Investors resilient as market switches

Europe’s hotel markets were surprisingly resilient in 2020, despite the substantial upset delivered by the pandemic.  

Figures just collated by agents Cushman & Wakefield show that, while European hotel investment volumes fell 63%, investors recovered from the covid-19 shock and continued showing confidence in the sector. By the year end, more than EUR10bn of deals had closed.  

For those holding hotels in the UK, chancellor Rishi Sunak announced a new capital spending tax break in his budget, which is destined to support the upgrading of hotel properties. For some, though, such opportunities will be too late, with distressed sales likely to make up a larger portion of 2021’s deal volume.  

Jon Hubbard, head of hospitality EMEA at Cushman & Wakefield, commented on the 2020 figures: “The hotel industry is unique in that, for the most part, there is not a viable virtual pivot for travel and tourism – there will always be a need for hotel accommodation. Investors recognise this, and their sentiment for the sector remains positive for the medium to long term. The continued transaction activity in 2020 and the number of deals we are seeing in the pipeline reflect this confidence.” 

The 2020 market was generally intra-regional in aspect, with international travel restrictions making it difficult for physical inspections. And institutional investors accounted for 48% of deal volume, investing as they do for the medium to long term.  

By country, the UK saw EUR2.3bn of deals, followed by Germany at EUR1.8bn and Spain at EUR1.2bn.  

The market in the UK has continued to see strong activity in recent weeks. In London, investor Orca Holding has acquired the Zetter hotel, which opened in Clerkenwell in 2004, and two Townhouse properties, along with the Zetter brand. Orca CEO has big plans to take the brand on the road, seeing “huge growth and development potential. This acquisition presents an opportunity for more strategic expansion of The Zetter brand and will benefit from Orca Holding’s global hotel development experience.” 

And agent Christie is marketing the 183room Qbic hotel, which is being offered on a long leasehold basis with the option to rebrand. “There is a real pent-up demand from domestic and international hotel operators, to have bedroom inventory ready for the inevitable surge in leisure demand from May,” said Andrew Evangelou, head of London hotels at Christie.  

Elsewhere, the German owner of the Rocco Forte property in Frankfurt has sold out. GIC Asset disposed of the landmark Villa Kennedy property to new owner Conren Land, for a sum said to be in the “in the upper double-digit millions”. DIC had acquired the asset on behalf of a client six years ago, and said the exit had been planned.  

And in Barcelona, in a deal that could well be replicated several times in coming months, domestic owner operator H10 has agreed a sale and leaseback on one of its Barcelona hotels. The disposal, to a private family office, will give H10 a further EUR20m of liquidity as it battles through the coming months of rebuilding its revenue stream across its Spanish portfolio. 

However, the long-expected shakeout of stressed hospitality businesses is now looming, report those active in the market. Mo Sondhi, senior director at bank OakNorth, told Hotel Analyst: “In the last couple of weeks you are starting to see distressed hotels on the market. You are starting to see banks pushing their customers,” to find ways of paying down debt. “That, for us, is an opportunity.” 

Big banks, said Sondhi, will take a sector view, and this may be leading to reports that some lenders are stalling additional commitment, while they have an existing overhang of business. “There’s still some fantastic deals to be done. We look at each case on its merits, while big banks will take a sector-wide view. I genuinely think there’s a lot of positives in the space.”  

Sondhi also said hoteliers would do well to study the latest budget, and particularly a new capital spending tax break. For the next two years, qualifying capital investment will receive a 130% tax allowance against profits. “If hoteliers take a look at that, they will benefit.”  Spending could, he suggested, be used on tech, room upgrades or remodelling, and branding. “I think it was a really good idea, the chancellor needs to be applauded.”  

Christian Mole, UK head of hospitality and leisure at EY, worries that having been proactively lending funds via government support schemes, banks are now going to review their portfolios and lend their support only to those businesses they think are set to survive the coming months. This could lead to more job losses over the summer, as furlough falls away, and tough decisions need to be made. “I think you’ll see a radical change in hotel operating models – and you’ll see a fair bit of alternative use coming in.”  

His colleague Giles Barling, director of capital and debt advisory said hotels still look a good bet, particularly compared with some real estate alternatives: “People might not want to buy shopping centres, but they do like hotels.”  

The pair also worry about the scale and pace of return of business travel, as corporates wrestle with the ESG agenda. The last year’s enforced adoption of working from home, and the use of platforms such as Zoom, could be a “tipping point” that leads businesses to rethink attitudes towards corporate travel for good.  

HA Perspective [by Andrew Sangster]: The Working From Home debate, which is pivotal to what happens in real estate investment given that offices represent 40% of commercial property, is going to continue to run for the next few years. News flow is likely to support both sides of the argument, as restructuring businesses seek to consolidate office space and growth businesses (in some cases) add to their floorspace. 

Your view on WFH will shape your perspective on the recovery and the likely winners from that recovery. At Hotel Analyst we have nailed our colours to the mast of a recovery in offices and corporate travel. But there are smart people taking the opposite view. 

In finance, a number of the big banks have taken dramatic decisions to reduce office space. HSBC has announced a 40% reduction and Lloyds wants 20% less. Standard Chartered is to allow about half its staff to apply for hybrid work. 

Set against this are the views of JP Morgan, Goldman Sachs, Blackrock and Barclays, among others. These firms believe a return to office culture is vital for productivity. 

It is not easy to disentangle whether businesses are cutting space due to pressure to save costs or whether they believe there has been a fundamental shift in how professional services businesses will operate going forward. Best perhaps to adopt the fashionable expression of each having their own truth. 

For hospitality and some other segments of operational real estate, the important point is the net impact on demand which hinges on the net balance of these “truths”. The key point being whether enough businesses switch into expansion mode to compensate for those reducing space. This remains unclear. 

Also unclear is the impact on hotel supply. If development remains constrained and some hotels cease trading due to conversion to alternative use, then the net supply demand picture may still be good. 

Underpinning all of this is the economic outlook. The OECD club of rich countries has upgraded its growth predictions for most highincome countries. The UK has been given a growth estimate of 5.7% this year and 4.7% next year and the Euro area 3.9% and 3.8% respectively. 

This is much higher growth than we have seen in the recent past. There seems broad consensus around the next couple of years but thereafter the outlooks diverge. The OECD sees growth slipping straight back to trend rates seen pre-Covid at just 1.7% for the UK in 2023, good but hardly great. And certainly not the Roaring Twenties. 

Some of the best analysis I have seen on the office market (and indeed wider real estate) is by Dror Poleg. His vision is one where there is a modest decrease in total demand for offices but employees are increasingly viewed as consumers and office provision has to be much more flexible. 

In fact, offices end up looking a lot like hotels except think day occupation by people wanting a desk rather than night occupation by people wanting a bed. You might call it the hotelisation of offices. 

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