• How bad?

Last week Hotel Analyst asked the question: How long? The answer was probably two years before something like normality begins to return.
Some in the sector are still focused on Covid-19 being a short-term phenomenon that will be over by the summer. Some hope. No one can be sure of the full duration but the scientific evidence and government guidance shows that there will be no return to normal life until well into 2021.
If we know that the duration is going to be considerable, the next question is how bad? And the news is no better. Most economic activity across the globe is being stopped by government decree. This is not a case of business taking a downturn: it is business stopping.
Economists are as confused as the rest of us with what lies ahead but early estimates are terrifying. Capital Economics reckons that the fall in GDP in Q2 will be 15%. This is bigger than in the GFC or the Great Depression. It is most likely an under-estimate.
What makes this crisis peculiar is that it is not a market-induced problem. It is the result of government action. And in this there is the hope that governments rise to the task of ameliorating the worst of the impact.
It is far too soon to say whether governments will succeed. There has been nowhere near enough. What we do know is that monetary action is not going to fix things. Governments are going to have to spend.
Already, massive amounts have been promised. But so far, much of the support offered to business is in the form of loans. Leveraging up corporate balance sheets is not the answer. Only government balance sheets can withstand the level of economic pain we are going to endure.
In the UK, for example, the Government has promised GBP350bn of money. But just GBP20bn of this is in the form of grants – giveaways – the rest is loans. Even with government guarantees, banks are going to struggle to offer funds.
Coming out of this crisis, most businesses will face an L-shaped scenario. The notion of a V-shaped recovery is for the birds. The so-called L-U-V debate is rapidly being settled in favour of the gloomiest forecasters.
If governments want businesses to continue, then direct money is the only rational answer (or, if governments are so inclined, nationalisation). To enable this, government balance sheets are going to balloon to levels last seen in the Second World War.
This is going to end the deflationary period. It is hard to escape the conclusion that we will again see significant inflation and in many ways this is a desirable outcome to enable governments, businesses and consumers to get control of their debts.
For hotel investors, and real estate investors generally, property offers a hedge against this inflationary surge. This means that property will continue to be in demand even as bond yields begin climbing.
In the near term, however, government bond buying is pushing bond yields down, growing the yield gap between property – or at least what we will be calling for the next few years, the “normalised yield” in property. The lessons learned during the GFC seem to be remembered and central banks are stepping in to ensure liquidity is maintained.
Another challenge for hospitality, as part of the operational real estate landscape, is that conservatism and a flight to safety will predominate. One of the key tailwinds driving the push to operational real estate – the hunt for yield and willingness to move up the risk curve – will become a headwind.
But the fundamental driver of the adoption of operational real estate, the underlying economic changes driven by the growth of the experience economy, will remain. It may be a slower shift, but the shift will continue.
At Hotel Analyst we remain optimistic about the future of the travel, tourism and hospitality business, and for the adoption of operational real estate. But we recognise that there is going to be no continuation of business as usual, even once the Covid-19 virus vaccine is in place. There will be no economic inoculation.
Over the coming months we are going to be shifting our focus to what the future of our industry will be like while also covering the difficult challenges being endured. This will be editorially, through our subscription product, but also through events (obviously these will initially be online only). More from us on the latter shortly.
Our business has been devasted but we will survive and continue to offer our subscribers and delegates the service which has built our reputation over the past 17 years. I hope to see all of you on the other side of this challenge and to keep in touch virtually in the meantime.
*This is commentary by Andrew Sangster, editorial director and owner of Hotel Analyst

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