The first UK Hotel Lending Report, published by the Real Estate Research Centre in collaboration with Berkeley Capital Group, shows that despite the pandemic, hotel lending continues to have a strong place in lenders’ real estate loan books, and that brand association remains an important consideration for lenders.
Key UK Hotel Lending Stats
Using data from STR and analysis by Savills, The UK Hotel Lending Report 2020 identifies the UK hotel investment market to be valued at year-end 2019 at approximately £135bn. This represents approximately 12% of the total investible UK institutional real estate investment market, which has an estimated size of £1.1trn.
Other key findings from the report into a sector that has been among the hardest hit by the pandemic include:
- Lenders have substantially grown their loan exposure to hotels since the Global Financial Crisis of 2008–09. Between 2010–2020, hotel investments grew by 175% (£45bn) and debt origination by 141%
- During the first half of 2020, average lender targets on interest coverage ratios increased to an average of 2.2x (generally 1.8x would be considered low and 2.5x would be the desired minimum mark). Some lenders, however, require 4x, especially for managed hotels with no, or a less strong, brand association
- 78% of lenders prefer financing hotels with a franchise or renowned brand image. Hence, independent hotels have found it easier to raise finance in the turbulent market conditions caused by the pandemic by joining a brand
- Average hotel senior lending margins increased to 305bps, from 270bps, between the six months between December 2019 and June 2020 for an average LTV of 58%; by December 2020, the average margin was expected to be 300bps–400bps for a hotel of good credit quality.
Restructuration and cost management
The report also sources data and sentiment from an in-depth investor and hotel owner survey, showing the extent to which UK hotels have restructured their businesses and cut unnecessary costs.
The change to zero-hour contracts for hotel staff has been one of the biggest cost savings for the sector, which is also expected to see staff reductions of between 20%–30% in the short to medium-term
Investors and operators have explored alternative revenue-generating activities since the start of the pandemic. The most cited activity was “hosting key workers” followed by “home-office” room alternatives. However, room rates for these activities are 30%–50% lower than the usual room rates
Renowned brands such as Marriott and Hilton have received further enquiries from independent hotels to join the franchise and been more proactive in finding ways to accommodate them. This trend was already developing but has been accelerated due to the level of demand from independent hotels during the pandemic.
Lenders’ sentiment
Overall, and despite the pandemic, hotel lending continues to have a strong place in lenders’ real estate loan books and loan exposures are expected to remain constant.
In particular, lenders confirmed that they still see long-term value in key city centre hotels in areas such as London or Birmingham and suggest that the current effects of the pandemic will not affect their long-term view beyond 2020. Investors and lenders have been concentrating their main activities in the capital city versus other regional cities, and there is strong consensus that market activity in London will bounce back more quickly when restrictions end.
New origination for 2021 is expected to be concentrated in debt funds, but larger transactions will still be done by banks and insurers. Both banks and alternative lenders are open to looking at leased hotels as well as those with operating contracts.
The individual leverage situation of a hotel’s current business operations and track record when making a lending decision are significant. In terms of loan sizes, the most liquidity lies in the lending market between £50 million and £100 million. Lender diversification and loan availability for smaller loan sizes is much more limited.
Dr Nicole Lux, Senior Research Fellow at the Business School (formerly Cass) and author of the report, commented: ‘Especially during this momentous time in the market, the findings in this report will be key reading material to everyone investing in and financing hotels to better understand the UK hotel market structure and financing opportunities.’ Lissa Engle, Managing Director at Berkeley Capital Group, added: ‘As the first report focused on a specialised asset class, The UK Hotel Lending Report will become an annual publication with all proceeds benefitting WiH Global, a not-for-profit and global community who believe that by collaborating, we can have greater impact and create a hospitality industry that is more diverse and inclusive.