‘Danger zone’ for hotel operators waiting for recovery

Demand for leisure hotels will bounce back quickly but the real recovery will take longer, delegates heard at Real Asset Media’s Hotels & Leisure Investment briefing, which took place online on REALX.Global recently.

“We’re very mindful of the next 18 months, it is a danger zone for operators because we have to fight ahead on our own,” said Asli Kutlucan, chief development officer, Cycas Hospitality. “When bank moratoriums, furlough schemes and government support come to an end it could be a bloodbath.”

There will be bankruptcies and private equity companies are likely to move in and take over, she said.

“I’ve seen many operators go bust already, but the next 18 months could be even more dramatic,” said Jochen Schaefer-Suren, CEO hotel and leisure division, Principal Real Estate Europe. “If the recovery takes longer than expected there’ll be blood in the streets.”

With no bank guarantees or cash reserves, some operators will find it hard to keep going.

“There are a lot of ongoing negotiations between banks, landlords and operators,” said Gerd Leutner, partner, CMS. “I see a very constructive and pragmatic approach, at least in Germany. There’s an understanding that we need to find a new equilibrium.”

Banks have a big role to play, but some are not interested in new financing and are only servicing existing clients, while other players move in with new forms of funding and higher margins.

Some traditional lenders, however, continue to be active because they believe in the long-term prospects of the sector.

“We understand the operational side, we work closely with our clients and we have a long-term view of the market”, said Charles Combet, VP special property finance – Hotel & PBSA Properties, Aareal Bank.

UK regional cities currently performing better than London

Hopes are pinned on the recovery, but it will be uneven. The UK has already bounced back, Kutlucan said, but the market has shifted and regional cities like Dundee and Liverpool are performing better than London.

In Europe, the recovery is slower because the continent lagged behind in vaccination programmes and the relaxation of restrictive measures. Uncertainty over the future is one of the reasons why transaction volumes in the sector are down.

“You don’t know how operators will come out of the crisis or how the market will perform”, said Frank Hildwein, head of hotel acquisitions and sales, Deka Immobilien. “It’s a leap into the unknown.”

The other reasons for the decline in transactions are the lack of distressed opportunities and the fact that, despite an unprecedented period of upheaval, transaction pricing has not changed.

“It is fascinating that prices are not falling, but hotels won’t have the same profitability and there’ll be a huge impact on cashflows,” said Schaefer-Suren. “The real crisis could come in 2022/2023 when people realise there won’t be a return to so-called normality.”

There will be consolidation in what is still a fragmented market. Another outcome could be a reduction in hotel supply and the chance to re-purpose hospitality assets.

“As hotels close down, the conversion market will be interesting,” he said. “Many conversion opportunities will come up and assets will be turned into residential or student housing.”