The UK’s place in the European Union just got a bit more complicated. The nation voted to leave the EU in June; since then, the pound’s value has plummeted against the dollar by 18 percent and the currency’s value remains near a 30-year low. While this drop has helped boost tourism numbers from deal-seekers and also improved some hotels’ profits for the third quarter (Millennium & Copthorne reported a 28-percent rise in Q3 profits), the vote also meant that hotel transaction activity is likely to slow down as investors assess the outlook of future trading.
Now, a new twist. On Thursday, Britain’s High Court ruled that the government does not have the power to trigger the Article 50 process for the UK to leave the EU without a parliamentary vote. If this decision is upheld, it could present a significant roadblock to the Brexit and leave potential investors in a lurch: Invest now while demand is high, or wait to see how the economy fares in the long run?
What is Article 50?
Prime Minister Theresa May—who replaced David Cameron after the referendum—announced last month that two years of formal negotiations for a member of the EU to depart, otherwise known as Article 50 of the Lisbon Treaty, would begin before the end of March 2017, meaning that the UK could be out of the EU by the summer of 2019. The other 27 member states have said negotiations about the terms of the UK's exit cannot begin until Article 50 has been invoked.
Courtesy of the BBC, here’s a chart explaining the departure process:
The June referendum result is not legally binding. Parliament still has to pass the laws that will remove Britain from the 28-nation bloc, starting with the repeal of the 1972 European Communities Act.
And now the High Court has ruled that Parliament must vote on whether the UK can even begin the process of leaving the EU, throwing another wrench into the proceedings—and also potentially giving the UK a way to remain in the Union in spite of June’s vote. Should Members of Parliament force a general election, and should the winning party campaign on a platform of to keeping Britain in the EU, the party could then claim that the election mandate topped the referendum. Two-thirds of MPs would have to vote for a general election to be held before the next scheduled one in 2020.
Still, as the BBC notes, “the process of obtaining parliamentary approval may delay or complicate the process but it is hard to imagine that Parliament could ignore the outcome of the referendum…If all the MPs voted in the way that they campaigned in the referendum then there would be a Commons majority for staying in the EU, but it is enormously unlikely that they would decide to ignore the outcome of the referendum.”
Brexit, the UK’s Economy & Hospitality
There are plenty of factors for potential investors to consider when looking at the UK right now. For one, while the drop in the pound’s value is great for international visitors (and locals looking for staycations), it also means that UK-based businesses have seen the cost of doing business go up. (Easyjet, for example, has reported an increase in costs.) And some economic indicators, according to the BBC, indicate a financial downturn is on the horizon.
But there are some incentives for getting in the door now, as well. The Bank of England cut interest rates from 0.5 percent to 0.25 percent—a record low and the first cut since the global financial crisis of 2009—in a move to prevent a recession and stimulate investment.
Last month, OakNorth Bank’s Director of Debt Finance Trevor Morris told HOTEL MANAGEMENT that while the ongoing uncertainty caused by the Brexit vote has stalled certain hospitality businesses’ growth plans, the appetite for borrowing is still “very much there.” Since the vote, he said, OakNorth has doubled its loan book to more than £200 million, and the company has completed a number of large deals with businesses in the hospitality sector including a £10.5-million loan package for SGS Hotels. “We’ve actually seen it as a huge opportunity, as a number of larger lenders have been retrenching from the market as a result of the vote. In fact, we had two opportunities come in the day after the vote as a direct result of big banks pulling out of deals.
“It is still too early to determine with certainty whether changes in things like occupancy levels are seasonal or part of a longer-term post-Brexit trend. Upsides from the weaker pound (increasing tourist numbers and “staycationers”) should be balanced against general economic uncertainty and business confidence, which could result in spending on hotels for conferences, office parties, etc. being curtailed.
“In the wider economy, consumer spending has remained strong but there are still cost pressures from minimum wage, higher living costs, etc. This combination will generally lead to a more cautious approach but the key remains in ensuring that we have a clear understanding of the income drivers on each deal and the impact on the overall viability, which variations in these can have.