• Last Call! All Hedgeye Products → Up To 65% Off

    This offer expires Sunday at midnight. Get your portfolio proactively prepared. This is a limited-time offer to the sharpest investing research money can buy.

We at Research Edge appreciate transparency and honesty so we couldn’t help but comment on the recent statement by the UK’s Minister for Tourism, Margaret Hodge. “I agree that hotels are expensive and I worry about the quality.” Ouch. Not exactly “What happens in Las Vegas, stays in Las Vegas” is it? I don’t disagree with either of her potentially damaging assertions, particularly the part about expensive.

What is really disconcerting is the macro. The macro drives demand in the hotel business. We do macro here at The Edge so we do have an opinion. Our opinion on global macro is not favorable. In fact, it is quite negative. Ms. Hodge can backpedal all she wants, but with so many macro global negatives, London and the UK will soon be in a “world of hurt” to quote our newest Vice Presidential candidate. I’ve outlined a few of our concerns below.

Unfortunately, continental Europe will face the same hurdles as the UK, but we have to start somewhere and the UK looks like one of the major sick men of Europe. The second chart provides profit exposure by companies with US listings to Europe. With the exception of MAR, all the hotel companies listed maintain material exposure to Europe, especially OEH. As I’ve opined in the recent past, estimates need to come down significantly based on US RevPAR and margins alone. When Europe starts to capitulate, the cut will be exacerbated and expedited.

  • Global economies slowing: As Keith McCullough has written extensively about, we are in the midst of a global economic slowdown. Tourism and travel will not fare well in this environment. While the recent rise in the dollar could attract some US visitation to London, the US consumer is pinched.

  • UK economy: flat GDP could go negative.

  • Inflation: While UK PPI down ticked in August, it is still up 10% YoY. Consumer inflation jumped 0.6% in July, an unprecedented increase. In addition to the inflation impact on the consumer, rising costs will eat into margins at the same time RevPAR growth is slowing.

  • Hotel asset values falling: We can guess at asset values but the transaction market is dead. Can’t mark to market without a market. Marylebone Warwick Balfour (MWB) is attempting to sell hotel chains Malmaison and Hotel du Vin for the third time in 18 months after knocking £50m off the previous asking price of £700m for the two chains. My industry sources in London are not expecting a decent price to be advanced. Robert Milburn at Pricewaterhouse Cooper‘s forecasts a correction of 10-20% before sales are made but even this prediction look conservative.

  • RevPAR comps get very tough: Summer events boosted recent RevPAR. As can be seen in the chart, comps get very difficult beginning in August. It won’t be long before RevPAR goes negative, possibly as soon as October.

  • Airfare going higher as capacity is reduced

  • UK housing market potentially worse than in US

Comps get awfully difficult
OEH and HOT maintain the most exposure to the sick men of Europe