United Kingdom
Time to invest in hotels? - Marc Reinecke
A number of partners and managers in BDO’s Leisure and Hospitality team attended the International Hotel Investment Forum (IHIF) in Berlin, in early March, and witnessed an improved mood compared to the previous year. The IHIF is the major annual event in the Hotel Industry where global Hotel Operators meet Investors and Developers to discuss the latest industry news and seek opportunities for future deals, with accountants and lawyers hunting for new contacts and potential work.
The overall sentiment was that now is a good time to invest into hotels with London being in a good position where a lot of foreign money is chasing deals particularly in the luxury segment. The latest example of this is the appointment of CBRE to sell Grosvenor House which is expected to attract offers north of £500m. Despite the fact that trophy assets are generally regarded as being in a class of their own which follow different sales patterns, often driven by status and ego of the superrich rather than future earnings multiples, it still indicates a positive trend in the market.
The attendees in Berlin noticed an improvement in the banks' willingness to lend but the development pipeline of the major operators (ie Marriott, Hilton, InterContinental, Accor) is still looking rather weak as owners and franchisees are finding it very difficult to find loans for new developments. Hence developers are looking more towards the major operators (who over the last years have moved to “asset light” which is now being rebranded as “asset right”) to provide financial guarantees and support for new developments.
The market for distressed sales remains relatively quiet and the message was that a “rolling loan gathers no loss” which refers to the cautious inclination of many banks to refinance loans when borrowers are in breach of covenants rather than to pull the plug and write down the loan. Industry typical ratios for refinancing loans are values between 6 and 8 times EBITDA with margins ranging between 2.5 to 4 per cent (toward the higher end if the bank takes on any development risk) and loan maturities ranging between three and five years. The last point being rather unattractive for an owner who is planning a major refurbishment as this represents a long term investment and three to five year money does not provide the required planning security.
From a global point of view potential buyers are attracted to China, Vietnam and the 24/7 Gateway cities whereas there are abundant properties on the market in Spain, Ireland, Florida and the Caribbean – where no one wants to buy.
In the UK we are seeing signs of cautious optimism particularly amongst our clients in London where trading is clearly improving at a much higher pace compared to the provinces. Whilst we don’t anticipate consumer spending to increase significantly over the next year, we believe that corporate travel acitivity has hit the bottom and will recover throughout 2010. Our expectation is that transactional activity will pick up in the second half of 2010 with banks drip feeding assets to the market – and with a number of buyers circling to bid on new assets when they come to market. We do not expect a wave of distressed sales to hit the UK market in the same was as was seen during the 1990s recession.