An aggrieved real estate investor at Expo Real in Germany recently complained: “It’s fair to say that the banks are making the entire situation worse, in some cases not being willing to do business at all. Those who will offer financing, won’t exceed 50 per cent.
“They seem highly focused on internal issues, such as dealing with distress. That said, no one wants to have to explain afterwards why they underwrote deals in 2023, with the benefit of hindsight.”
With the prospect of interest rates remaining higher for longer globally, as both the Fed and the ECB urge caution in the light of ongoing inflation, many investors in the real estate space are wondering if an absence of debt is going to dampen dealmaking well into 2024. But is the outlook gloomy for all asset classes? Not necessarily, with hotels and hospitality among the property types still able to access debt, according to Brad Greenway, co-head, debt & structured finance at JLL. “I would actually say that there’s more liquidity for hospitality today than almost every other asset class,” he says. “It’s an attractive time to be a lender and there is a robust amount of debt capital available for the right assets and the right Sponsors.”
Real estate owners might understandably feel the pinch if they compare the financing conditions of the recent past, when zero percent interest rates flooded the markets with cheap capital. But the markets now have their eye on a “new normal” Greenway suggests, with inflation likely to settle around 3-4 percent in the medium term, which may well be enough to kickstart dealmaking once more.
He adds: “Historically, real estate owners would go to their four or five ‘relationship’ lenders. They might need to look a little further afield today. But in the European panorama, there are now around 250 or so active lenders in the space, and they are increasingly diverse.”
Alternative lenders
Indeed, lenders like Leumi, Cheyne Capital and Cohort Capital have all become familiar names in the European hospitality scene in recent times, agreeing to underwrite deals and back hotel refurbishment drives throughout 2023. And they’re not alone. “The likes of Blackstone, Starwood, Ares continue to back the asset class. On top of that, the sector’s traditional lenders like Aareal, Société Générale, Credit Agricole are still present, plus banks like NatWest and Barclays in the UK. Further, local banks continue to back French, German and Italian hotel deals,” he notes.
Hospitality, argues Greenway, repriced during the pandemic, so there hasn’t been the same waiting game around valuations that other asset classes have suffered in the last 18 months. That clarity over pricing has helped purchasers, vendors, and lenders act with alacrity. The alternative lender focus on hospitality, meanwhile, underlines a broader trend. “There are simply new debt funds and capital sources entering the market,” he notes. “All of the lenders that were supportive of hospitality previously are still supporting it, while renewed investor interest is really driving volumes.
“Furthermore, when an asset class like offices loses attractiveness, capital has to go somewhere. It’s going to life sciences, self-storage, and data centres as well. But as these sectors are still in their infancy, it’s easier to underwrite hospitality deals, due to the maturity and transparency of the sector.”
Traditional banks
Germany’s Aareal Bank, which focuses on real estate lending in over 20 countries, is one such bank which continues to back hospitality through good and bad. “We had a lot of hotels activity during Covid, even though most of the hotels were closed during the pandemic. We were firm believers that hotels would be very much needed again when travel resumed,” says Christof Winkelmann, chief markets officer and a member of the management board of Aareal Bank. He adds: “We won`t exit and enter asset classes tactically, as our clients rely on us to be there throughout the cycle.”
In fact, choppy market dynamics sometimes yield the best opportunities. “Some of our clients like downturns because they can pick up assets that others prefer to stay away from,” he adds. “Certain clients buy at both ends of the cycle. Our approach is more about nuance in underwriting the deals.”
Yet he concedes: “In downturns like the present one, debt coverage ratios on all loans are tighter because of interest rates. If you couple that with the fact that some industries are still recovering from Covid, certain assets are having a tougher time.”
ESG factors
Still, the bank is walking the talk, reflected in its recent lending pipeline. In August, Aareal agreed a DKK 769 million (€103 million) financing agreement under the group's green finance framework for Villa Copenhagen Hotel in the Danish capital owned by Strawberry Group and Varner Brothers. The five-star property is set in Denmark’s Central Post and Telegraph Head Office, adjacent to Tivoli Gardens. The hotel’s green features include a rooftop beehive, organic vegetable patch and herb garden, while rooms are made from recycled or sustainable materials, and the pool is warmed by excess heat from the kitchens.
Other banks, while remaining committed to lending across a broad range of asset classes, still sound a note of caution. Michael Windoffer, head of commercial real estate, international clients, at Hamburg Commercial Bank says the bank is “open for business” but is “not volume driven, nor growth driven”. Formerly known as HSH Nordbank, the current bank resulted from the privatisation of the previous entity, following legal wranglings and write-downs. Today, the bank seems understandably protective of its clean slate, but is prepared to lend against “core structures that tick all the boxes in terms of ESG”. He adds: “We look at the quality of the sponsor, the property, and the location, and how well the property matches that location.”
Are overly cautious banks contributing to market turgidity? “Banks have to focus”, says Windoffer, adding that there had been a need “for all parties to learn from this crisis. For the sake of both parties, you need sufficient equity in deals, and ESG compliance as no one wants stranded properties.”
Several lenders are offering more and more sustainability-linked debt as the argument around stranded assets and environmental responsibility grows. However, Greenway doesn’t see this as a significant route revolutionising finance in the space.
“We’re still at a point where most of it is greenwashing,” he says. “There really isn’t the pressure for people to deliver what they say they will. Until these loans are default linked to ESG performance, it’s just going to continue to be more of a marketing tool than anything.”