reasons explain why budget hotels will probably be less impacted by the upcoming crisis in the short term than luxury hotels. They should navigate it with a certain resilience and medium-term growth prospects.
What's more, it's possible that the economic crisis will affect some poorly managed structures, creating excellent acquisition opportunities.
The investment solution structured by Mata Capital allows for co-investment, alongside institutional investors, in a hotel portfolio managed by the leading independent French hotel management group in the economy segment. Under certain conditions, this solution is attractive to entrepreneurs because it offers the advantage of being eligible for article 150-0 B ter, thus allowing them to benefit from the 'apport-cession' regime, and it is excluded from the taxable base of the IFI (real estate wealth tax).