The true identity of UK's hospitality industry is about to reveal itself

(IHIF 2017)

March 6-8, the global hotel investment community will descend on Berlin for the 20th International Hotel Investment Forum (IHIF). This year's conference is shaping up to be one of the most compelling, if not the most thought-provoking, given the current state of the global hospitality industry in the face of such extraordinary political and social change—from the U.S. to the UK.

Ahead of the conference, we are talking to some of the many IHIF speakers for their takes on the industry. In this edition, Tim Helliwell, director, head of hotels, Barclays Bank, talks Brexit, the state of development financing in the UK, who is investing in London and in what and how 2017 will shake out.

Helliwell will participate on a Day 1 panel at IHIF entitled: The Next 20 Years: A Collective Look at the Hospitality Investment Landscape. He will be joined by moderator Cameron Cartmell, Partner, EMEA Hospitality and Leisure Leader, EY and fellow panelists: Jim Abrahamson, Chairman & CEO, Interstate Hotels & Resorts; Cody Bradshaw, Senior Vice President and Head of European Hotels, Starwood Capital Group; Simon Vincent, President EMEA, Hilton Worldwide; and Hubert Viriot, CEO, Yotel.

Tim Helliwell of Barclays will discuss hospitality investment at IHIF.

1. Brexit continues to command headlines and attention in the UK with Article 50 set to be triggered imminently. How will the Brexit impact real estate investment and development in the region, both short-term and long-term?

Helliwell: First, 2015 was a stellar investment year for the sector and real estate. Headline deals were being done up to December 2015, with international investors looking into the UK. Brexit hadn’t yet come on the horizon. Then the June vote happened and management teams had to reassess their strategy. We were refinancing deals up to days before the Brexit vote and the Lone Star Atlas Hotels sale to London & Regional took place days soon before the vote—so there was activity.

Transactions were down in 2016—maybe some 50 percent—compared to 2015. There were many refinance opportunities for banks. People wanted to push out their maturity profiles on loans. International liquidity, capital and debt left the UK market, and that was positive for the domestic banks. It took away some of the upper end of liquidity that had entered the market reflecting volumes of 2015.

Pre-Brexit, there were some portfolio sales that were going to happen, but some had Brexit clauses that allowed the buyer to walk away if there was an exit vote. We did see some international buyers walk away post vote.

2. What is the state of cross-border investment into the UK. Who are the buyers and what are they buying?

Helliwell: We've seen Asia showing interest and when you look at trends in segments, it’s across the board. Activity has moved around with the wider geo-political news. Still a lot of Asian interest in the UK, especially Chinese interest. There is equally domestic buyers, especially in provincial space. There are a number of international investors who see London as expensive even with the depreciation of sterling. London looks expensive to some overseas buyers.

Historically, international buyers only focused on London. But if you look at 2013, that's when the Abu Dhabi Investment Authority acquired a portfolio of provincial Marriotts. Then, in 2015, Frasers of Singapore buys acquires Malmaison and Hotel du Vin. Suddenly there is a provincial market with a global investor base. UK as a whole is open to the global market of investors. It remains a positive attractive class.

3. How active will private equity be in 2017?

Helliwell: Any private equity that bought in 2012/2013 did well. The combination of buying well and RevPAR growth coming through strongly, there was a good story for those who had bought well and wanted to sell. Some of those buyers are still investing strong. KSL is growing the Village brand as is Starwood Capital and its Principal portfolio. They view the UK consumer story as a positive one.

4. Are buyers looking outside London? Are secondary markets attracting capital?

Helliwell: There are signs of brands entering locations that were arguably secondary but still had city status. Like Lincoln, England, which has a Doubletree, and Aberdeen, which has experienced an oil bubble. It's a tough time at the moment, but recovering. Still, Aberdeen is now one of highest-performing RevPAR cities in the UK. You are starting to see brands develop new products in new locations that were defined as secondary. But they do very well.

5. Interest rates have remained low in the UK and there are no signs of an increase. How does this impact financing deals and development?

Helliwell: Interest rates are benign. We had a cut in our base rate of 25 bps to a quarter of 1 percent last August. That was immediately post-Brexit announcement and it worked really well in terms of liquidity into the sector. The outlook is pretty benign and looking at unchanged 25 basis points for the whole of 2017. For investors, they are locking in at zero interest rates in terms of cost of funds—another positive factor for investment. They are locking in three- to five-year money and really only paying the margin on the borrowing.

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6. Are there any UK areas that are dealing with an oversupply scenario?

Helliwell: There is supply going into Central London that has been strong. Also strong supply, more in the budget sector, around greater London and around the Tube stops at end the of the line. Supply is going there as people are happy to stay there with only a 30-minute ride into Central London.

But hospitality is not defined just as hotels. Serviced apartments are growing and home-sharing. It might be expensive to buy an asset in London, but it’s relatively cheap to stay there at the moment.

7. Has there been any real impact from Airbnb in the UK?

Helliwell: Not yet. For sure, i’s more difficult for those in feasibility to look at some of this stuff. We are talking about it more. Millennials seem to be comfortable with it.

8. How would you characterize the overall state of development financing?

Helliwell: We are getting projects funded 100 percent with equity, then refinanced out through conventional debt once the hotel opens. Development financing typically is domestic—it's UK led. We have seen projects owned by international investors with their banks following into London. Often, though, they’ll wait to see a domestic bank to provide expertise.

We are starting to see deals in '13 and '14 now opening in '16 or '17. Places like Manchester, Glasgow, Edinburgh, London—even Leeds, Cardiff, Bristol, Southampton, have reasonable supply coming in.

There is still degree of uncertainty and development financing has notched back a little bit. It will always be relationship led. Loan to costs are now around 50 percent to 60 percent. You might have got 60-percent-plus to 70 percent in '14 and '15. It’s notched back.

9. What are the brands doing in the UK? What's the strategy?

Helliwell: We are seeing strength of the conversion brands. The Doubletrees and Indigos have done very well, and new brands on the scene have attracted financing, like the Citizen Ms of world and other new brands from the large corporations, like Hub from Whitbread. New brands have found support for external debt.

Locally, you are still seeing some non-branded hotels, especially in secondary cities, but the proliferation of brands and new brands is prevalent.

10. What then is the opportunity for acquisition financing?

Helliwell: Providing financing for an existing, well-located, cash-flow hotel for a reposition play has been successful. Most of the brands have conversion or boutique brands that allow them to go with a quirkier type of real estate. Banks find that more attractive than pure ground-up financing—especially with a strong brand and distribution engine.

11. What will be the big storyline in 2017?

Helliwell: Barclays processes some 25 percent of all card transactions in the UK and we break down spending by some 35 categories. Add in terms of consumer spending growth, hotels are up double digits through December. So keep a close eye on consumer spending. That is key.

Inflation is a risk. For hospitality, it’s concerned with costs. Labor cost is inflating through living-wage legislation and property taxes are increasing. So inflation is a risk, but as you see with interest rates, we are still flat.

Last, U.S. President-elect Donald Trump has said that the UK could be first in line for a trade deal, which is optimistic news for UK.

IHIF is March 6-8 at the InterContinental Berlin. For more information and to register, visit www.ihif.com.