When Hotel Management International spoke to Barclays’ head of hotel finance, Tim Helliwell, in 2012, the lender-investor equilibrium across the European hotel sector was still feeling the jaundiced after-effects of the global downturn.
At that time, low levels of liquidity made securing bank finance a tough business. The liberal lending patterns seen during the boom had given way to a general context of caution wherein debt finance had all but dried up. For new investors in particular, entering the hotel space posed a Herculean challenge.
Fast-forward two years and the picture is certainly considerably brighter. Thanks to renewed liquidity, banks are lending again – although not quite to pre-crisis levels – which in turn has prompted improved trading across the market.
While it is often difficult to pinpoint a single event that represents a turnaround in fortune for an industry, the revival of Europe’s hotel business can perhaps be traced back to Starwood Capital Group’s acquisition of Principal Hayley in March 2013. According to Helliwell, the transaction (which saw the US-based private investment firm purchase the hotel, conference and training operator for £360 million) was the first sincere declaration that lenders were back in business after years of distress.
"The Starwood Capital-Principal Hayley transaction was really the starting point in terms of interest from investors and the building of confidence across the lending community," he opines.
"Before then, even in late 2012, it felt like you were in the midst of a crisis, albeit a fading one. Things have started to thaw since then."
An equitable life
With the benefit of hindsight, it does indeed appear to have been a seminal event for the lending market. Notable business since has included the buy-out of Malmaison and Hotel du Vin by Denver-headquartered private equity group KSL in a £200 million deal, as well as Starwood’s acquisition of UK conference centre operator De Vere in March of this year for £231 million. Regarding the latter transaction, Barclays and Royal Bank of Scotland put up £140 million.
Improved equity has also been complemented by better levels of access to debt funding for investors to the extent that Helliwell is reminded of the favourable market conditions before the downturn.
"It feels as though access to debt funding is now very much at a level that compares to those that existed before the crisis," he explains.
"Over the course of the last year and a half or so, we have seen lenders’ liquidity improve, coupled with the fact that the trading of hotels has also improved significantly.
"Before then, transactions weren’t really happening, as buyers and sellers were invariably unable to agree on deal prices. In terms of debt funding, it feels a little bit like where we were back in 2005/06."
Dominic Murray, senior director at CBRE Hotels, shares the view that debt is much more readily available to new and existing investor profiles.
"I would define current levels as good," he says. "There are a number of options around the marketplace, such as off-balance sheet vendors, which are able to raise specific debt funds to lend to investors.
"There are also certain groups with knowledge of the hotel sector that are aggressively lending, or wanting to lend, €30-50 million and more. It is a very positive situation."
From a pan-European perspective, the outlook appears heartening, but it shouldn’t be presumed that liquidity has returned across the board.
Debt levels, while improving, are disparate and differ between nations. Understandably, they tend to be lower in markets that are still suffering in the wake of the global financial crisis."It is variable across Europe," says Andreas Scriven, head of consultancy at Christie + Co. "Yes, there are markets to which debt levels have returned that are now improving steadily, but in other areas, especially those that are still quite distressed, access to something like debt funding is much more challenging."
Markets that have seen substantial growth in terms of lending include northern European heavyweights such as Germany, France and the UK.
"Lenders, generally speaking, like safe markets," explains Murray. "Bearing that in mind, Germany is clearly high on nearly everybody’s agenda when it comes to lending, as it provides a sensible growth potential from a point of view of both trading fundamentals and values."
Helliwell agrees. "It is a mixed bag and is specific to the proposition you are looking at," he says. "Germany’s been resilient and is a relatively strong market, but places such as Spain and Italy are quite far behind."
Trade on reputation
Obtaining debt funding is also contingent on the respective investor’s reputation, says Christie + Co’s Scriven. High-percentage loan-to-value (LTV) deals are still reserved for what are deemed to be the most credit-worthy and secure borrowers.
"If you are a seasoned investor with a track record in the industry, debt is often available and lenders offer much more competitive packages," he explains. "On the other hand, it can be trickier if you are a first-time buyer and don’t have an existing relationship with the bank from which you are looking to get funding.
"Obviously, though, the message being put out to the market by almost every major bank and lender is that they are open for business, especially large portfolio deals. With LTVs, some deals are now at 70%, so we are definitely seeing something of a return to the heady levels of five years ago."
While some gateway cities, such as London and Paris, performed surprisingly well during the nadir of 2008/09, the same couldn’t be said for hotel openings in provincial markets. The likelihood, for instance, of new investors securing finance for a country house in a tertiary location would have been close to zero.
With increasing saturation in many gateway cities, though, the provincial sector has recently stolen a march on the back of mounting interest among wealthy, international investors looking to diversify their assets and make returns. According to Helliwell, some regional portfolios have seen their value increase by "anything up to 20% and in some cases 25%" over the last year and a half.
"From there having been no interest whatsoever in the provincial hotel market, we have seen a clear shift among investors," he says.
"These are sophisticated players, too. The likes of US investment firms, sovereign funds and high-net-worth individuals are now taking an interest in provincial assets."
Provincial attitudes
"Across Europe, the provinces offer opportunity around yield and, specifically, internal rates of return over typical investment holding periods," adds Murray.
"From the point of view of market values, as well from that of trading fundamentals in the regions or provinces, we have seen some pretty good growth in the last 12-18 months. The indications are that this will continue in the medium term."
The news in May that Starwood was planning to borrow £100 million to refinance its purchase of Principal Hayley adds further support to the notion that confidence is high across the European hotel sector.
For Scriven, it also serves as irrefutable evidence that the relationship between investors and lenders, once fractured by diminished trust and pessimism, is now firmly back on the right track.
"The news that Starwood is going to refinance that deal is definitely indicative of the current wave of optimism when it comes to bigger deals," he says.
"While banks and lenders have always claimed that they were open for business and willing to lend, for a long time it was a bit of a hollow message. The difference is that they are now starting to put their money where there mouths are."
