A group of hotel investors and owners active in the UK market joined a roundtable at the AHC Reimagined last week, where they discussed the challenges of recovery of the hotel sector, and how hotels will always remain an attractive asset class to investors.
The discussion was hosted by Thanos Papasavvas, CIO and Founder of ABP Invest, who also presented some of the results of the Investor Sentiment Assessment for Q3 2020, a survey of a broad range of investors, from private equity to institutionals, family offices, sovereign wealth funds and REITs, led in partnership with Questex Hospitality + Travel.
This recap of the discussion does not include participants’ names or companies, as the session was held under Chatham House rule.
What is the investors’ sentiment on the economy?
The Investor Sentiment Assessment Survey shows that in Q3 of 2020, 54% of investors surveyed expect economic conditions to improve over the next 12 months. Of those, the proportion of people who expect a significant improvement have gone down since June (from 22% to 9%), while those who expect marginal improvement has increased significantly. The biggest change is the number of people who think conditions will deteriorate significantly (from 53% in Q1 to 17% in Q2 and Q3). Looking at the types of companies, PE firms are the most optimistic (70% think economic conditions will improve) while the most pessimistic are family offices (60% expect a deterioration). Investors based in the US and Europe (except UK) have the most optimistic outlook, while investors from the UK are the most pessimistic.
When can we expect recovery?
According to participant of the roundtable ‘We are in this till the end of 2021. We have a long road ahead of us, I’m quite pessimistic about the future. We’re starting thinking about repurposing properties if the business doesn’t come back.’
Others are more positive: ‘Investors are entrepreneurs and as such are naturally optimistic, which is not to say we’re not realists: this is a tumultuous period, with large-scale borrowing and increasing unemployment. But on the flip side, interest rates are going to remain low for much longer, inflation will only help the property market, hotels will remain a strong asset class. So, in the next 6-12-18 months, we have to be realistic, but we can still be quite bullish for the medium to long term.’
Another participant said ‘When we rewrote our business plan in April we expected to be back in the spring of 2021 but that’s not happening. We had a good summer but October is not going to be as good as we’d anticipated. We’ve all had to borrow or bring in extra equity to get us through these times and we’re going to have to do it again. There’s a lot to happen for us to get back to where we were before.’
How does this crisis compare to the global financial crisis of 2008?
According to a participant, ‘This is very different from 2008-2009: there is a massive amount of capital in the debt market and in the equity market, and a lot of it wants to be invested. This is a natural disaster, not a financial crisis, so the economy should bounce back quickly.’
According to Thanos Papasavvas, ‘Recovery may take longer than post-2008 because we’re relying more on SMEs which are the backbone of the economy. This potential economic crisis could lead to significant socio-political developments if they’re not checked. The last thing governments want is a repeat of the GFC, which led to the Arab Spring, to the Eurozone crisis, and to populists coming up. So I do believe money will be thrown at this, programmes will be extended for as long as it takes for the recovery to start coming through, because the alternative would be vastly more expensive. Levels of debt may rise from 80 to 110%, levels of deficit may be expanded by 3-5%, but that’s the price to pay to ensure economic growth with contained social cohesion.’
How will the prospect of inflation affect hotels?
Thanos Papasavvas said: ‘Some inflation will be caused by all of the stimulus entering the market (which is a multiple of what we had during the GFC, and shared amongst everyone rather than just the banks), as well as receding globalisation in terms of the supply chain. It may not happen in the next 12 months but it will from thereon, and it will be sticky.
When inflation happens, real assets, commodities, and clearly hotels are going to be there. Interest rates aren’t going to be raised anytime soon. It makes the hotel funding from an economic point of view more attractive, and from an investor’s point of view we are still going to be in a low yielding environment. The expected yields in hotels will be more favourable than in the broader industry.’
Buyers or sellers?
In the Investor Sentiment Assessment Survey, 10% of investors described themselves in Q3 as net sellers, while none did in Q1 and Q2.
A participant said: ‘Looking at things from the top, now is a great time to invest in hospitality, and there’s a lot of money being raised to do that. I don’t think there is going to be a lot of distress, maybe marginal assets.’
Another said ‘Now is the time to buy, obviously at the right price. We’re looking and we’ve made a few offers recently. There won’t necessarily be the wall of distress that people are talking about, but people have different agendas and some companies are looking to exit the sector for different reasons.’
What will recover first?
Expected recovery will differ according to location and segment. One participant saw the limited service segment as ‘resilient and probably quicker to come back’. Another said ‘Some areas aren’t going work out and are going to be repositioned but I’ve no doubt central London hotels will come back, and resorts are doing well. Even the MICE market is going to bounce back, maybe next year, certainly the year after: people want to meet.’ Another added: ‘The leisure market is phenomenal but the corporate business is diabolical’.
Opportunities in serviced apartments and other segments
The Investor Sentiment Assessment Survey shows that serviced apartments, hotels and extended stay top the list of most attractive asset classes within the hospitality sector.
The group confirmed this view: ‘In terms of where the professional money is looking at, there’s no question the whole extended stay product is really attractive. Lots of people are looking at it right now, there’s lots of money chasing after it.’
A participant pointed out the role of construction costs in the segment’s appeal: ‘If we see construction costs come down, we may well see serviced apartments being the preferred segment to invest in. Historically when we’ve compared in key city centre locations the construction costs and the square footage of serviced apartments, we’ve always preferred the traditional hotel. A lot of the franchisors have value-engineered the brand standards: we’ve seen room sizes come down across the board, including serviced apartments, so that could be a segment to watch over the next 2 years.’
Another questioned the appeal of the segment post-recovery: ‘once this blip goes and there’s no more issues about the virus, will the serviced apartments remain as attractive? I want to go back to a proper hotel with full service as soon as possible.’
The survey also showed that PE investors found the senior living segment attractive which, according to a participant ‘makes absolute sense with the aging population’.
Looking at other segments, a participant said: ‘There’s a growing trend towards wellness and sustainability, and perhaps a new segment will be created. Urban resorts is a growing trend in London. Mixed-use is something that more and more developers will look at, with an element of commercial RE, an element of hotel and an element of residential, so you can at least diversify or blend your risk profile.’
What are the biggest challenges faced by the hotel industry?
The last question from the Investor Sentiment Assessment survey was on the challenges faced by the hotel industry in the next 12 months. The top listed ones were not a surprise: economic slowdown, geopolitical uncertainty, current volatility. Following them were more sector-specific issues: oversupply, deal flow/liquidity, expensive valuations, inflationary pressure. Environmental risk was perceived as the lowest challenge, although sustainability may become at the forefront of asset owners’ concerns.
Participants of the roundtable identified the current lack of travel as the major challenge: ‘How do we get people out of their houses and back to travelling? The corporate and MICE market is probably a third of what it should be now. When are people going to have reasons to travel (such as events) and when are they going to stop being scared about going back to normal?’ Another participant highlighted the role of the government in the recovery: ‘People aren’t travelling because they’ve been told to stay at home. I don’t think people are scared of staying in hotels: you only have to look at leisure hotels to see that. Once the government tells people it’s safe to get out, we’ll be in recovery.’
However, the question of managing the now remains: ‘We have extremely challenging times ahead of us with the economic slowdown, and people will have to start paying back their bills. We’ve added costs, all bookings are coming via OTAs which brings higher costs. Getting through this short-term situation is the real big question, and how nice the banks are going to be about it’.
What about the customers?
The sector should be careful to remember the customer, as a participant pointed out: ‘We need to take a more customer-centric approach, we need to bring back that confidence as an industry. Sometimes we can become quite siloed: we believe all customer experience is defined by hotels or air travel, but there’s a need for us to look outside in other industries and understand what the consumer requirements are going forward. What does the customer want, how do we remove that friction from travel, how do we make people feel safe again?’
If you are a hotel real estate investor and would like to be involved in the next invitation-only investors' roundtable, please contact [email protected]