The scariest phrase for any investor should be: “this time it will be different”. Nobody in the hotel industry is claiming that the cycle has gone away but most seem to believe that this time the downturn will be much gentler.
While there are sound reasons for such optimism, economic slowdowns can have a nasty habit of gathering speed as the graphs begin pointing downwards.
TRI Hospitality Consulting has in the past week put the bull case for the UK. It argues that economic growth is stronger, house price growth still positive and inflation lower than it was at the last turning point at the start of the 1990s.
At least two of these three seem sustainable. The economy is clearly slowing but few believe GDP will enter negative territory in the next year. Inflation, too, seems set to be restrained despite significant commodity, particularly oil, and food price pressure.
Already shot, though, are house prices. These are falling if figures for the past few months are looked at rather than 12 month moving averages, and seem certain to continue on a downward spiral.
Data for the UK residential housing market goes back 100 years, encompassing two world wars, the Great Depression of the 1930s, the remarkably low interest rates of the 1950s and the stagflation of the 1970s.
Drawing a line through the data points shows house prices are around a third higher than the long run average. Even the most optimistic commentator is hard pressed to make a case as to why prices will not eventually head back to the long-term trend.
Supply shortages are a prop but cannot account for the huge gap which surely has been expectations driven. These expectations are now reversed and will reinforce the move south on residential house prices.
The good news is that the evidence in the US, which has seen a residential property meltdown for 18 months or so, has shown that even with drops as high as 20% in nominal values, consumers are still coming out to spend.
There seems a reasonable chance that the asset price bubble will work its way through without a major recession.
Despite all this, there is no doubt that revpar growth is slowing markedly thanks both to the slowing of the economy and a pick-up in supply growth.
In the US, where the data on room supply is more robust, some leading Wall Street analysts are already turning bearish. At the end of last month, Goldman Sach’s Steve Kent advised investors to move away from hotels as “a slowing economy will be met by accelerating supply growth, resulting in a loss of pricing power”.
Rather than the hotel operators, the hardest hit will be some of the buyers of hotel property over the past couple of years.
Asset price drops of 20% are already being mooted (although the big question is from what point is this drop calculated) and financing conditions are much tighter.
TRI makes the point that UK chain hotels are in great shape to confront an uncertain future. This is probably true for operators. But investors who jumped in at the top of the asset price cycle look more poorly placed.