London's hotel market is likely to feel the worst knock-on effects of the terrorist attacks on the USA. Continental European markets may yet stave off a prolonged downturn. "Naturally everything rests on the nature and extent of any retaliation action in the coming weeks and months" stated Arthur de Haast, Managing Director Europe at Jones Lang LaSalle Hotels.

"Our first thoughts have to be with the individuals affected by this terrible disaster. But as the knee-jerk reactions have passed, we must try to look forward to the possible implications for our industry in the short, medium and longer term" added Mr de Haast. The European markets with the highest reliance on US-sourced demand are likely to be hit the hardest.

"Thus we have to assume that in the short term the London market has the potential to suffer the most, not only due to its high level of US demand, but its role as a gateway to Continental Europe for many US leisure travellers" said Mr de Haast. In addition, the high profile political and possible military support the UK has given the USA, may deter travellers to the UK. Looking across the Continent, the upper segment of hotels in Paris, Rome, London and Amsterdam are most exposed to US demand.  

In the short term it is the convention cities which are also likely to suffer as large scale meetings and non-essential travel is cut. "Cities such as Paris, Berlin, Madrid and Frankfurt all fall into this category and hoteliers across these markets are citing heavy cancellations of meetings. While the short term (September and October) is likely to see further cancellations, a proportion of this demand will be deferred to next year" stated Mr de Haast.

However, the European market has proven more resilient to cancellations in meetings and conventions compared to the US. "US-out bound travel is certainly likely to be significantly down in the fourth quarter 2001 and perhaps 2002 which puts European leisure destinations popular with the US market at risk, particularly the top end hotels" said Mr de Haast.

Leisure demand can book 6 - 12 months ahead of travel date and given the current uncertainty about retaliatory action, travel decisions are being postponed. "Lead times for leisure bookings will certainly be reduced for next year. This could mean a more prolonged effect for the resort markets, with demand for Summer 2002 having the potential to be weaker depending on the duration of the conflict" stated Mr de Haast. The destinations likely to feel the worst impact of the curtailing of leisure demand include Egypt, Morocco and Tunisia.

Turkey too may suffer from significant cancellations. "Spain and Portugal, which are currently amongst the most important outbound destinations for the UK and German markets, look likely to benefit from displaced demand" said Mr de Haast. While international travel plans and long-haul travel is postponed, this can only bode well for domestic tourism.

"The boost to domestic tourism will come as a much welcomed respite, particularly in the UK which has suffered a decline in both domestic and international tourism as a result of the foot and mouth crisis earlier this year" said Mr de Haast. This will not be restricted to the UK, with Germany, France, Spain, Italy, Austria and the Benelux also likely to benefit from increased domestic tourism. Continental European hotel markets stand a better chance of avoiding a prolonged downturn in the current climate.

"Most Continental markets have a generally higher proportion of domestic demand (looking like the safest bet at this time), ease of travel between markets and a greater distance at this stage from the political and any future military conflict that the UK and USA may become involved in" said Mr de Haast.

Intra-European travel has been facilitated by a network of high-speed trains and motorways and travel patterns should not be as disrupted by a backlash against flying. The fear of retaliation may prompt business and leisure travellers to shy away from US-affiliated hotels on the Continent, which could lose market share to what are perceived as lower profile domestic and regional European hotel chains.

"Looking back to the Gulf War, the London hotel market was the first to fall, but noticeably the first to recover" said Mr de Haast. In contrast, the Continental European markets were able to stave off the fall in US demand and decline in travel globally during the months of the Gulf War crisis. The London hotel market saw a sharp fall in room yields in 1991, but saw a return to growth in 1992.

The high dependence on domestic and intra-regional demand in Continental markets, driven by the still-growing economies, served to lessen and delay the impact. Most Continental European markets felt the worst declines in 1993 when the economies began to falter. "What we must keep in mind is that oversupply played a role in the slump in trading performance, particularly in markets such as Berlin and Barcelona in the early 1990s.

Europe is currently in a much stronger supply-side position, with average annual growth in supply at 4.0% from 1998-2000, compared to 6.8% from 1990-1992" stated Mr de Haast. The European hotel investment markets are adopting a "proceed with caution" approach at present as they wait for the response of operating markets to become clearer.

The expected dip in short term hotel profitability and uncertainty surrounding future trading performance means investors will find it difficult to price assets at the moment. "Investment volumes are likely to be down on original expectations for the remainder of 2001. However following this, there are likely to be attractive opportunities for the astute investor" said Mr de Haast.