Thoughts, Views and Opportunities: The Hotel Market in Lockdown 2.0

Managing Director, Hilltop Hospitality Advisors

Hotel Investors are looking to diversify from reliance on short stay income to longer term income which will enable greater resilience to withstand demand shocks. Consequently there is increasing interest in serviced apartments/residences/apart hotels and hybrid hotels. This could be through acquisitions of existing assets, re-purposing obsolescent buildings (eg offices, department stores, car parks etc) or ground-up development. Whilst most of the large brands are represented in this sector, there are number of new brands that are emerging with exciting concepts.

Backed by investment capital, strong ‘tech’ capabilities and innovative designs and uses of space, some of these brands will disrupt the more established players and enhance consumer and investor choice. For example, City ID, an emerging apart-hotel brand in Amsterdam has been backed by APG and Aware Super who plan to invest €500m to grow and develop the business. Elsewhere in Europe, Bob W, a hybrid-hospitality operator operating in Finland and Estonia has raised funding from real estate investors and venture capital firms for expansion in the Baltic and Nordic nations as well as in London. In the UK, the family-owned Room2 is expanding their ‘home from home’ experience in key cities throughout the country.

The London Conundrum

Despite the current turmoil in London, with international flight arrivals about 10% of what they were last year, overseas investors are still in many cases prioritising London as their number one hotel investment location. Whilst the expectation is that international travel will return, part of their rationale is that London and the UK is seen as a safe haven compared to their home country. Also the strength of overseas currencies brings additional purchasing power against sterling priced assets. However, survival of their domestic businesses is the priority in the short to medium term, so the longer the crisis deepens the less able overseas investors will be to export capital.

Whilst the London hotel market has been relatively static since the sale of the Ritz Hotel at the start of Lockdown 1.0 and various other high value assets have been withdrawn from the market, the prime commercial sector has been booming. Savills reported  in October 2020 the highest transaction volume ever recorded ( £1.09bn), with prime West End yields hardening from 3.75% to 3.5%. UK purchasers have represented only 14% of buyers since Lockdown 1.0, with flight to quality and safe haven appeal continuing to drive overseas investor demand for prime commercial London property. The stand out deal was the sale of the Chanel flagship on New Bond Street, which was guided at £240m and ended up selling for £310m after a bidding war.

The expectation that prime hotel assets will be sold cheaply in UK and Europe is probably a fallacy. All it takes is buyer competition to keep pricing respectable and at small discounts rather than a large ones. An example overseas recently involved a group bidding for a prime city hotel asset in Australia. The investor’s bid was ultimately defeated by two others. Despite conservatively pricing the asset the investor felt that their bid would still be attractive to sellers in this ‘distressed’ market. It proved not to be the case and a similar scenario might play out when prime assets come to market in London and gateway markets, particularly when buyers are likely to outnumber sellers. In the absence of existing hotel sales,  London continues to remain attractive to hotel developers, with one re-development and one conversion recently announced in Covent Garden and one hotel conversion in Victoria.
UK Hotel Capital Markets – Who Blinks First?

It has been reported that the holder of a securitised loan on a large UK portfolio  has recently breached its debt yield covenant. This means that either a full repayment is required or a cure, in the event of not being able to negotiate a loan amendment or waiver. Is this a sign of things to come? Probably not as there are only a handful of UK hotel portfolios that are securitised (compared to the US with c$40bn of defaulting CMBS hotel loans), but other portfolios with more traditional debt structures will still be coming under pressure particularly when forbearance eases in 2021 and rolled over refinancing comes up. 

The end of March 2021 will coincide with the expiry of the second six-month extension for borrowers’ loan agreement waivers, deferrals and other concessions they have managed to negotiate with banks. From Q2 onwards banks will not be able to offer the same levels of forbearance,  and instead they are likely to adopt a more vigorous approach to loan performance, in particular loan to value and debt/yield covenants. This is likely to lead to pressures from lenders for owners to cure or consider exit strategies.

Generally speaking there are a number of scenarios which could unfold, such as:


  • Owners reaching out to private equity and debt funds for injections of rescue capital, in the form of mezzanine debt/quasi equity
  • Renegotiation of leverage ratios with senior debt providers and re-priced term extensions
  • Freehold sales backed by ground rents to long term annuity type funds, effectively providing low cost of debt. However, the sustainability of the ground rent structure may be challenging when cash-flows are so low.
  • Asset sales, either as portfolios or single assets, which in some cases may be required to shore up ownerships elsewhere. Sales could be finessed with vendor financing, such as guaranteed cash-flows or earn-out provisions, whilst sale and leaseback structures may also be considered
  • Joint Ventures will be a possibility, but this would probably be in the shape of rescue capital
  • In the worse case scenario, administrator led sales of assets, which we are beginning to see in  markets like Aberdeen, where some owning companies have liquidated.

Whilst lack of investment stock is stalling the UK market at the current time, constraints in the debt market are making it challenging for buyers to raise sufficient debt to finance acquisitions in any case. With banks focused on managing existing relationships, any acquisition finance will either be for existing borrowers or for more favoured real estate sectors. To compound the challenge,   LTVs have fallen from 60%+ to 50%+ and spreads have also been pushed out. This reflects the higher risk that hospitality investment is now perceived by the lending sector.

In light of this, more creative selling structures are anticipated which could include sellers loaning back debt to buyers. Also debt funds and challenger banks are  providing more accessibility to debt, albeit at a higher cost than traditional senior debt. According to INREV a record amount of €32bn in non-listed (private) real estate debt products was raised globally in 2019, which was 50% above 2018 levels. Whilst investors in North America and Asia have always had a preference for non-listed real estate debt strategies, this has been less so in Europe but demand is now growing strongly.

The buyer and seller psychology is an important consideration. A number of assets that have been offered for sale in the UK have been withdrawn from sale due to wide bid/ask spreads, with sellers not wanting to meet the discounts required by buyers. Also owners’ benefitting from temporary protection (eg CIBIL loans, furlough, bank forbearance) have not needed to meet the market.  On the other side of the coin buyers are wary of bidding too much for an asset today that could fall in value tomorrow.

At some stage (maybe in Q1 2021?) there will be pricing discovery when an owner decides to sell a hotel asset or portfolio for less than they would ideally like, but they see the benefit of selling before the market is awash with opportunities. Meanwhile, a buyer is now prepared to meet a sellers’ price even though this is more than they would ideally like to pay, but they see the benefit of acquiring before the wall of competing capital is deployed to acquire assets. History will perhaps repeat itself with the scenario that played out after the GFC. After a 12 month period of inactivity in the hotel investment market, suddenly a few deals led to a constant stream of transactions for distressed portfolios and single assets.

Global Hotel Transactions – Activity Picks Up

Given that we are in the midst of a global crisis, it seems appropriate to consider the global hotel transaction market and the trends that are emerging. One thing is indisputable. The world is awash with liquidity for real estate investment, be it hotels, distribution, data centres, life science, residential, PRS, Healthcare, student, offices and retail. The yield and demand curve varies significantly for these sectors, with distribution and data centres arguably commanding the strongest demand and keenest yields right now. At the other end of the spectrum is retail, but this could ultimately lead to alternative uses and opportunities for hospitality. For example, the re-positioning and re-purposing of redundant retail to serviced apartments. 

In the GFC of 2008/2009, which was principally a debt crisis, certain world economies were able to recover much more quickly than others. For example,  Asia, which, after the region’s financial crisis in 1997, established and maintained a prudent lending regime. This enabled countries like Singapore to bounce back from the GFC much more quickly than western economies. The great crisis of 2020 bears little resemblance to this other that those economies that are able to establish the most effective measures to facilitate international travel and those that have access to a reliable vaccine will have the best chance of recovery.

A hotel transaction in Australia has previously been mentioned and in fact there have been three major sales in Sydney, Melbourne and Brisbane since lockdown 1.0, with domestic buyers acquiring these assets. In previous years Asia has been responsible for much of the hotel investment into Australia so this marks a new trend.

In the US there have been some distressed sales in New York in the last few months, with REITS in particular under shareholder and lender pressure to divest. One example (Ashford) crystallised a 40% loss in value over an 18 month ownership. The different nature of ownership in London and European capital cities means that these types of sales are unlikely to happen to the same extent. However, despite the levels of delinquent CMBS hotel debt in the US, bondholders and special servicers’ have thus far been reluctant to foreclose on hotel assets that in many situations are earning zero or negative cash flow. 

In California over $300m of sales have been announced in recent weeks, with a REIT (Host) selling a large resort asset in Newport Beach (to a domestic buyer) and the US government successfully auctioning a trophy asset in Beverley Hills. Meanwhile Highgate have acquired Colony Capital’s hotel business. Remarkably, the fund assumed debt of $2.7Bn and only needed to inject $67.5m cash into the acquisition, which is currently the largest global hotel transaction in 2020.  

Back in Europe the transaction market is likely to remain quiet until the governments’ and lenders’ withdraw their protection measures draw from Q2 2021 onwards, but there are some exceptions. In London a high profile bank controlled sale has just been launched to the market, whilst in Frankfurt an iconic hotel is being marketed which is attracting wide interest. The freehold property is offered with vacant possession but also has residential development potential, which is extremely rare in a market dominated by lease structured investments. One of the higher profile European transactions that was agreed pre pandemic and completed during Lockdown was Convivio’s acquisition of eight hotels for €573m in cities such as Rome, Florence, Nice, Prague, Highgate and Budapest.

Remote Tourism – People Want Experiences

A sector that has been attracting a lot of exposure in the UK and Europe during the pandemic is ‘remote’ tourism or ‘glamping’ as it has become known. With restrictions on international travel, car borne domestic tourism has grown immeasurably. Whilst this has supported and sustained the provincial hotel markets between lockdowns, travellers have often wanted more secluded rustic experiences in tents, cabins, pods etc and outdoor activities, but also more sustainability. In the UK there are many examples  of this and for higher quality accommodation during peak season these can typically achieve 85% occupancies and c£200 +/- ADR even in the remotest parts. Remote tourism demand is predicted to keep growing even after the pandemic and the net result is that investment in glamping brands and operational businesses will scale up over the next few years. 

The market is much more established in the US, with the likes of Starwood Capital, KSL and BBG investing in businesses like Under Canvas, Getaway and Collective Retreats. Meanwhile, Hipcamp (the airbnb of glamping) is enabling homeowners to create a glamping experience for guests on their land. In Europe, KKR completed the acquisition of Roompot (Europe’s largest caravan park operator) during Lockdown 1.0 for €1Bn and this has been the largest hospitality deal in Europe in 2020. Whilst this makes perfect sense in the environment we are in today, it is doubtful that a deal like this would ever have been predicted to be the largest hospitality transaction in any given year.

There are a number of new operators developing their glamping concepts in UK and Europe whilst established groups like Accor already have a glamping brand in their stable (Mantis) and others will certainly follow.  With potential for high returns and strong margins during peak vacation months but also accelerated pay back periods, sometimes as little as two/two and half years, then it is likely to be a target sector for investors over the coming years.