Covid-19 Rebound and Recovery: A focus on the hotels market in Spain (transcript)

CC Hello. A very warm welcome to everyone listening. For those of you who don't know me, my name is Cristina Calvo. I am the founding partner of the Ashurst Spanish real estate department and lead its hotels practice. I'm also head of Continental Europe.

First, I want to thank you all for attending this Ashurst webinar in collaboration with Colliers International. Our intention today is to give you an overview of this market as we see it shaping up post COVID, as well as the main legal challenges hotel businesses face from a practical perspective going forward. And for that, we have lined up a panel of experts.

We have with us today Miguel Vásquez from Colliers International. Miguel is managing partner of the hotels department at Colliers International, Spain. He was a founding partner of Irea and director of its hotels division until March 2018 when Irea joined Colliers International. He focuses on offering advice to investment funds, hotel chains and hotel owners.

We also have with us today, Diana Rodríguez. She is a partner at Ashurst Madrid and heads the employment department. Diana specialises in daily legal advice to companies in all aspects regarding employment law and, in particular, special employment relationships for senior managers and contractual relationships of directors, employment issues arising from commercial transactions, dismissals and sanctions, company restructurings, and collective dismissals, as well as collective negotiation and trade union issues.

We also have with us José Antonio Rodríguez. José Antonio is a partner and heads the dispute resolution department of Ashurst Spain. He is a state lawyer and he specialises in litigation, arbitration and insolvency and restructuring disputes. He advises some of the leading financial institutions in pre-litigious matters as well as in court, and he has extensive experience on hotel disputes.

The format of the webinar is of a Q&A session with the speakers. We will be running for about 45 minutes and then we will have 15 minutes for questions. If you have any questions, please send them to the Events London email address that you can see on the screen and we will pick them up at the end of the session.

So, we're going to start with Miguel. The world tourism market has been strongly shaken by the impact of COVID-19 and Spain plays a very prominent role in the world tourism map. Tourism represents about 12 per cent of the Spanish GDP, and at the beginning of this year employed about 13.6 per cent of the Spanish workforce. What do you think has been the impact so far on the Spanish market, both at the urban and vacation level, and what are your forecasts on how and when the recovery will occur?

MV Okay, thank you, Cristina. Well, just for a little bit of background about what was the momentum immediately before this meteorite hit the world, Spain was … as you well said, was ranked at the second level in terms of the largest destination worldwide after France. The last five years were extraordinary years with hitting peaks in terms of tourist arrivals and income. In almost all the statistics we saw across Spain the results were really very good, I mean historically good. 2019 in the Balearics was the best peak performance ever.

Investment was flowing in the markets, so institutional investors started to target Spain 2015, so they deployed a huge amount of capital. And 2020, it started with a very good picture. A lot of investment was done in the recent years in repositioning's, and we expected a very good year, no? The Spanish economy was growing with pace. 

And then, in March, the lockdown worldwide started to happen. Our government decided to basically shut down all hotels immediately, on 14 March, and the whole country entered into a very strict lockdown, I think probably one of the most strict lockdowns in Europe. The hoteliers at that time, particularly those focused on the islands and … were preparing their openings for Easter, so high season will be starting in one month, and from one day to the next everything changed and they … so a situation never seen before. So, all the hotels was what I call the war phase. So, there was a war; how to manage it, we don't know. I mean, we need to do our best. But not only ourselves, but all the different parties across the industry.

So, the government started to place measures. First, I think it's [*] all Europe to widen liquidity, so making the money flowing. So, the banks were the first to understand the situation, and I must say that we saw a very different reaction than we saw in the last crisis, in the financial crisis back in 2007. So, banks started to open, immediately, collective negotiations with hotel owners, which of course were in shock and [*] opposite to cash generation, they were facing a cash consumption in the coming months. So, this was a very good point. I think banks reacted quickly. We think that there was a momentum of a lot of uncertainty which was the big tour behaviours which are really important for the Spanish market is … particularly in the islands, there is a lot of tour operation dependence, and so what happened in between, remember that we had the bankruptcy of Thomas Cook six months before.

CC Yes.

MV So, what happened, we get to holidays with all the tour operators, I think in one month combine the force of the governments and the banks basically [*] most of the big players. The other worry of the banks were, on top of hotels, airlines. And, again, there was a combined force which basically, in the short term, basically support relief. And this gave a momentum in all this crisis which was some way positive and, on the other hand, those hoteliers that faced the situation were … they did not have [*] but they have leased their hotels, they faced a situation where they were obliged to pay the rent but they would not have income, no?

So, again, and we will probably will talk about, José Antonio will describe it in detail, there was immediately negotiations between landlords and tenants. And I must say, my view, this first round of negotiations in the war phase, basically in general terms, were positive and the outcome was positive. But this was the war phase, which has finished. In Spain, basically the state of alarm was lifted on Sunday, last Sunday, so it means that the country is in the new normal, and now it is the post-war phase which probably, from my point of view, I'm talking about potential impact, is the more risky and the more challenging one. I mean, during the war phase everything was shut down but there was protection from the government taking advantage of a figure which is in our labour relation, that Diana will explain in more detail, that basically got for the hotel companies a coverage of the cost of personnel, which …

CC What happens now?

MV Well, okay. So, now the measures were extended until 30 June, and now negotiations between the companies and government to extend this protection, this scheme of protection, until 30 September. Hoteliers are asking for at least 31 October because the season in Mallorca, which is the first focus point now, it doesn't make any sense that basically you have protection only until September if your season is going to finalise on October. But this is a negotiation which is taking place and is something which is key for the whole industry. This is going to be a key negotiation. And our feeling, talking with the different parties involved, is that there is a consensus to get a solution on that. Because, if not, the impact will be huge.

How the hotels are facing the … the hotel companies are facing the openings? Well, putting the focus on Mallorca, I think the season is basically, is going to be very weak. I will say it's gone, I mean, I guess that probably no more than 40 per cent of the total room count will open, so those big hotel companies with a lot of hotels in Mallorca or in Menorca or in Ibiza would decide to open just a few of them. So, those are the independent, and there is a lot of … because it's a very fragmented market, the hotel market in Spain. The independents are going to have the final decision to open or not open. They don't have a possibility to open one out of four, they just have one hotel.

But at the end of the day, we understand, and talking with all collaborators in the recent weeks, and in two weeks ago, it's a very important point, their bookings were negative. I mean, the number of cancellations in comparison with the number of new bookings was a negative number. I was listening the CEO [*], he told the audience, it's funny because I never took care of a group … information about a group of 25 people that has booked in our hotel in X location; now this is gold. So, this gives you a feeling that the expectations for the summer are very, very, very weak.

We think that 2020 is going to bea very, very bad year. In between it is going to be the challenge basically to afford the losses, definitely. And to keep a hotel, a 250-room hotel in the beach in Mallorca and [*] costs as an average €100k per month, so it means if you need to close for six months, €600,000 when in normal times you will win probably €8,000k per room. So, it means that the loss of profit is going to be huge. And more than the loss of profit, the cash consumption which is now the [*] that the good situation of the market in the last five years suppose the balance sheets of … in general, talking in general, of the big groups are in good health. Their leverage is limited, so that's why we foresee that banks are going to have tools to basically provide new financing and new liquidity facilities that are going to be needed probably during the following 12/18 months. So, this is the main challenge now.

CC Okay. So, cash is king, basically, at the moment.

MV Right.

CC So, Diana, the hotel industry, obviously, has been directly affected by the lockdown and that has resulted in a huge number of job losses. Once the market begins to recover, how do you think the crisis is going to affect the future labour markets? Will employers be obliged to reinstate all the employees that were under furlough? I know there is negotiations about the extension of the ERTEs and what's happening with that, and what are the measures that you think could be implemented?

DR Yeah. Good morning to everybody. As you say, because of the closure of the hotel industry in March 19, most of the hotels were under what we call "ERTE" which is our furlough, because of force majeure, and they will … they're supposed to last until next week, now 30 June although, as you say, Cristina, unions and employers associations are in negotiation with the government in order to extend those ERTEs until September or the end of the year. In any case, if these ERTEs due to force majeure, these furloughs, are not extended and the only [*] employers have begun to reinstate employees, when they began to operate, they can negotiate new temporary redundancies process, new ERTEs, due to productive grounds or financial grounds depending on their situations, and unfortunately there could be also collective dismissals in case that this new situation, the new measures that the hotels are going to implement and the new costs may result in a necessity, in a need of restructuring the whole [*].

There was a prohibition to these missed people that had affected by ERTEs so that their employees cannot be dismissed in the six months following the re-opening of the hotels. This has been now changed and interpreted by the government saying that in case of the company will be in risk of [speaks in Spanish] … sorry, I don't have the English for that, it will come to me.

CC Bankruptcy.

DR Exactly. Bankruptcy, sorry. Yeah, in that case dismissals could be implemented. But in case there is a preference for maintenance of employment so that their employers will be focused or will be forced to extend redundancies, temporary redundancies, instead of collective dismissals. I guess that there could also be some kind of modification in employment conditions, reductions in salaries, in working time etc., but that will of course depend on how the market reacts and how the hotels industry is finally recovering in Spain, if there is a huge demand or no, but we need to have flexibility.

There was also a discussion regarding this new reform that government is talking about, part of the government is talking about, to amend, again, the law and in order to live without that flexibility that we got in 2012. And of course employers are totally against that and, honestly, I don't think that there is a possibility we have the European Union looking at us, and we cannot put more pressure on the employers because otherwise lots of employments will be permanently lost. So, we need flexibility, we need to extend the ERTEs, the furloughs.

CC Yeah. So, you don't think that a reform of the labour law as the government is proposing, or part of the government, the communist part of the government is proposing, is going to get through?

DR I don't think so, honestly.

CC Okay. That's good to know.

DR And I mean … of course I don't know, but they don't have the majority in the parliament to go through the reform right now, and that will be the closure of lots of small companies that

CC Yeah, but Europe is not, you know …

DR No, no, no …

CC Europe is not going to let it happen, is basically what we think.

DR No, I don't think so. If they reform something, they will be minimal amendments regarding collective bargaining agreements or something, but not anything regarding furloughs or collective dismissals, severance in case of termination of employment, I don't think so.

CC Good, good. José Antonio, one aspect hotel investors are going to be looking at quite closely when analysing an opportunity, is the lease situation. How are owners and operators, how have they approached the lockdown in terms of rental payments? What have been the demands of tenants? Have agreements been breached generally, and if so, how will they impact future income? José Antonio, you are on mute. José Antonio, you are on mute. You are on mute.

JAR Sorry. Yes, I was saying that indeed one of the main issues that arise out of the COVID crisis concern the lease contracts in the hotel sector. This is due to both business reasons and legal reasons. A business reason because we know that the hotel chains in Spain, a big part of the hotels that are operated by these big companies are under long terms lease contracts. So, this is the usual formula. I don't know if, after that, Miguel has a comment on this but this is a very usual formula for the operation of the hotels. But the second has to do with legal considerations because these long term lease contracts really are very vulnerable to a shock, a [*] crisis like that of the crisis of COVID, and there are several reasons for that.

In general, the long term contracts are problematic because they many times are executed under very different market conditions, and clauses in the contract that deals with the adaptation of the contract along the time, like rent review clauses, are not really prepared to face a shock like this. And a third cause is probably that in the contractual practice in Spain is not very useful and this is something that probably has to be taken into account at the COVID crisis to include force majeure clauses in the contract. And that is an important reason why this kind of contract are very vulnerable.

So, the reaction of hotel operators to the crisis has been the one described by Miguel. Everyone has tried to adapt the contract to the new situation through a negotiation process. The reason for that is that for one side there is no direct legal support to renegotiate the contract because, indeed, among the set of rules that the Spanish administration and the parliament has passed to deal with the COVID crisis, there is no single rule that is applicable to the commercial basis. And the second is, as I have explained, these long term contracts are not very well prepared to face because there are no clause that could be used for the adaptation of this contract to the reality of the COVID situation.

So, the negotiation was the only possible solution for both of the parties and here, in general, the lawyers have seen … we, the lawyers, have seen an element that probably is quite new, is that the different operators, both the landlords and the tenants, have assumed that they have a duty to negotiate. This is a very important change if you compare the reaction to the COVID crisis to, for example, the reaction facing the financial crisis in Spain between 2008 and 2014. Everyone has assumed that there is a duty to negotiate in good faith the adaptation of the contract to the reality of the COVID crisis. I mean, a large majority of cases, this is our experience in the firm and in my personal experience, in a big percentage of the cases, an agreement has been breached. Probably more than 90 per cent. So, litigation has been set aside for a very minority for the cases.

In a negotiation, the position that the parties has taken has different levels of aggressiveness, we could say. Obviously, the treatment that the parties has done to the different periods of the crisis is different because you have to make a distinction between the closure period, the period in which the hotels were shut down because of the administrative message of the government, in which the most aggressive tenants has sustained that there is no obligation at all to pay the rent because there was no possibility of operating the hotel, and this is a case of force majeure and this is the most aggressive position. And after that, in the period in which the hotels could open because there was no administrative prohibition, the usual argument to sustain the position to try to modify the contract has been the [*] that is similar to the [*] in the common law jurisdiction.

These are the position of the tenants and landlords in general has been flexible in negotiating these agreements. And, Cristina, you can probably give information about that, and …

CC Yeah.

JAR But probably more in giving financial flexibility about the payment of the rent and not a suspension of the contract or a reduction of the rent. That is my impression, I don't know if you have a different one.

CC Yeah, basically protracted rent which means that with a catch up at the end or with a sharing of the profits in the future so that everybody can recover their losses. So, what José Antonio was saying, and it is true that we have seen, is we have seen that people have realised that this time there is nowhere to place the guilt of what has happened, the blame of what has happened. And therefore, you know, if tenants say, "Well, I'm closed, I can't pay" and the landlord says, "But if you don't pay me, I can't pay the bank" and it rolls out like that, so it's nobody's fault and everybody's felt the need to sit down and negotiate a solution that works for everybody, and what has happened is that agreements that have been agreed, they said, "Okay, we wait. We reduce the rent for now, we see what happens this year but, hey, we share on the next year so that we can both recover". The main aim for everyone has been to preserve the contractual relationships to the extent possible.

Another thing that's going to change is that we are going to see everybody going forward and negotiating lease agreements for hotels including hardship and force majeure clause, and including pandemics, and sort of … there's going to be an added point to negotiate which is, you know, who bears the risk or how that risk is spread going forward.

Miguel, back to you. How do you evaluate the position that investors have adopted so far? And, perhaps more importantly, how do you see the investment scenario in the next 12 to 18 months? And what about the financing scenario?

MV Okay. Yeah, well, it's … there is not … unfortunately not much activity. I will say that everything was stopped when the meteorite hit. Yes, there are some deals that were ongoing and in final stage it happened, but the reality is that all the instructions were on the fridge, put on the fridge, ongoing transactions, and in fact transactions that were under preparation have been postponed. We don't see the activity, we see … in Colliers, no, it's a good example; we were starting, or planning to start, the same process of a couple of hotels in Mallorca in March. We stopped the process and we started one week, the marketing of this opportunity. We have received a number of requests for signing NDAs, so it means that the people is starting to at least consider, you know, and look what is happening. We are aware that there is not too much leeway in the market, so we don't have a feeling right now but this is a good sign. But nothing is happening.

And we foresee that the wait and see mode for investors is going to remain at least during the coming months. We are considering that probably if the situation, the expansion of the virus is really under control and there is no increase of infected people in the summer and after summer, I think the investment sentiment would benefit of this. We have been in the … I mean, in terms of sentiment, the last three months were the worst of the worst. I mean, nobody was … everybody has been hit, nobody wants to do the first deal. There are no comparison in markets, it's very, very difficult to put a value, and so this [*] is basically put in a way that most everybody know.

Opportunistic investors, France was the first to call in March, April, asking for our view. Our view is that, and always with a caveat of depending on how the virus is … when and how the virus is under control, the situation is not a distress situation. There is going to be a situation where companies are going to need [*]. I think if banks are there, the government has taken measures as well to provide some financing at low cost, and it's true that there will be companies that probably will face really strong problems, but it's not going to be the big picture as it was ten years ago.

So, we don't see at the moment a distress situation, generally talking. We see that … and our scenario now is that probably 2021 will be a very good year. [*] pull off equity. Financing is not there, asking your question. So, banks are now basically focused on keeping companies going and not financing new acquisitions or new developments, and I think this is going to remain the whole year because n the second part of the year, they are going to be obliged to give more liquidity to their current clients. So, we think that 2020 is going to be a very weak year, but our guess is that considering the interest rate levels and the equity levels and the fact that we understand that the impact is going to be medium term but not [*].

If you see oil prices, if you look back in the last 35 years, global tourism has grown always. Only twice there was a decrease, and a slight decrease, which was back in 2003 with the Iraq War and SARS at the same time. I suppose that the number of tourists worldwide decreased for 12 years … 12 months, sorry. And the other one was in 2009 with the financial crisis. In 35 years' time. So, it's a growing industry and I think there is a consensus that this is a very different challenge. Never … in the last how many years there was a pandemic like this one. But I think there is a consensus in the market that the recovery will come in 2022/2023 probably we will recover at the numbers and levels similar to 2019.

If this is the case, we think that core investor will be there for investing probably in 2021, not in 2022. Opportunistic investors I think are not going to have a huge opportunity. And something which is very important to take into account in Spain for investors in general, is that this situation is going to make a difference in some family-owned hotel groups which now after 50 years that the founder is managing the business, I mean, some cases you have in the Balearic Islands around [*] which are not very well-known, are not very big or familiar, but groups with a portfolio of hotels between 3 and 12 hotels, so medium size, family-owned. The owner is 70-plus years old, probably no succession, and they didn't sell in 2018, 17 or the fans were knocking at the door because everything was so good that they thought, "Well, next year will be better and will be a better moment to sell". And my feeling is that after this really strong challenge they are facing now, once they basically get the new momentum, they will be very … they'd like to sell. And this is …

CC You're absolutely right, yeah. Yeah, we are actually seeing investors finding opportunities with owned and operated hotels that … it's basically sale and leasebacks of owners operators that need to sell because they need to raise the cash to continue operating. And that is already happening, we are working on investments like that that have come, you know, in the last couple of weeks. So, yeah, you're absolutely right.

MV Yeah.

CC Diana, with regard to health and safety and the prevention of risks at work, what is the safest way to operate at the moment, if you could say quickly, and what are the responsibilities that hotel operators face if they don't comply with the new health and safety measures?

DR Well, most of all, the Prevention of Risk at Work Service has to be fully involved, fully involved. There is a need of making new assessments of risk at work. For sure, COVID is a risk at work because employees can be infected at work. But it will be very difficult to connect … in case of an injection of an employee, to connect the infection with where the employee got infected or not. So, the most important part of this is to have the Service, the Prevention of Risk at Work Service, totally involved. Follow guidelines and have a very, very day to day eye of the situation; facilitate and provide employees with, of course, masks, hand sanitiser; inform them and try to train them on how they have to work and how they have to interact among them and also with the clients of the hotel.

And of course for those employees that can work from home, there is still a prevalence of work from home until the end of September for those employees that are not needed to render services presently in the hotel. There is also a very important part of the prevention which is regarding critical employees or those more vulnerable employees like people suffering certain diseases or pregnant employees and nursing employees. In such a case, it is very important to talk to the prevention service and try to assess if these employees can be relocated or if they can be protected with more extraordinary measures in order to prevent them to get infected.

It is very difficult I insist in employers being responsible for infections because there is no … so far, I mean, it's impossible to certainly know where …

CC Where they got infected?

DR Yeah, exactly. Exactly. But it's extremely important to have the Service involved, follow guidelines and every single suspicions that an employee may have, talk to them and put people in isolation.

CC Yeah. Thank you. José Antonio, for those who haven't managed to reach an agreement, clearly they'll be thinking about going to court and there is going to be a huge backlog on the courts, I assume. Spain is already known for having a very slow court system. How do you think the lockdown is going to impact on the timing to get a court ruling, and basically what can be done to avoid that?

JAR Yes, briefly, indeed the COVID crisis will have a huge impact in litigation because in spite of the fact that in the majority of the cases, agreements have been breached between the operators, it is obvious that in the little number of cases in which this was not possible, will imply an important increase in the number of disputes. There is a second comment; in Spain, the judicial court were closed at the beginning of the State of Alarm in 14 March, and continued to be closed until 4 June. The problem of this is that the Spanish court will accumulate a huge number of disputes to decide, and the judicial system will be even slower than it is now. So, this is probably not a good way to monitor this [*] now.

So, there is an absolute and urgent necessity to recourse to other formulas – negotiation, mediation or arbitration – to try to solve the dispute between the operators or, importantly, taking into account that the Spanish judge are applying as a matter of course the harsh doctrine or [*]. So, you are going to recourse to the judge, and the judge is, if this is right, to adjust the contrast in the manner the judge consider a proper. And, in my opinion, it is better to do this by the [*]. That is my comment.

CC Yes, yes. Whatever the court decides is not … you're never going to be happy either way, that's our experience.

JAR Yeah.

DR Never.

CC So, time for the speakers is up and now it's time for the questions from the attendees. I have a question here from Alejandro Sanguino from AXA Investment Managers. Thank you, Alejandro. He says, "Could you kindly share your views regarding the expected number of owners that will start divestiture, sales or lease or process of their assets or their portfolio? Could you also share your views regarding the yield compression expected relative to the beginning of the year, pre-COVID". This one's for you, Miguel.

MV Yeah. Okay. Well, I think, as I said before, I think the hotel companies has focused in these months and will continue focus to get basically [*] of liquidity for managing their future, okay? And the decision about selling and divest will very much depend on length of the crisis and impact, which is unknown. So, the summer season and the following months everybody around the sector will have more and more information, but it's likely that additional cash will be required. So, for a hotel company the possibility is, okay, ask your bank again and ask for new money, and this is going to be more tough than it was a couple of months ago. So, as an alternative to a commercial bank you may have the possibility to go to a debt fund to ask for a more expensive financing, high deal financing, and probably is not very appealing, the conditions.

And then the last route would be if you have your own assets, to sell the assets. Not an easy decision because it's quite likely that investors, in three months' time, and answering your question regarding the cap rates that will be applied, probably they will assume that there is no more decompression because this compression happened during last year's because of the higher investment activity, and probably considering the answer type is no and the fact that the interest rates can fall below the current levels, probably is not a decompression but the other way round. So, in terms of valuation, an owner that wants to sell his property in three months from now, let's say in October, when he or she asks for a price and the buyer will tell him, "Well, this is not a 7 per cent cap rate, it should be 7.5 per cent because the momentum, the risk. And not only this, but the cash flow I'm projecting and your property has nothing to do with the cash flow that I would be in a position to project six months ago because probably in 2021/2022/2023 there will be a ramp up again and this is upping the value".
And we think there is going to be a gap of expectations between buyers and sellers. And, for us, this gap only can be basically solved through [*] I mean, where the owner which managed the property and has no possibility to get liquidity out of a bank or a debt fund because it's so expensive, he can commit in the best hotels of the portfolio, "Okay, let's sell these properties. I don't care about if you say that this is value of 40 where for me it's valued 45 or 48, this is my only way to get money out of this momentum. But I will sell you … I will lease back but I want to have an option to buy back the property in five years' time once the market has recovered, up with a marking for you in respect to the price you paid today, which gives you probably considering the annual rent and the [*], some kind of [*], a decent return, probably in the 15/16 per cent [*]. But this gives me … I'm happy to … basically to commit this payment of rent because I have the right in five years' time and I trust on the future".

So, we think that these kind of structures, we are going to see this situation because if there is no, this component of recovery of the ownership in the future, I think it's going to be very difficult to manage expectation from sellers and buyers. And I don't see people selling at a very discount. And I see a lot of comments from the buyer's side, from the potential buyers, saying, "Okay, I will buy at least 15 per cent below the price with pre-COVID". But why? I mean, it makes sense but, I mean, in a … I cannot meet this in a medium-class property which has … but in a property asset, I mean, there is a very good room, from my point of view, for co-investors that has a long term investment plan basically to structure sale and leasebacks with companies that are going to require [*] and the only possibility probably will be to do just a sale and leaseback. This is my view.

CC Thank you. There is another question about the fact that the government has announced last week a package of measures to support the tourism industry, and if we can explain what they are and how they have been received by the industry and by the sector. Unfortunately, it is … and I've taken a look at it over the weekend, it is the usual sort of, I would say, empty talk of all the measures announced and the paper is quite long. There is only one that is effective at the moment and this is the line of guarantees from the official credit institute [*].

There are some moratoriums announced but they need to be first specified and then developed, so there's nothing there, it's just basically a whole of … you know, a document full of good words and intentions and praise for the tourism industry and for the hotel sector, but nothing very concrete at the moment. It has been received by the tourism industry and by the hotel industry as completely insufficient, and negotiations are taking place to try and improve it. And I would say there is quite a sense of drive by the hotel sector, trying to save the season although, as Miguel was saying, it's going to be hard. Maybe towards August it will get better, 'cause we are seeing demand increasing but it's not going to be nowhere near where it was last year. So, we'll see where we end up but there's nothing really more to say that is concrete and official at the moment.

There is another question, Miguel, asking which will be the regions in Spain that will rebound first, do you think. Can you just name whether it'll be the tourism or the city hotels which resumes in particular?

MV Yeah, okay. Our view is that in the very short term, hotels in mainland Spain will benefit more than those located in the islands. More than 80 per cent of the demand for the hotels in Canaries and Mallorca comes from abroad and is a weakness when we analyse a hotel in South Spain, Cádiz, Huelva and so on, we always say what is the problem here, because there is no international demand; 80 per cent relies on the domestic market. Now this is positive because our government, as many other governments I understand, that they are promoting a stay in the country [*] country. So, I think this is one in this kind of hotels located in mainland in the coast, so leisure hotels are going to recover first. We foresee that touristic departments, not those managed independently by the owner of [*] B&B but those self-catering kind of accommodation which are managed by hotel groups or by organised groups will benefit from this situation. I mean this kind of accommodation is going to be … it's being very, very high in demand.

We think that in the first round of recovery will be the mid-scale and leading the service hotels and so talking about city hotels. This is the first book of recovery I would say. The second book only will be the islands, let's see how the [*] looks but we think that [*], that's it. The hotels, the companies operating the hotels there are considering that the high season, the winter high season, will have some leverage for making money, so, we think that the islands and leisure city hotels. In general terms we are looking at the companies which has hotels in cities, delaying openings to September. So, nobody is going to open before September and so for the last part of the year leisure city hotels and islands will benefit. Business hotels are literally within that …will come later on and [*] because the kind of accommodation that mix people in the same room and so on they are going to be very affected. And the last in recovery probably will be all the hotels focussed on big conference hotels in the surroundings of airports, all these probably will recover in the long run.

CC The last.

MV Yeah.

CC Thanks Miguel. Diana, quickly a question for you. Since employers have now been closely monitoring health and safety, how do you think the post-COVID era will affect privacy of the employees?

DR [*] and protection of privacy at work is still fully enforced but it is true that here the obligation of employer to preserve the health and safety of employees it has a prevalence over the privacy of the employees. So there are some principles that have to be respected such as managing of the treatment of the data of the employees. But for instance, for medical checks additional principle is that they are totally on a voluntary basis for the employees and we are talking about monitor the health of employees regarding COVID in case that there is an employee who has symptoms. He can be obliged to go under medical check. So, and of course the check of the temperature of employees is also allowed for the employees and it's compulsory for the employees to go under that.

So, we have to respect privacy, we have to treat data of the employees extremely carefully and respectful, as I said the purpose of the access to the data is only for protection of health at work, that's it. You cannot use those data for anything else and trying to be as less invasive as possible but there is maximum interest here which is the protection of health. And employees have lied to enforce that, so you have to balance.

CC Thank you. We all feel like a bit "Big Brother" at the moment, you know.

DR Yeah, absolutely. But the thing is that you cannot retain those data, you cannot use them for any other things but of course you have to take care.

CC I was driving the other day and I passed the bridge and there was a sign that said "COVID1984", you know. It's [*] all over again.

Miguel, one last question. So, it's about expectation of value and valuation, whether selling or accepting a liquidity injection or another firm there has to be agreement on value. Do you see there's been an impediment to transactions? With these unprecedented levels of uncertainty how would you value a hotel other than simply a price per room metric? Income is possible to predict with accuracy, isn't that right?

MV Yeah, it's very challenging. Again, always challenging but in this times it's really, really, really challenging. By [*] unfortunately somebody has to basically put the number. I think considering the [*] we have seen now I think that is quite, quite normal in this moment, that the coordination, and what I'm going to say is very general so don't take notes on this. But, in general what we're seeing is that only considering the impact on performance and it's like increasing in this country, not in a city that you consider that in two years' time [*] or previous time [*] will be at the centre of 2019 and considering that you are in a central location which always will happen to the value of exit cap rate, we are not, for example, affected materially. I mean we are keeping in the exit cap rate similar cap rates pre-COVID but affecting the discount rate for the four, five years' time we are calculating the net present value. Around 10 to 15 per cent discount in price with respect … a reduction in price with respect to evaluation, we inspect the same property pre-COVID, this is quite normal in this moment. But always relying on the capital predictions and nobody has the crystal ball but I think that is depending on the city, depending on the kind of hotel and this applies to companies like us. Not to fine tune a lot but at the end of the day you make your best assumption. But, in general terms we are considering that recovery will last for three years probably to come back to the levels of 2019 in most of the markets.

CC Yeah. What we are seeing, we're not seeing investors buying with debt at the moment, it's all equity and the only valuations we're seeing are the ones that had to be done when you get … and we get, owners or operators need liquidity and they expand on their mortgage and they need to get a valuation for those purposes as is required by the Bank of Spain. But those are not RICS valuations those are [*] valuations and they're usually well below market value as I understand. So, I don't think they will give you an idea as to the market value.

Okay, well thanks everyone, we're four minutes over but keen to move on because I know you're all very busy and we have something scheduled next, so thank you very much José Antonio, Miguel, Diana, you've been great. We hope it's been useful and we're all here if you have further questions. Thank you very much and have a good day.