An upward trend

Investor demand is maintaining hotel prices, as hopes of a wave of distressed opportunities fades. But there are signs of a quickening of deal pace.  

In recent weeks, Marathon has completed its GBP180m acquisition of the Project Horizon portfolio in the UK, picking up a package of Holiday Inn and Crowne Plaza branded properties from seller Cerberus. Provincial UK operator Handpicked Hotels snapped up a trio of hotels in the Channel Islands, while Highland Coast Hotels acquired four properties on the Scottish coast.  

KSL-backed Village Hotels scooped the former Hilton in Bracknell for GBP17.5m, UK to convert to its Village format. And in Edinburgh, Castleford Partners bought the former Best Western Queensferry, which it plans to relaunch after an upgrade. Dublin landmark the Morrison changed hands for EUR65m, as Zetland Capital acquired the hotel from an owner who took the property off NAMA in 2012.   

In mainland Europe, seasoned hotel investors are back in the market once more, after several months of holding back. ECE has agreed a club deal to acquire a EUR100m deal to buy the 191 room Hotel Bonvecchiati in Venice, while Union Investment has returned with its recent completion of a forward purchase in Stuttgart, picking up a combined scheme that will have a Premier Inn and Adina aparthotel.  

Richard Dawes, Director in Savills Hotel Capital Markets, said demand, and a view that markets will come back long term, are keeping pricing tight in strong city markets: “Prime yields for leased hotels in Paris, Amsterdam, Berlin, London and Munich remain sharpest, in line with strong levels of investor demand driven by long term fundamentals.” For Paris, Savills puts the yield at 3.5%, ahead of 3.75% in the other major European markets.  

According to figures collated by Savills, first quarter investment volumes in Europe were down 49.7% year on year at EUR2.16bn. The UK was the quarter’s lead market for volume, at EUR746.5m, ahead of Spain with EUR400m. Germany, often a leading hotel investment market, saw a lower volume of deals at EUR241.1m. 

“The non-prime segment is likely to experience further outward yield pressure, driven more directly by tough micro market conditions, and assets’ ESG credentials and financial challenges,” warned Dawes.  

At Christie & Co, hotels team head Carine Bonnejean said that the smaller scale private market remains “very healthy”, with the firm having exchanged on 160 properties so far this year. Bigger deals are ticking over, “and there’s been a bit more pitching over the past few weeks”, but no significant rise in distress opportunities. She expects the maturing of government covid relief loans in coming months to prompt some owners to sell. 

Bonnejean said that staffing and training remain issues for operators: “Reopening is proving to be quite challenging. Customers are more complicated, and you have staff who haven’t worked for 15 months, or who are new to the sector.”  

For those looking to grow international leisure business, the other major operational challenge is knowing which target markets to encourage. The European travel landscape is currently a smorgasbord of restrictions, most not bilateral; while other nations more dependent on seasonal leisure travel try desperately to open up for business. The UK is operating a traffic light system, but many of its green listed destinations – such as Australia and New Zealand – will not accept overseas visitors. Meanwhile, France and Germany have implemented a temporary ban on any UK visitors, over fears of the virility of the new “Indian” variant of covid-19.  

In contrast, Greece and Spain are keenly enticing visitors from other parts of Europe, whatever advice those source market governments are giving their citizens. The Cypriot tourism minister has been in London, lobbying officials to improve his island’s traffic light ranking, on the basis of a low level of covid infections, and a highly efficient population testing regime. And further afield, Thai authorities in Phuket are opening up the destination to international visitors from July 1, guaranteeing arrivals access without quarantine.  

Feeding in the latest UK operational data, STR’s Robin Rossmann revealed that the last full week of May, prior to the Bank Holiday, saw seven day rolling occupancy at 46%; he noted that the figure started the week with 31% booked, while 15% was effectively last-minute reservations.  

“Business on the books for this week was 40% at the start of the week… so assuming the trend of picking up 10%+ during the week continues… actual occupancy should burst past the 50% mark – making us all feel like glass half full kinda people.” 

Rossmann predicts mainland European hoteliers ought to be able to expect a similar upward trend, albeit with a one to two month lag behind the UK.  

HA Perspective [by Andrew Sangster]: In a world of near zero or sometimes negative interest rates, it is tough to see how yields will move out, allowing prices to fall. 

And in a world set for the strongest economic growth since World War II, it is similarly hard to see any correction, however irrational current pricing appears. 

Finally, there is the wall of money waiting to be deployed. There has never been as much capital examining opportunities in the sector. 

These three factors make it exceptionally unlikely that there will be widespread discounting of hospitality assets, despite what has been the most traumatic period of trading most operators have ever seen. 

But it is also true that hospitality businesses have highly stressed capital structures, many of which require significant injections of new equity. So far, the overwhelming bulk of lenders to the industry have shown great forbearance. Covenants are well under water in many instances but there are few signs of foreclosures. 

The French philosopher Alexis de Tocqueville said revolutions start not when societies are at their lowest point but usually when conditions started to get better. A not dissimilar timeline can be expected with the recovery in hospitality. 

As businesses begin to start becoming profitable again, lenders are going to ask borrowers to make good the deficiencies in the capital structure. Either the owner will find the cash from their own resources, or the asset will trade. 

If the asset does trade, unless there is some underlying shift in economic conditions, prices are going to be where they were pre-Covid. The exceptions are going to be assets which are incorrectly positioned for future demand or those which are in an unproven and higher risk segment. Think things like regional conference hotels for the former and fancy new concepts for the latter. 

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