Risk likely to hit values

Ritz London Royal Suite

The current outbreak was likely to affect the value of hotels in the future, Simon Allison, Hoftel chairman & CEO, told a webinar hosted by Questex Hospitality’s Hospitality Insights.

The comments were made as rumours suggested that the sale of The Ritz in London had completed.

Allison said: “There clearly has to be a change in the risk perception of the sector and that will apply to lenders and equity investors. To get lenders to put money into hotels at this point is going to be trickier and loan-to-values are going to be coming down and spreads will be going up, which means you’ll need more equity. But the equity risk premium is also going to go up -  it’s a sector which can be closed down through no fault of its own at two weeks’ notice.

“Investors will need higher returns and no-one is pricing that right now. Can you put it into the cash flow for looking at the what an insurer would charge for comprehensive indemnity insurance? If it were to be 10% of revenue, that’s 20% off your bottom line indefinitely. Maybe that’s the valuation hit hotels are going to take?

“The flip side is that you cannot pump that much money into the economy [through government action] without triggering inflation, so you are going to have a magnified impact of what you had after the financial crisis; so performance doesn’t go up but values are pumped up with inflation and you have the same cycle as before.

“We’ve always joked that this is a one-night rental business and that is made very clear by this crisis, so you’ll get the same pattern you get in most downturns, which is that the opportunity funds will smell opportunity.

“I don’t think we’ll see foreclosures in 2020. The banks don’t like foreclosing when there are no buyers and they don’t want to end up owning all the hotels in the world. But as the recovery comes and buyers come out of the woodwork, there will be foreclosures and there will be buyers and it will be the usual suspects who smell blood in the water and take advantage  - and they are backed by institutional money. Whether the pure institutional investors look at the sector in the same way  seems likely - they just don’t like this level of risk.”

Allison said that his members were confident that with government assistance and lender waivers “they do not feel that they are about to lose their assets”. He added: “Our members are pretty far thinking, but some are still saying ‘I’ve got cash for two or three months and then I’m stuck’. If countries are not going to put in furlough packages and lenders aren’t going to waive, there are likely to be difficulties, but that is unlikely to happen.”

Philip Camble, director, Whitebridge Hospitality, told us that, as far as hotel investor sentiment stood, “sharp investors are waiting for deals top pop up, but too early for those at the moment. Other investors working on pre-COVID-19 deals without much discussion for the moment about reduced pricing. My take so far is that people and investors are open for business, but the pace of business has slowed considerably. Re: values, it’s too early to say that prices are falling. In such a slowed-down world, there are too few deals at present to judge.”

The webinar came as speculation suggested that the sale of The Ritz had completed. The site had been expected to sell for around £800m to a consortium of Saudi Arabian families and, if so, will have increased in value by 150 times in almost 50 years.

Stephen Potel, consultant at Whitebridge Hospitality, sold the hotel in 1971 for approximately £6m gross, against the anticipated world-record-breaking price this year of £6m per key. The Barclay brothers paid £75m for the hotel in 1995 and have since spent around £40m refurbishing. It comprises 111 rooms and 25 suites.

Potel told us: “When I started in the hotel industry in 1970 the first deal I was involved with was The Ritz Hotel. It was sold by the Bracewell Smith family who also owned the Park Lane Hotel and a major stake in Arsenal football club to Nigel Broackes and Victor Matthews of Trafalgar House PLC. They bought it for around £6m and now the Barclay brothers are selling it for over £6m a key. That price is remarkable, but it probably includes the casino and it shows that the London hotel market continues to offer the best asset appreciation you can buy.”

Insight: The institutions have been showing high enthusiasm for the sector, marking hotels as mainstream assets. JLL reported earlier this month that institutional investment in Europe’s hotel sector soared by 80% last year, with €7.5bn of acquisitions. In contrast, institutional investors only sold €3bn of assets during the year, giving them a growing presence in the sector.

Variable lease agreements, opco/propco structures, as well as the minimum lease combined with a percentage of turnover - which, the group said, accounted for around 5% of investment routes -  were becoming more popular among institutional investors.

But where institutional investors had started to become more comfortable in the sector - witness the many recent adventures of GIC, for example - they were still, one suspects, at heart, more fans of sitting quietly in the background, with a gentle, stable, long-term income such as one gets from a ground lease. Nothing scary, no participation, just something to slowly fill the pension pot. As Allison pointed out, the news that hotels can be suddenly shut down - for the first time in its 100-year history, said Hilton - is likely to spook. But it is also likely that, if this is contained and the bounce back is strong, there will be others to take their place.