There can be no doubt that UK domestic tourism is enjoying something of a renaissance. The great British countryside is back in vogue, and holiday parks, as a result, have become an exciting asset class for real estate investors seeking a combination of capital growth and income. On a risk-adjusted basis, research conducted by M&G Real Estate shows that, over the past 25-years, the leisure sector ranked second against all other asset classes regarding average annual excess returns. It also ranked amongst the lowest regarding annual volatility.
There is little prospect of that changing dramatically in the near-term, regardless of whether or not Britain votes to remain as part of the European Union. Writing in a recent Sunday Times Magazine article, AA Gill described the impact of nostalgia as a driving force behind the Leave campaign, a nation longing for a return to some bygone era of ‘Elgar and fudge and proper weather.’ But domestic tourism has come a long way from the caravan parks of yesteryear as featured in the Carry On films. Many UK holiday parks offer luxurious Alpine-style lodge accommodation, with hot tubs on the decks and on-site spa retreats to boot. Gone even are the days of icy cold shower blocks; the noun ‘glamping’ has appeared in the Oxford English dictionary since 2013.
Irrespective of external macro factors, the UK has become an attractive holiday destination in its right. This is true not only for the older demographic; the millennial generation are domestic holiday makers too. In spite of globalisation and cosmopolitanism, research has indicated that close to 50% of people purchasing their first holiday home in the UK are aged between 26 and 35. Given the current prohibitively high costs of residential property ownership for first-time buyers, it would be easy to assume that this is solely down to financial considerations. However a recent survey conducted by VisitEngland, the official national tourist board, suggests that financial matters rank behind attractiveness when selecting holiday destinations.
TravelZoo, which conducted this study, revealed that 27% of bookings for Briton’s main summer holiday in 2016 were for domestic trips, making the UK a more popular destination than Spain, France, Italy and the USA. It’s clear therefore that the attraction of England is a bigger driver than finances, which would suggest that the ‘staycation’ trend is here to stay.
The good news is that financial incentives are possibly likely to improve in the event of a vote to leave the EU, and remain on a continued upward trend under the status quo. UK Treasury’s prediction of at least a 12% drop in the value of the pound in the event of Brexit could make overseas travel for UK consumers more expensive, by reducing purchasing power and squeezing holiday budgets. Conversely, inbound travel from the USA and Europe, who respectively make up 30% and 19% of UK holiday park visitors, could benefit from a lower rate in sterling.
At the same time, any currency weakness can be expected to lead, in due course, to inflation and rising interest rates. In turn, this would result in falling total returns for real estate investors. The relative benefits of investing in holiday park real estate in such an environment would be twofold: first, a good proportion of income is derived from ground rents and amenity license fees which are RPI-linked, and, secondly, new lodge purchases often come with a guaranteed annual return for the first three years of between 8-10%. If that’s not enough, there is the added kicker of no stamp duty to pay.
Clearly it’s not all champagne and roses: there are risks inherent to Brexit, the most pertinent being the fact that consequences remain hugely uncertain. At the annual results presentation of Land Securities Group plc last month, Rob Noel – Chief Executive Officer of the UK’s largest commercial property developer and investor – observed that
“We’re facing a period of greatly enhanced economic and political risk.”
Uncertainty is never well received by the investment community. It’s conceivable that a decision to leave the EU would cause households to delay investment decisions, causing sales of new lodges at holiday parks to stall. There is also the impact of increased costs for hired staff, given the fact that a large portion of the casual workforce is currently made up of migrants, and potentially more expensive build costs associated with the lack of low-cost foreign manual labour.
This is, however, a long away from the ‘damned if you do, damned if you don’t’ scenario many analysts and commentators have been prescribing for the general economy. More than one has resorted to quoting The Clash: ‘should I stay or should I go now? If I go there will be trouble, and if I stay it will be double’. But for the UK holiday park industry, and domestic tourism more broadly, neither outcome should be expected to materially disrupt the positive momentum driving increasing numbers of visitors and growing opportunities for investment.
Media coverage regarding the potential implications of Brexit has been unhelpful. It’s evident that both the Leave and Remain campaigns have been guilty of hyperbole. Whatever the outcome, both retail and institutional investors can be cautiously optimistic in the face of continued tailwinds for the UK holiday park industry, which is likely to remain largely unaffected by the vote on 23rd June. After all, Blake’s ‘green and pleasant land’, the very same ‘pastoral landscape’ which inspired in Wordsworth ‘a sense sublime / Of something far more deeply interfused’, will still be here – whether “in” or “out”.