At OakNorth Bank in the UK, Director of Debt Finance Trevor Morris helps find short- and long-term funding solutions designed to support entrepreneurial-growth SMEs. At the upcoming Annual Hotel Conference, Oct. 12-13 in Deansgate, Manchester, Morris will participate on a panel discussion entitled “Make Them An Offer They Can’t Refuse - A Debate.”
In the panel, commercial lenders and alternative funders will discuss the best way entrepreneurs can present their propositions to secure the cash they need to expand their business.
Ahead of the conference, Morris spoke with HOTEL MANAGEMENT about lending in the UK and the rest of Europe, and the future of financing hotel development.
1) Subsequent to Brexit, how do the lending markets look like in the UK, specific to hospitality projects?
Morris: While the ongoing uncertainty caused by the Brexit vote has stalled certain hospitality businesses’ growth plans, we’d say the appetite for borrowing is still very much there. Since June 24, we have doubled our loan book to over £200 million, and have completed a number of large deals with businesses in the hospitality sector including a £10.5-million loan package for SGS Hotels. We’ve actually seen it as a huge opportunity, as a number of larger lenders have been retrenching from the market as a result of the vote. In fact, we had two opportunities come in the day after the vote as a direct result of big banks pulling out of deals.
It is still too early to determine with certainty whether changes in things like occupancy levels are seasonal or part of a longer-term post-Brexit trend. Upsides from the weaker pound (increasing tourist numbers and “staycationers”) should be balanced against general economic uncertainty and business confidence, which could result in spending on hotels for conferences, office parties, etc. being curtailed.
In the wider economy, consumer spending has remained strong but there are still cost pressures from minimum wage, higher living costs, etc. This combination will generally lead to a more cautious approach but the key remains in ensuring that we have a clear understanding of the income drivers on each deal and the impact on the overall viability, which variations in these can have.
2) What are the type of hotel projects being financed, or having an easier time being financed? What segments? Branded?
Morris: Since we began lending in September last year, we have lent to a number of businesses in the hospitality sector with deals ranging from £1 million all the way up to £15 million.
Budget operators (e.g. Premier Inn, Travelodge, Ibis, etc.) tend to offer long leases, which generally makes them easier to fund from a lender’s perspective, as their income isn’t dependent on the operating performance of the completed hotel. In July, we completed a £10.5-million deal with SGS Hotels Group to enable them to acquire the 78-bedroom Best Western Calcot hotel in Reading. We’ve recently approved a loan on a serviced apartment/aparthotel development, which is a growing sector of the hotel market and one we are interested in doing more business in.
3) Are there any new parameters those seeking debt should be aware of? Or is strong sponsorship, strong brand, strong location still the most important?
Morris: Strong sponsorship, strong brand, and strong location are still the fundamental parameters but it’s also worth taking into account any movements in the macro-economic environment—for example, the dramatic fall in the value of the pound has led to a significant jump in the number of tourists visiting the UK, and the number of Brits choosing to do a ‘staycation’ rather than travel abroad.
[Hoteliers] and developers seeking debt should also ensure that they’re meeting local requirements and that they’re aware of the demand drivers in specific locations–for example, with hotels based in major cities such as Liverpool and Manchester, it’s worth offering conferencing suites. For hotels based in small towns where there may be limited choice in terms of leisure activities, spas or restaurants, having one of these could not only be a hit with tourists but could also create a nice all-year-round revenue stream with the locals.
While we’re taking a slightly more cautious approach, making sure our LTV limits are at sensible levels, we are in an incredibly strong position to continue lending at a time when many banks will be thinking about retrenching. UK property continues to be a strong asset, and the shortage of property against strong domestic demand has not changed overnight just because of Brexit.
4) Please characterize loan-to-value in the UK. Are lenders now expecting more equity from lenders for non-recourse loans?
Morris: For development lending, senior debt loan-to-value in the UK is likely to be between 50 percent and 55 percent. I think post-Brexit, most lenders have scaled back their loan-to-value which will result in a larger equity requirement for borrowers unless arm’s length pre-lets or pre-sales can be achieved.
5) What are your parting words for those seeking financing for a project and what will the future look like?
Morris: In the future, I think we will see a continued increase in competition and diversification in the investment lending space both from alternative lenders and new, specialist banks. There has been a dramatic decline in the property lending market share of the big four in recent years–72 percent in 2008 to 39 percent by 2014–proving that developers are shopping around and considering alternatives.
The larger banks are also realizing that on certain deals, they simply can’t compete with smaller, more nimble providers. According to CBRE, only 3 percent of bank loan books are allocated to commercial development. At OakNorth, the figure is closer to 40 percent, and unlike the large lenders, we give our borrowers the chance to meet Credit Committee (i.e. the decision makers) and pitch to them directly, which means we can typically complete deals in weeks rather than months.
Some advice for smaller developers: Debt funds and peer-to-peer lenders are not the only alternative providers. At OakNorth, our property development finance and property investment loans typically range between £1 million-£15 million, and we’ve worked with a number of smaller developers who aren’t yet hugely well-known but have a proven track-record.
Potential borrowers need to demonstrate a clearly thought out plan with potential downsides and their impact considered. It is not simply a loan-to-value exercise. A lack of track record is not necessarily a deterrent on new schemes, but borrowers must expect to have quality professional firms involved (to add the experience factor), and factor these costs in.
The Annual Hotel Conference is Oct. 12-13, at the Hilton Hotel in Deansgate, Manchester. To learn more about the conference and to register, click HERE.