Property investments: the impact of terrorism

That a spate of terrorist attacks in France have impacted on tourism and hotels is beyond doubt. Yet local equity and real estate fund managers must also gauge risks such as these in respect of looking for investment opportunities.

2016 is a terrible year for French hotels, Stéphane Botz, head of Tourism, Hotels & Leisure for France at KPMG said on 20 September during the presentation of the firm’s annual report on French hospitality industry.

Botz explained bankruptcies and a 10% drop of the overall sector turnover for 2016 year-on-year are expected.

The second quarter of 2016 saw a sharp -4.8% year-on-year decrease in the number of tourism nights in France after a gain in Q1 (+1.1%), according to the National Institute of Statistics and Economic Studies (Insee) in France.

However, the fall involving foreign travellers was significantly worse at -8.5% than it was for residents at -2.9%.

“The drop in foreign customer occupancy, larger than the first quarter (-2.7%) was similar to that in Q4 2015, after the terrorist attacks of November.”

“The number of nights spent in hotels decreased anew in Q2 (-3.5% year-on-year), after a rebound in Q1 (1.9%). This decrease was more pronounced for foreign customers (-7.3%) whose overnight stays slipped for the third consecutive quarter,” Insee suggests, Paris being the most impacted area (-12.9%).

Didier Roman (pictured), portfolio manager of the Tocqueville Odyssée and Tocqueville PME funds at Tocqueville Gestion, says French hotels’ bad figures in Q2 2016, whether in terms of occupancy rates or revenue per available room, did not surprise him.

He argues that despite hosting the 2016 Uefa European Championship, Paris still suffers from the risk of terrorist attacks and what occurred in Nice in July 2016 emphasised that risk.

Roman highlights that American and Japanese tourists cannot travel to France because the state of emergency has not been lifted yet and they would not be covered by their insurance policies.

He notes that around 70% of French hotel clients remain primarily business-related ones.

“French hotels’ expenses have been huge to ensure a high-standard quality of service despite clients missing,” Roman also observes.

Régis Lefort, portfolio manager of Talence Opportunités and Talence Sélection PME at Talence Gestion, agrees with the idea of the poor figures being the consequence of attacks.

He adds that the wait-and-see attitude stressed following the Brexit vote has probably had a role, albeit minor.

TERRORISM RISK
The level of exposure Talence Gestion’s French equity funds have to hotel chain stocks is very low, Lefort says.

“I have a position on Accor in Talence Opportunités that represents around 1% of the fund. Accor constantly underperformed since the attacks of last November. The group remains inevitably exposed to the terrorism risk.”

“Figures of consultant MKG suggest that Accor’s revenue per available room in Paris dropped by 32% in August. Extended to the whole country, Accor’s RevPar figures show a slump of 13.8% in August. These figures speak for themselves,” he says.

However, he also suggests that the side effects of terrorism risk are more visible in French urban centres than in the countryside, quoting figures from resort chain Pierre et Vacances, which he holds in Talence MidCaps.

“Pierre et Vacances is a more diversified and established group across France than Accor. The group’s turnover in the first half of the year was up 9% – 5.7% when the calendar effect is excluded.

“The only business of Pierre et Vacances that suffered has been Adagio, as these apartments are located in urban centres and the company stated that terrorist attacks had had a clear impact on Adagio’s income decline,” Lefort says.

Adds Roman: “Terrorism is a risk we will learn to live with in France like elsewhere. Security will be reinforced everywhere and we will cope with it. That will not eternally affect the sector.”

According to him, French hotels’ figures will improve when there will be less pressure, in particular regarding terrorist risk.

“Also once the state of emergency will be lifted, we can expect results to improve quickly as Japanese and American tourists would eventually return to France,” Roman says.

Lefort considers that the risk, being permanent, may impose a discount on hotel chain stocks in particular over a long period.

“It can bring trading opportunities. Profits can be made over strong market corrections that unfortunately happen in the aftermath of terrorist attacks. Terrorist attacks can also much increase the volatility of these stocks,” he adds.

Lefort estimates it is a shame French hotels face such turmoil “because the global macro environment improves in Europe and it’s normally rather favourable to the tourism sector, and by extension to the hotel industry.”

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