Hotel market not in danger of meltdown, say pundits

Industry experts reckon the hotel market is alive and well and set for steady growth over the next two years, despite recent warnings that it is in danger
of overheating because of high loan-to-value rates. Emily Manson reports

With the hotel property market booming, it's perhaps understandable that no one in the industry has wanted to put a spanner in the works by questioning the business models behind many of the deals.

But a number of industry figures raised their heads above the parapet at the British Association of Hospitality Accountants conference this month, firing a warning shot at consultants, agents and bankers who are overleveraging loan-to-value rates (Caterer, 9 November, page 6). The current high levels were not only unsustainable, but were also storing up problems for the future, claimed Karen Smith, consultant at HVS, and Peter Anscomb, corporate director of leisure at Royal Bank of Scotland.

Concerns raised

Now another industry source has reiterated the concerns, warning that the high percentage of debt against the high level of valuations made structures less able to deal with any downturns. "What happens if the cycle changes and the assumption that EBITDA earnings before interest, tax, depreciation and amortisation] always goes up by more than inflation no longer holds true?" he asked.

The source warned that while the market was still currently buoyant, the nature of the sector was changing. "We all need to do transactions and find the best deals around - but there needs to be knowledgeable assessment and discussion about whether these amounts of debt and structures are actually good for the long-term interests of the business," he said.

However, several other industry figures challenged this position, insisting the market hadn't overheated. Craig Millward, director at property agent CBRE Hotels, said that while competitive lending rates were creating increases in debt-to-value ratio, the market remained sustainable.

"While there's pressure on banks and advisers alike to constantly raise the bar, the majority of the deals taking place are based on professionalism, sound business practice and parameters which should ensure very sound returns for investors and lenders alike," he said.

Sustainability

Jeremy Hill, director of hotels at agent Christie & Co, agreed the market had not overheated but warned that pricing had to be carefully considered, pointing to the recent administration of the London and Edinburgh Swallow Group. "With Swallow," he said, "everyone knew it was when - not if - it would fall over, but the majority of investors are savvy and take into account lots of factors. These include length of investment, where their money comes from, the quality and location of the product, the sustainability of the business and whether the asset is being sweated as much as possible."

Hospitality consultant Melvin Gold said the recent problems with Swallow and previously with the Meridien hotel group didn't mean that all structures in the sector were flawed or heading for a fall.

Compared with a decade ago, the hotel transaction market had changed dramatically in terms of the yields on deals, the amount of money coming into the sector and the sources of funding, from both equity and debt, he said.

"It's a sign that the hotel world has changed but it doesn't necessarily mean it's overheated and the only way is down," Gold said. "Some of the pricing structures will put a lot of pressure on operators to perform but everyone recognises the risk and no one wants to be caught out."

Steady growth

While some are voicing concerns over business models, several experts still expect steady growth in the hotel sector over the next two years.

"A number of factors will fuel continued growth, including the amount of debt available, the number of private equity players in the market and the introduction of REITs (Real Estate Investment Trusts) next year," said Stephen Broome, senior manager of hospitality and leisure at consultancy PricewaterhouseCoopers. "There's nothing currently standing in the way of hotel values continuing to increase."

Recent UK Hotel Property Deals

Single-Asset Deals

• Great Eastern hotel, London £150m
• Marriott West India Quay, Canary Wharf £110m
• The Howard hotel, London £80m
• Thistle Lancaster Gate, London £67.5m
• 3 Ramada hotels: Gatwick Airport, Birmingham, Hatfield £65.3m
• Oakley Court, Windsor £50m
• Hanbury Manor, Ware, Hertfordshire c£40m

Portfolio Deals

• Marriott Portfolio (36 properties), various UK locations £1b
• De Vere portfolio UK £940m
• Center Parcs portfolio UK £825m
• Travelodge UK portfolio £675m
• London and Birmingham Hilton Metropoles £417m
• Great Southern Hotels portfolio, various locations, Ireland £200m
• LRG Acquisition: 11 Holiday Inns c£65m
• Alias Hotels c£30m

Sources: Jones Lang LaSalle, Knight Frank, Christie & Co and CB Richard Ellis Hotels

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