The hotel sector remained attractive to investors, but was still a cyclical play, with only those looking long-term likely to succeed, according to a webinar hosted by Praxi Valuations.
There were concerns that hotels would see a race to the bottom for rates, but as travel in Europe increased, there were hopes for a good summer.
Hugo le Moing, Colomer Expertises, said: “Compared to other assets the risk/return ratio is very good, at least in normal times. In the future I think it will still be a good alternative asset for investors. Those with a long-term view will survive - there are very few players with a short-term view in this sector.”
Maurizio Negri, Praxi added: “Before this hotels were performing well and were considered a very interesting asset for investors.”
The sector has seen a number of deals in recent months, with private equity groups in particular drawn by hopes of falling valuations. Thomas Zinck, Swiss Life Asset Managers, said: “I don’t have a crystal ball, but as an landlord there are two figures which can influence the price of the property; the cashflows coming into the rent and the yields related to the risk you are taking. The recovery phase is going to take one year but probably two. If you have variable rent you will have a direct impact.
“In the past two years the spread between hotels and other asset classes decreased significantly, but yields also shortened between tier one and tier two cities. In resorts in the last year we have also seen a reduction in the yield. In tier one hotels we are not expecting a strong increase in yield, but we also see hotels with less than 150 rooms are generally better off because they are less exposed to groups - business and leisure. There is also uncertainty around financing and the cost of money. At the moment some banks are more reluctant to lend to hospitality; if the interest on mortgages increase there will be an impact on yield.
“We look at occupancy and ADR and when we speak to operators today they say they are willing to lose a little occupancy to maintain prices, we have seen in some cities, such as Rome, where the ADR has increased in recent years and operators are keen to maintain this. The worse that could happen is a price war where nobody wins.
“But even more important is the coverage ratio, Ebitda divided by rent. In a normal year you would have 1.2, but as soon as you have a crisis the impact is dramatic. We believe a sustainable ratio is 1.4.”
Looking at current trading and hopes for the summer, Grégory Pourrin, Paris Inn Group, described the domestic market in France. He said: “In Paris we are seeing different types of customers, including local guests. At first we thought this was going to be just for a few days, to experience something different, but people want to use the services, the restaurants and swimming pool. But we are seeing 40% to 60% occupancy - so it’s not so bad. In the west of France it’s full, people want to stay and we are probably going to have some of the better Julys and Augusts.
“The south of France is probably going to be the same situation, even if we have no foreigners. French people could spend more money in hotels and restaurants because they have not spent money on a flight, but people might keep their money because they don’t know what will happen in September The South of France will be good for occupancy in the summer, but may not be good for ADR.
“Paris will probably have occupancy lower than 30% and the price of the room 40% or 50% lower than last year. One of the important things will be how many hotels open for the season, how many drop rates.”
At the time of the webinar, the UK government had yet to confirm when it would lift its quarantine. Pourrin said: “We are still expecting the decision of the UK, if people decide not to leave the UK they will probably have the worst summer they have ever seen - they want to find sun, sea and it could be good news for us. But right now we don’t know. We have a lot of requests from Germany, Belgium, Luxembourg, but not for the UK.”
Insight: These days, when people talk about hotel valuation, they are talking about whether they can get a bargain. There has been much chat around the market about how deep the dip in valuations is, with 30% a popular number. We understand that, for deals agreed ahead of the pandemic and now being completed, the figure is closer to 10%.
But in markets such as Italy and Greece, there is hope around NPLs, which have proved happy hunting grounds for opportunistic investors.
Ioannis Orfanos, Arbitrage Real Estate, said he expected to see movement from “existing NPLs which needed a push”. He added: Those who know their business, they will have difficult times, but assuming the banks are being reasonable, they will survive. There will be some consolidation, but those with the right fundamentals will survive”.
What will help keep heads above water was, the panel agreed, management. Pourrin said: “Everyone used to think that it was easy to manage a hotel - you just turn on the light and the guests come, like mosquitos. But when you want to invest in the hotel industry you have to keep the cycle in mind.” There are a number of operators who would like to get involved in consolidation alongside investors, particularly in the resort segment, which is looking resilient. A strong summer beckons for the brands.