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.
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.”
But Tocqueville Gestion’s Roman finds that despite reporting poor figures and terrorist risk, two major trends in the French hotel industry, the arrival of Chinese investors and need for concentration, could draw investors.
“Hotel chains are being challenged by companies such as Airbnb that have forced them to review their offers. They address the issue by growing their size and acquiring competitors.
“Most of these concentration moves have been operated by Chinese investors. They want to acquire a know-how that they will be able to import in their country where tourism is an emerging industry,” Tocqueville Gestion’s portfolio manager explains.
He quotes the example of French luxury resorts group Club Med purchased by Chinese firm Fosun in 2015.
For Roman, Chinese investors want to understand how the group works because China’s wealthy population is growing fast and might want to spend on higher quality holidays.
He says their strategy is to draw to Club Med resorts the 10% of wealthy Chinese individuals travelling outside Asia and to import the Club’s know-how in China for the remaining 90%; while he stresses a different Chinese move over Pierre et Vacances as the business is different being split between housing promotion and apartment rentals for tourists.
Roman maintains a positive stance on that last stock as its house promoting business can further generate 6 to 8% margins.
He assesses the group will see its apartments occupation rate rising with the forthcoming arrival of Chinese travellers during off-peak periods when European clients are not available.
In Lefort’s view, Chinese investors taking a stake into Pierre et Vacances’ capital is a speculative factor that renders that stock more attractive but he says it is not the reason why he bought it.
He adds that shows their strong interest in the tourism sector across Europe.
Another firm targeted by Chinese investors remains Compagnie des Alpes, a French state-owned company that runs the biggest ski resorts in the French Alps and a few leisure parks across Europe, they would like to take a stake in.
“The company will not be brought under Chinese flag but they have engaged discussions for a real strategic partnership as Chinese individuals will go skiing ever more,” Roman assesses.
Regarding Accor, the portfolio manager says he holds the stock in several funds, calling it very attractive due to bright prospects for its Hotelinvest branch that streamlines and manages the existing asset portfolio through disposals and acquisitions.
On the property fund management side, a shift from UK to other markets such as France alongside Germany and Benelux was likely in 2016 for European hotel transactions according to researcher HVS’ 2015 European Hotel Transactions report.
HVS found out European hotel transaction volume last year reached a €23.7bn record, up 66% compared to 2014.
It reported some €1.6bn in total deals were made on French hotels in 2015, down 11% over 2014. But that drop has to be balanced against Jin Jiang’s
acquisition of Louvre Hotels’ 90,000- room portfolio in 2014.
For France, HVS’ report mentioned a rise in levels of smaller portfolio deals as well of single-asset transactions in “real terms”.
Nathalie Charles, regional head of Asset Management & Transactions, Southern Europe, and pan-European development leader at AXA IM – Real Assets, assesses that the hotel sector remains attractive for real assets investments but that his firm is selective in its choice of assets and locations.
“The tendency for mid/long term in the sector means growth of RevPar is expected at a significantly higher pace than office rents for example, between 2016-2020. Therefore, we should see an increase in our portfolio,” Charles says.
Describing a very strong competition over the past 2-3 years with private equity firms and foreign players “who now move more towards Germany”, Charles explains the company targets mid to higher scale hotels rather than budget and economic hotels.
The reason is that “they offer stronger protection against the sharing economy and stronger exposure to Asian tourists’ increase in purchasing power.”
AXA IM – Real Assets favours assets located in central Paris, which draw business and leisure clients. Charles says another specific driver to Paris “is the fact that historically the hotel premises inside Paris have been largely managed by privates, in relatively ‘old fashioned’ facilities.”
“The tendency to have more well-known international brands with solid worldwide client bases is important and gives room for more institutional
investment, based on capex refurbishment plans, solid brands and management.”
Charles explains French tourism’s poor figures in Q2 this year will not make the firm reconsider its strategy, arguing Europe remains the favourite destination of international tourism, and seeing Paris as a gateway city.
The firm believes that on a mid/long term basis, as the hotel room supply remains relatively moderate, there is still growth potential with solid fundamentals in this market.
Regarding the risk of terrorism, Charles points out historical evidence suggest that terrorism results in a temporary decline in hotel occupancy rates.
“Such travesties and their impact on tourism remain highly unpredictable,” she adds.
“Again, long term tendencies in a worldwide market of business and leisure tourism suggest a reasonably good level of resilience. In that sense it’s interesting to note that our recent signings with IHG and Marriott for Capucines Daunou and Tour Paris Lyon projects happened several months after the November 2015 attacks.”
“So, it’s not just us on the investment side that have confidence in the hotel sector’s future, but the operators are clearly demonstrating their confidence also,” Charles concludes.
This article is a longer version of the feature that has been published in the October issue of InvestmentEurope.