Banks still have an appetite to lend to the hotel industry, but the rise of new lenders and a host of new headwinds could spell trouble ahead.
LONDON—Key changes and trends in hotel financing will include the appearance of new types of lenders and the increased involvement of institutional capital, according to sources.
There also could be troubled times ahead, as traditional lending becomes more conservative and new lenders seek to fill the gap, both of which come with risks.
“Capital will not necessarily come from the banks, which are probably all in already,” said Anthony Say, head of hotels at NatWest Corporate Banking, during a panel titled “The interest and appetite of lenders” at the recent Hotel Operations Conference.
Tim Helliwell, head of hotel finance at Barclays Bank, said banks are still willing lend in the current economic environment.
“The finance industry has plenty of liquidity and is looking for opportunities,” he said.
The notion that the cycle is in its final stages or soon will be—and in the U.K. that the ramifications of Brexit are digging in—does not help lenders gain the full confidence they need in some circumstances, panelists said.
“We are not heading for a fall off the cliff anytime soon, but there are headwinds,” said Stephen Welch, relationship director of hotels and leisure at Santander Corporate.
Helliwell said the circulation of capital in the U.K. has been resilient since the Brexit referendum in June 2016. However, since the March 2019 deadline for the U.K. to leave the European Union has come and gone, a downturn has occurred.
Spending has a direct correlation with lending, panelists said.
Roland Stumpf, executive director at bank Coutts, said Brexit always has been seen as a cost issue, not a revenue one, but that there may come a point when the impact of Brexit might drive a recession that would affect businesses more directly.
“We have to put in place now strategies that help mitigate risk,” Stumpf said.
Helliwell said the banking industry feels now is the time to continue on despite the worries of a lack of confidence permeating the U.K.
Russell Kett, chairman of HVS London and the moderator of the panel, said capital appears to be guarded against the effects of these worries, at least for now.
“London is holding up, but I was in North Wales yesterday, and it is a bloodbath out there,” Kett said.
Borrowers and lenders
Banks remain in the lending game, but the sector’s conservatism is concentrating more and more attention on the truisms of handing over capital: the quality and experience of management, the suitability of product to market and a reading of the overriding picture of the macroeconomic situation.
Lenders have long memories following the Great Recession, panelists said. Once bitten, twice shy, and such an approach will see the rise of new forms of lending, panelists added.
“I concentrate on the operating model. What is it we’re lending to, and being mindful of where we are in the cycle,” Helliwell said, who added the individual situations of debtors need to be analyzed depending on the different levels of debt and equity.
Welch said his bank focuses on the combination of the project itself and who is behind it. Say also stressed the importance of research.
“There is a more work needed to understand the reality of cash flows grounded in independent research, because otherwise we might get so far down the discussion before we get to the nuts and bolts and perhaps have to end the discussions,” Say said.
Stumpf said one positive is that today’s business plans are well-constructed with a dose of realism, although he, as do the other bankers, said that little on a plan can trump successful track records and the establishment of tried-and-tested relationships.
Different tricks for different bricks
Say said he did not see much difference between lending to conversions or new-builds.
“The risk (for new-builds) is higher, so it is priced higher, and our appetite might be staid a little as you have no idea what revenue the hotel will deliver,” he said.
Panelists said success is always more obtainable if lenders have a good relationship with borrowers and fully understand the trading asset and its management team.
“Generally the market looks at five-year term money … to have the right development timeline to stabilize that asset,” Stumpf said.
“It is difficult to do a new concept with a new customer you do not know,” Helliwell added.
To this point, Welch replied that while such a view generally has consensus from major banking institutions, he realizes it does not give any support for entrepreneurs.
“We’re not following first movements,” he said. “Partly due to regulation, partly due to the cost of capital.”
Profitability of F&B
Panelists said they are also seeing more debt being requested for hotel restaurants.
“We are seeing a prevalence of leased F&B as it is deemed a safer way to go, although we, too, are seeing plans for conversions of F&B to more rooms,” Say said.
Helliwell said it was not too long ago when it was unlikely anyone would prepare or see a profit-and-loss analysis of F&B.
Stumpf said many brands just required F&B, and so in it went.
“You would see the loss side of that, not the profit side,” Kett added.