VILAMOURA, Portugal —Investors in leisure hotels and resorts still see opportunities in the market despite the impact of higher interest rates and widespread inflation.
Speaking at the Resort and Residential Hospitality Forum, Javier Arús, senior partner at Azora, said: “People are taking a more cautious approach to their refinancing costs. [Interest rate rises] have had a huge impact in our pricing capacity for deals. Prices have to get lower.”
Gaël Le Lay, deputy CEO, Hova Hospitality added: “It’s maybe better not to raise debt on deals if we can, and we prefer to do them on a pure equity basis and plan to refinance later on when markets will be more stabilised.”
Chairing the panel discussion, Kenneth Hatton, managing director – head of hotels Europe, CBRE, asked if the increased margins from lenders, in addition to the rise in the base rate from central banks, were fair.
Le Lay replied: “You have the positive news that hotels have managed inflation by increasing rates however, we have no choice but to reduce leverage because we need to anticipate an increase in the cost of financing, including the margins of the bank. In our case, our maximum is 40% leverage in any case for our core funds.”
Hatton observed that a year ago most lenders were comfortable with loan to value ratios of 55-60% which are now 40-45%.
Refinancing issues
Operating results have been strong this year, but there is a question mark over the ability to refinance. Hatton said: “We’ve got this rolling wall of refinancing, kind of like the UK mortgage borrowers. What are they going to do? The commercial borrowings of the hotel industry run into hundreds of billions over the next few years. Where is the most distress that you look at?”
Hugo Steen, head of investments - hotels and leisure, Principal Global Investors, said: “There are areas. There is still a huge proportion of independent hotels in Europe. Unfortunately, it’s the smaller people who are going to suffer the most from this because they are not going to have the credit rating, the deep pockets of shareholders, so they’re going to be under more pressure. It’s an area we look at and think that’s probably a place to be doing [rollup transactions].”
Others on the panel believed that government support would stave off the volume of distress.
Arús said: “Of course there are always more singular cases, but in general we don’t anticipate a strong distress opportunity driven by debt. We are a highly intensive employment sector. Governments provided help through COVID. They are not going to pull the trigger and create unemployment so they will try to push the envelope a little bit further out to help.”
The panel noted that 11% unemployment in Spain and 12% unemployment in Greece had meant much more moderate wage inflation than in countries such as the UK (4% unemployment), which would ease ongoing operating costs.
Recession worries
On the prospect of recession, there was a consensus that as long as it doesn’t result in widespread unemployment, any recession would be short-lived and recovery would be fast.
Steen said: “There seems to be much more visibility compared to the 2008/9 Great Financial Crisis which was a big shock. We are planning ahead.”
Arús added: “Hospitality has become a much more meaningful asset class. We have more weight in the portfolios. There is now more liquidity. Over the last ten years it has not been easy to invest. The future is brighter.”
Le Lay predicted activity from big private equity firms with more opportunities than in the past: “The last few years were very well-priced. This is a period for value-added strategy, even if there is inflation.”