After attending Henry Stewart’s Finance for Hotel Investment and Development in the UK and Continental Europe conference recently in London, Mintel’s Macy Marvel reports back on his key takeaways from the event. Upmarket hotel values in the capital city have regained their pre-crisis highs and set a new record in 2013 –at an average of £625,207 per room, according to figures from HVS (Hospitality Valuations Services), presented at the conference. Room values in London should continue on their upward trajectory through 2018, by which time they should have reached £690,000 – a projected increase of some 10% over the 2013 level. Overall, per room hotel values in London vary between £250,000 and £1,000,000, while cash yields on hotel properties range between 3% and 9%, as measured by recent transactions. However, the current slowdown in the inner London residential market may presage a cooling market for hotel properties. Provinces were hard hit Provincial hotel values were much harder hit by the crisis and, in 2013, remained far below the highs registered in 2006-2007 (Birmingham -43%, Edinburgh -25% and Manchester -33%). The good news is that prices are now recovering and are projected to rise steadily through 2018, outpacing growth in London with values forecasted to climb by over 14% to £130,000/room in Birmingham, by 16% in Edinburg to £270,000/room and by 12% to £166,000/room in Manchester. Nevertheless, room values in these three leading provincial cities should still remain well below peak 2006-2007 levels 4 years hence (Birmingham -34%, Edinburg -12% and Manchester -24%). Performance improving across the board Rising hotel values are being supported by improving performance in practically every UK hotel market. Over the past 4 years, ADR (average daily rate) in London has soared by about 30% and occupancy has moved up by about 3 percentage points to over 80%, according to STR Global data, presented by CBRE’s Joe Stather. While London was relatively unaffected by the recession, due to steady foreign demand, provincial UK hotels were more severely impacted with ADR declining by 11% and occupancy retreating by over four percentage points to just under 67% at the nadir in early 2010. As of October 2014, occupancy had dramatically improved to a new high of 75%, but ADR is still trailing the all-time highs of early 2008 by about 4%. Otherwise, Mintel’s Hotels UK 2014 report forecasts that total arrivals in transient accommodation establishments (including hotels, motels and guesthouses) will rise from 61.6 million this year to 67.2 million by 2019 –a projected increase of 9%. 75% of the UK’s total 465,000 hotel rooms are to be found outside the nation’s capital city Provinces offer good value While London continues to be the focal point for hotel investors – especially from abroad – 75% of the UK’s total 465,000 hotel rooms are to be found outside the nation’s capital city. According to Philip Johnston, director at property consultants, Harris Johnston, over the past 3 to 4 years it has been a struggle to sell hotels in provincial locations for even their cost of construction. However, now things are looking up and hotel investments in the main provincial cities, such as Birmingham, Leeds and Manchester offer better appreciation potential than in London where occupancy and rates appear to be stabilising on a high plateau. Buying now with a holding period of five years should provide decent returns. Johnston notes that budget hotels- particularly the two leading UK chains, Premier Inn and Travelodge – have made significant inroads in the provincial hotel sector, displacing some ‘tired’ 3-star hotel stock. There is also a trend towards converting hotels to other uses, including, residential, student accommodation, as well as serviced apartments and offices, which is helping to alleviate the oversupply of rooms in some locations. Bank lending under control While the London hotel market may be looking a bit frothy and provincial hotel values have rebounded, there are no signs of excesses in terms of lending policies, such as preceded the crisis and recession, when banks were offering up to 85% of senior debt on some transactions with a 10% mezzanine top up to boot. LTV (loan-to-value) is not the key metric for assessing a borrower’s debt capacity, according to the bankers present, representing Lloyds and HSBC. Rather hotel financing limits are dictated by debt as a multiple of EBITDA (earnings before interest, taxes, depreciation and amortisation). In general, banks would be willing to lend an amount up to 7x EBTIDA for financing hotels in London, but only 5x EBITDA for properties in provincial locations which lack the broad diversity of demand drivers of the nation’s capital. Loans on hotel properties have very short terms, as compared to say residential mortgages – typically not exceeding five years. Watch out for rising rates though… While the current outlook for credit marketed is rather rosy, the bankers warn that even a small rise in rates from their current rock-bottom level could have a significant impact on borrowers. For instance, a rise on a variable mortgage rate from 4% to 6% would increase interest payments by 50%. “Loan to own” There is more than one way to acquire ownership of a hotel property. Besides buying outright, it is also possible to purchase the distressed debt of property-owning entities from banks which wish to clear problem loans from their balance sheets. According to one banker present at the conference, non-performing or under-performing loans on hotel properties are being bought at discounts of between 30% and 70% of their face value- typically by specialised private equity or so-called ‘vulture’ funds. Once foreclosed, the properties are refurbished and then put on the market. You might also be interested in: No related posts.