With London in the dumps in terms of demand and revenue, the U.K. investment scene has been flipped on its head, but investors remain focused on long-term assets even though risk, bad players and valuations muddy the waters.
MANCHESTER, England—Hotel investors remain committed to the United Kingdom despite the possibility of a second lockdown across parts or all of the country.
During a panel titled “The new U.K. investment landscape” at the Annual Hotel Conference, speakers discussed what’s next for the country’s hotel segment. Desmond Taljaard, managing director, hotels, London & Regional Properties, said the risks are there, but the hospitality sector remains attractive.
“It depends what your assets are, but too risky? As opposed to what—retail, oil-drilling?” he said. “As long as you have the commitment to research and operational capability.”
Taljaard said his company found the perfect formula to grow in the U.K., adding he is confident that larger markets like London will recover.
“We grew quite dramatically in the last seven years, attracted by long-term stability coupled with the question as to what else you’d rather be in,” he said. “What we have is safe and viable, with our luxury destination portfolio doing very well. London is tough, and it is difficult to see if (it) will have a V-shaped recovery or a vaccine.”
Taljaard said his firm is bidding on lots of mini-portfolios with the right long-term scenario to fold into its overall portfolio.
Munira Nathoo, director of Beverley Holdings Group, said her firm’s investment strategy has not changed despite the fluid situation.
“In August, we saw green shoots coming in the budget sector, and if you have a well-located asset, the fundamentals are the same across what will be a short-term blip,” she said. “It is not a risky sector, although (meetings, incentives, conventions and expositions) hotels will see a longer recovery period.”
The risks Nathoo sees include what will happen with business rates and, over the next six months, the continuation, or not, of capital repayment holidays for senior debt.
“There is a lot of uncertainty. Overlaying all that, it is looking as if we are heading into another lockdown, and international travelers might not come back,” she added.
Patrick Grant, partner with Alpha Real Capital, which invests primarily for U.K. pension funds, said the industry’s long-term revenue streams and quality of underlying information are very tempting to investors.
“No other industry has the value of data in what is real time,” he said. “Benchmarking is superior, second to none, and add to that the liquidity of underlying real estate shown over the last number of cycles.”
Grant said the short term in the U.K. will be difficult, and while his firm is a long-term investor, his immediate concern is what the new stabilized position will look like in the years ahead.
“Our investment, on a like-for-like basis, will be slower, but we will still invest. Find the right asset and then find the right structure for it,” he said.
Panelists said investors need to keep a close eye on senior-debt repayment in a period of ebbing and flowing revenues.
The investor panelists said brands and online travel agencies could do a great deal more.
“Brands have been excellent with domestic demand, but pretty useless in anything else,” Taljaard said. “A couple of brands did go out of their way to free capital from (furniture, fixtures and equipment) and (property-improvement plans), but we have not seen mass collaboration to beat up the OTAs.”
Nathoo said the demand change to domestic leisure requires investors to quickly adapt and pump in more capital, although that means investment isn’t being uniformly spent across the sector.
Brands’ staycation offers, such as three nights for the cost of two to boost demand, is having a cannibalizing effect, which investors end up paying for, she said.
“Something with the brands definitely need to be re-analyzed,” she said.
New valuations taken during the pandemic also are putting pressure on investors’ shoulders, including how valuations currently are being calculated amid an extremely different and difficult period.
“Any valuation is wrong is my opinion, and meaningless,” Taljaard said. “Long-term yields have fallen, so even if you take my cash flow as 10 and value it is as 20, I would argue discount rates would fall rapidly. A valuator cannot do anything but pontificate. Also, (I wonder) what is the upside of a valuation right now?”
Grant said the sternest tests concern the nonpayment of rent, when it is due and the price of debt.
“Protecting the downside is where most of our focus is,” he said.
Taljaard said he does not expect Brexit to have much of an effect as all revenue is coming in as domestic now.
“We’ll be net investors, in rescue (recapitalizations) and mezzanine (debt),” he said. “We’re long on hotels and committed to it, happy to buy the stuff no one else wants,”
L&R has taken advantage of the COVID-19 lull to open two new London properties, Taljaard said. The firm’s Mayfair Townhouse and Nobu Hotel London Portman Square hotels are both due to open in November.
“The websites are open now for booking, and we did an 18-month PIP rollout in eight as there was no cannibalization,” he said.
Grant said 75% to 80% of his investment is in London and Greater London.
“We are for it, too,” he said. “Maybe there will be a little more regionally, but what is key is analyzing the individual asset on micro levels, investing in high-quality assets for the long term.”