Valentine's Day Tragedy: Investors Fall Out Of Love With London Hotels
The latest research from London's Cass Business School (now renamed Business School) shows lenders dramatically tightening their criteria and backing away from smaller, high-risk projects. The data puts the final joyless lid on a twelve year romance.
The first detailed report into the hotel investment and lending market, completed by Business School in collaboration with Berkeley Capital Group, and using data from STR and Savills, showed that during the first half of 2020, average lender targets moved out sharply compared to 2019.
Interest coverage ratios increased to an average of 2.2 times income and earnings before interest, taxes, depreciation, and amortisation (EBITDA), furniture, fittings and equipment. In some cases the ratio more than doubled to four times where the brand was weak.
At the same time, hotel senior lending margins increased to 305 basis points from 270bps in the first half of 2020. Business School said the most liquidity lies in the lending market for lots between £50M and £100M.
The research comes soon after Knight Frank data that showed UK hotel investment volumes plunged by 70% in 2020, a year in which nationwide just £300M worth of transactions took place between March and December. Distressed sales and bargain hunters will keep the market ticking over in 2021, Knight Frank predicted.
According to Business School investors and operators have explored alternative revenue-generating activities since the start of the coronavirus pandemic. The most cited activity was hosting key workers followed by 'home-office' room alternatives. However, room rates for these activities are 30% to 50% lower than the usual room rates.
New origination for hotel loans in 2021 is expected to be concentrated in debt funds, but larger transactions will still be done by banks and insurers. Both banks and alternative lenders are open to looking at leased hotels as well as those with operating contracts, the report said.
The report estimated the value of debt secured against UK hotels at £15.1B in June 2020, which accounts for 9% of total outstanding CRE loans on lenders’ balance sheets at year-end 2019.
The cooling of investors’ love affair with hotels comes after a torrid and passionate encounter during 2019, the report revealed. The UK hotel investment market was valued at year-end 2019 at approximately £135B. This represents approximately 12% of the total investable UK institutional real estate investment market, which has an estimated size of £1.1 trillion.
It follows a decade during which regard for hotels turned into rampant desire. Lenders have substantially grown their loan exposure to hotels since the global financial crisis of 2008–09, said Business School. Between 2010–2020, hotel investments grew by 175% (£45B) and debt origination by 141%.