European hotel values remain in limbo, as buyers queue up to invest cash, banks relax payment demands, and stressed landlords and operators hold in the hope of better revenues over coming months.
Market volumes are depressed, with consultants HVS recording a fall of almost 70% in transaction volumes in 2020, compared with the previous year. Two thirds of the EUR8.5bn recorded were single asset transactions.
While transaction volumes fell through the pandemic, HVS notes they held up well compared to previous market downturns. In the global financial crisis of 2009, for example, annual sales volumes plummeted to EUR3.1bn. The consultants note that this crisis has not been one of liquidity, with Prequin estimating around USD300bn of capital looking for real estate investments.
HVS compared appraisals it has made against more than 350 hotels since the start of the pandemic, of which 130 properties had been appraised pre-pandemic. “The range of change spans from around a 40% decline, to an 11% increase.”
In between those extremes, 60% of the hotels saw a value reduction in the range 5-15% – with an average across the sample of 11%.
Aside from valuations, actual market numbers based on real world 2020 transactions suggest a price per key decline of just under 10%, or around 17% if the sale of the Ritz in London is removed from the numbers.
HVS says the steep decline in operating incomes hit values, as did a more cautious lending regime among mainstream banks, which has decreased debt available at low rates. Set against this, the volume of cash looking for a home has dampened return on equity expectations.
There were a number of issues identified as contributing to the steeper value declines experienced by the outliers in the sample base. These included properties with ground rents, evident underinvestment or poor management, or those with narrow demand bases.
“Hotels with weak business propositions will likely have to be re-purposed or re-invented but strong investor interest and weight of capital continue to chase assets with good potential and in strong locations, driving demand for deals that are realistically priced and limiting the degree of price discounting,” concluded Sophie Perret, senior director of HVS London.
Marc Finney, head of hotels and resorts consulting at Colliers, said in practice it is difficult to value hotel assets currently. “There isn’t really a market, there are incredibly few corporate actions taking place.” With supportive banks, he says there have been few forced sales: “It’s more of a seller’s market, which is counter-intuitive.”
Finney suggested prices may have come off by 10-15% from pre-covid levels, but are unlikely to drift any further. “There’s so much money that’s been raised, private equity firms will end up doing deals.”
At landlord Pandox, CEO Anders Nissen confirmed there are few bargains to be had in the market. He told shareholders at a q&a session that he had no immediate plans to acquire further properties, noting he had seen new bidders entering the market recently in the UK: “People are willing to pay a premium, even in these days.”
Nissen did not rule out potential acquisitions in coming months, which could potentially take Pandox into new markets. He said he likes the look of extended stay, with its recent resilient performance, and of hotels with corporate meeting space, which are likely to languish in the short term but will, he believes, ultimately see the return of corporate business.
Looking ahead, HVS’s Shaffer Patrick says transaction volume will pick up. “The full impact of the pandemic is expected to affect the transaction market later this year with an increase in distressed debt and opportunistic investment ahead of a gradual market recovery.”
But he agreed with the sentiments of Finney and Nissen: “There is still a huge weight of capital looking to invest in hotels, and the availability of distressed acquisition opportunities is likely to be significantly less than anticipated when the pandemic began, which will support recovery in asset values.”
HA Perspective [by Chris Bown]: When a market seizes up, the old adage applies – your hotel is worth what somebody’s prepared to pay you for it.
As noted, we’re living in a strange world, where there is cashflow distress, but a broad expectation that most businesses will return to profitable business in the coming months. Stick that out, and you stand a good chance of being OK.
Meantime, there is what Marc Finney describes as a Mexican stand-off. Potential sellers determined not to put a distressed sale price on their asset stare at potential buyers, equally determined to win a bargain. It’s simply a case of waiting, maybe for months, to see who blinks first.
Additional comment [by Andrew Sangster]: So, we are in a Mexican stand–off. In other words, we are in a situation in which no party can move forward without suffering a loss. It requires some external event to force a change. The critical questions here are: what is that event (or events) and when will it (or they) occur?
Historically, it has been debt that provides the catalyst, or specifically, the lack of access to it or inability to service it. Debt providers pull out the rug, asset prices collapse and new buyers step in to pick up the pieces.
But debt providers are not so short-sighted as to take pain today to create wealth for others tomorrow. If deals are going to be done, debt will need to be looked after.
In a world of near zero interest rates and a wall of equity waiting to deploy in the real estate sector, why would stable and solvent debt providers take on any pain? Buyers will need to either control the debt or pay a sufficiently high price to enable the debt to be completely cleared.
It does look like the great financial repression is coming to an end. Interest rates will rise again. But central banks are making it clear this is years and not months away. In the meantime, global economies are set to grow at speeds not seen for decades. Selling inflation-hedged assets like real estate at discounts does not make a lot of sense.
Where money is going to be made is by catching the secular shifts rather than relying on cyclical opportunities. Investors prepared to take on the risk of new and emergent segments, repurposing assets to exploit the new opportunities, are the ones set to win.
There will be other moments of opportunity. In the UK, the end of the moratorium on evictions for commercial tenants in July could create one such catalyst. But the opportunity here is for prospective tenants rather than landlords.
If, as we have argued in these pages many times, the distinction between landlord and tenant is breaking down, the opportunity is to create a combined opco-propco vehicle that benefits the landlord in the recovery. Where current tenants are unable to deliver this, more nimble operators will be able to swoop in and seize the chance.
To repeat what we have said before, this recovery is not going to offer the chance to simply buy low and sell high. Harder – and smarter – work is going to be needed.