Although the banks still have large exposure to hotel debt, the appetite of some is gradually returning, and they are lending selectively to operators who demonstrate a track record of success.
Widening debt market for hotels
The debt market for hotels is widening, to include alternative investors such as debt funds, credit investors through family offices, pension funds and insurance companies. As such we are seeing an easing of credit conditions and debt is more easily available than it was 12 months ago.
Banks have been more reluctant to force change when compared to previous recessions. Their role remains key: the list of hotel companies waiting to be refinanced remains long and, notwithstanding the above, whether the funds are out there remains to be seen.
London hotels market
London’s hotel sector over the next 12 months should be an exciting one. It will benefit from increased confidence resulting from an improved economic performance and outlook; growing visitor numbers (June 2013 saw the highest monthly total recorded); and a number of exciting new openings.
Average occupancy close to 80%
The London hotel market has proved to be resilient with average occupancy close to 80% for the first six months of the year. However, this is set against the backdrop of lower room rates relative to their Olympic peak. As such revenue per available room is below the previous year’s levels for 8 of the 12 months to June and with a number of months of negative results still to come.
For the year to July, Hotstats are reporting a decline in ARR of 2.3% to £141.28; growth in occupancy of 2.2 pts to 80.8%; and RevPAR slightly ahead by 0.4%. PwC are forecasting a decline in ARR of 2.3% in 2013, improving to +1.5% in 2014, with occupancy for 2013 as a whole of 81%, improving to 82% in 2014. RevPAR is forecast to improve in 2014 by 2.4%.
There is a strong pipeline of opportunities coming to the market which bodes well for volumes exceeding initial forecasts. However, investor demand in London is unlikely to be satisfied, thereby ensuring strong levels of demand and pricing levels being maintained.
Strong demand for upscale hotels in London
Demand for upscale hotels in particular remains strong and London is still a target for risk averse overseas investors. Key active investors include sovereign wealth funds, UK funds and private equity funds. Residential developers are also active in buying hotels and serviced apartments with a view to future conversion potential.
The economic strength of London, combined with buoyant tourism industry, has led to a number of innovative openings: September sees the opening of both the Edition in Fitzrovia and the Ace in the former Crowne Plaza in Shoreditch. October sees the opening of the Qbic near Aldgate East. Following on are Shangri-La (end of 2013/early 2014); The Beaumont (summer 2014); the “Balazs Project” in Marylebone (date not confirmed) and Ham Yard Hotel (May 2014).
Recent notable deals in London:
- Travelodge Royal Scot Hotel, Kings Cross: 5.48 % NI yield;
- Metropolitan by Como: exceeded the £40m asking price;
- Apex Seething Lane: 3.28% NI yield;
- Grosvenor Place: proposed Peninsular London hotel, 50% of site value for £132.5m
- Waterloo: PPHE, site purchase for £23.5m
- Sale agreed: Wyndham Grand ("close to £80m")
- Sale agreed: Hempel Hotel (conversion to residential)
- Available: Marriott Grosvenor Square
- Available: Hilton London Docklands
UK hotels market
The majority of the larger UK cities are reporting good year on year increases in RevPAR and increasing profitability through improvements in cost control. Hotstats have reported strong occupancies for the year to July of 70.3%, an increase of 1.8 pts, with ARR’s also up by 1.4%. STR Global is showing a 3% increase in RevPAR for UK regional hotels. PWC are projecting RevPAR to increase by 1.3% in 2013 and by 1.8% in 2014, although it remains below its 2007 value.
Hotel earnings holding up
Many hoteliers continue to face challenges, exacerbated where they may have borrowed too much and have not made allowance for capital expenditure. Nevertheless, hotel earnings have held up relatively well and hoteliers are continuing for now to benefit from low interest rates.
Key recent openings/re-openings include Hoax Liverpool; Wild Rabbit and Dormy House, Cotswolds; Sands Hotel, Margate. The future pipeline includes Bloc Gatwick; Heckfield Place, Hants; and Pig on the Beach, Dorset.
On the corporate side BDL Management and Redefine Hotels have merged to form Redefine BDL Hotels, a group that now operates over 6,500 bedrooms throughout the UK. Jurys Hotels has been restructured; and Travelodge is looking rosier in the short term following the CVA, with the refurbishments well underway, new developments occurring and some investment sales beginning to complete at fairly strong yields.
As a sign of the easing of debt availability, the LRG portfolio of 61 UK based Holiday Inn hotels for has been refinanced for £585m and the Cairn Hotel Group has completed a £31.5m refinancing.
Investor confidence improving
Key active investors include UK funds, who are competing for index linked hotel leases; US private equity funds looking to establish operating platforms for future expansion; property companies and owner operators, looking to buy at discounts to replacement cost. A narrowing of the gap in price expectation between buyers and sellers has resulted in improved investor confidence. It is likely however that it will take years to recover to former levels after the substantial fall in values since 2008.
Large amount of product offered for sale
Investment activity will be characterised by a large amount of product being offered for sale, much resulting from distressed situations. Following the three large portfolio deals in the first Quarter of the year: the majority of the Marriott and Principal Hayley portfolios and the Malmaison and Hotel du Vin portfolio. There are a number of portfolios currently on the market including De Vere Group and Menzies chain, which has fallen into administration for the second time in two years. More regional portfolios are expected to come to the market in the coming months, predominantly bank driven.
Hotels currently available include Oakley Court Windsor; Ramada (trio); a development opportunity at St Leonards Place, York: while the Brooklands Hotel, Surrey is likely to come to market. Four Pillars are rumoured to be reviewing their options, which include a possible sale of the 6-strong group.
LSH (as joint agents) has recently sold to Cowell Group the long leasehold investment, subject to MA, in the 157 bed Hilton Garden Inn Luton North, near London’s Luton Airport for a total realisation of £7.9m, (£50,318 per room). The hotel opened in 2008.