As Europe’s hospitality investment cycle stretches into its ninth year, investors may find less availability of bank lending for developments, according to a new survey from HVS Hodges Ward Elliott.
The European Hotel Lending Survey 2018 reported that, over the past year, cautiousness due to increased political risks and economic policy challenges had been replaced with a more positive outlook for hotel lending. Strong hotel performance meant that debt continued to be available in most regions, with hotels proving a popular alternative real estate asset class, with increasing interest from investors.
The study came as a “barrage” of investors exiting the UK at the end of last year was taken as a sign that the industry had reached the top of the market cycle.
The survey of leading banks active in hotel financing revealed, however, there was less financing available for developments than other projects, with the banks’ perception being that the market was at a more mature phase in the cycle. As such, lenders are concerned about oversupply, particularly in Western Europe.
The survey found that the average loan size from major international banks started to decrease slightly as the market matured, although those from smaller regional lenders had shown less change.
Topped Out?
Peter Szabo, associate at HVS Hodges Ward Elliott and one of the report’s authors, said that he did not see the pullback from lending on developments as an indication that the market had reached a peak. “Lenders are a bit more cautious at the beginning of the year about the maximum that they are willing to lend, but this is largely over development,” he said.
Other qualities, however, could still attract lenders, he said. “Anything in a major city, anything in the capital cities in Western Europe and Southern Europe. Anything which has a brand. Where there is no brand or the property has not stabilized, however, lenders are likely to be more cautious.
“Developers are replacing bank lending with ground leases or non-bank lenders,” Szabo continued. “If interest rates do start rising in Europe by the end of next year, it might [not be] harder to get bank loans, but more expensive. In a year’s time, Europe will be wondering about the impact of Brexit on the UK and about whether interest rates will rise.”
The study was released just as the Q4 2017 Hotel Bulletin from AlixPartners, HVS, AM:PM, and STR reported a surge in transactions in the UK in 2017, with combined value of transactions in the hotel industry for 2017 nearly double that of 2016 at £4.6 billion. On a quarterly basis, transaction values were also high at £1.3 billion for Q4 2017, the highest since Q4 2015.
“In 2017, hotel performance in the UK was bolstered by the depreciation of sterling,” Graeme Smith, managing director, AlixPartners, said. “Building top-line growth off strong comparators is likely to be challenging, particularly given the returning strength of the pound. Given this, and escalating cost pressures, 2018 is likely to be a softer year for profitability; experienced investors appear to be calling the top of the market due to the barrage of exits in the second half of the year.”
The report added that, after four consecutive quarters of growth in RevPAR, London recorded a 1-percent decline in Q4. “With its numerous tourist hotspots, this decline is likely to be partially attributable to the returned strength of the pound, which means that overseas visitors are no longer getting the bargain exchange rates enjoyed previously in London and across the UK.”
With the UK peaking, hoteliers must now prepare for the slide down the other side.
Katherine Doggrell is an editor at Hotel Analyst, the U.K.-based news analysis service for hotel investors.