Post-Brexit UK: What capital, branding might look like
Post-Brexit UK: What capital, branding might look like
07 JULY 2016 8:24 AM

Some might worry offshore capital will flee the U.K. following its vote to leave the European Union, but hotel insiders advise playing the long-term game and making sure cash flow and yield strategies are strengthened.

LONDON—Room demand and the United Kingdom’s hotel market at large are in fine health, despite the 23 June vote to leave the European Union, according to sources who spoke at the recent British Hospitality Summit.

Despite that overall positive outlook, uncertainty still colors some aspects of the U.K. hotel industry.

Nadeem Boghani, vice chairman of Splendid Hospitality Group, said he heard £30 million ($38.8 million) in construction projects had been put on hold after the Brexit vote and £250 million ($323 million) in hotel deals had collapsed following the vote.

“Investors might wish to pounce,” he said.

Those numbers aside, the U.K. shouldn’t be written off even in this period of huge uncertainty, according to panelists at a session titled “Connecting capital.”

“We all need to manage our portfolios in the best way we know amid this uncertainty, but the attractiveness of the U.K. market will not change, although now might not be the time for a huge macroeconomic bet,” said Nick Chadwick, VP of asset management at Starwood Capital Group.

“Transactions were slowing down anyway, down 62% in the United States and down 64% in the (Europe, Middle East and Africa) region,” added moderator Mark Wynne Smith, global CEO of hotels and hospitality at business consultancy JLL.

London remains the epicenter of the U.K. transactions landscape, panelists said.

“Investors are very attracted to the U.K.’s infrastructure, productivity and stability,” said Charles Kirwan-Taylor, corporate affairs and sustainability director at London’s Gatwick Airport. “Initially, there might be some trepidation, but over time the market will become re-established. Our investors are doubling their rate of investment, and we’re developing hotels on our site, too. Heightened competition between hotels will see business models and cash flow requirements not changing.”

Boghani said asset values in London are still valuable.

“London key asset value always seems to double in value every time you look at the numbers,” he said. “In terms of capital preservation, London remains valuable.”

What lending might look like post-Brexit
Hoteliers, lenders and investors will take a critical look at how they do business following the Brexit vote, but that would have been the case anyway at this point in the cycle, panelists said.

The panel pointed to cash flow as the critical factor in terms of sustainability and yield in terms of where investors parked their capital.

“2015 was quite frothy, with lots of mergers-and-acquisitions activity. Some of this was a little much for us, and in 2016 we’ll be concentrating on re-servicing loans on our own portfolio,” said Mike Saul, managing director of hospitality and leisure at Barclays. “As far as loan commitments are concerned, there will be no change as we had contingency loan platforms in place if there was a vote to leave the European Union.

“It is an interesting stage as people are looking to restructure their businesses. We still see the sector as a huge growth engine for the U.K., but much will be down to the ability of hotels to sustain cash flow. For established businesses there should be no change (from Barclays) to their investment metrics or debt suite.”

Saul advised hoteliers to “overcommunicate with your lenders,” and the other panelists agreed.

“Take time to listen to what investors want, to get away from the idea that ‘Yes, we know it’s your money, but this is what we’re going to do with it,’” said Philippe Bijaoui, VP of development for Europe at InterContinental Hotels Group.

Panelists emphasized that there are still investors looking to spend, and that capital remains increasingly diverse.

“Hotel ownership money is going back into hotels, and there also are lots of changes in hotel ownership, with many newcomers coming into hotel real estate, including European pension funds,” Bijaoui said. “Investors realized in the last recession empty offices bring in nothing.”

That attractiveness, despite the new political and economic landscape in the U.K., is helped by positive supply and demand ratios in many U.K. cities, Bijaoui said.

“There are 15 investors after every London sell, and even if you take half of that away, our prediction is a good percentage of offshore capital will still come to the U.K.,” Wynne Smith said, who added JLL predicts by 2020 there will be £1 trillion ($1.3 trillion) in institutional capital worldwide.

“In terms of yield, we see a 50-point outward shift,” Wynne Smith said. “If any sector gets hurt, first we’d say luxury residential, but much depends on lending. If banks find it more expensive to lend, the yield will come off real estate values.”

One player diversifying its overseas spend is Japan, Wynne Smith said.

“Up to now none of Japan’s sovereign wealth capital has been spent on the sector, but they have just said half of it could be spent on hotels, some $140 billion,” he said.

What branding might look like post-Brexit
Different companies’ nervousness concerning risk appetite, and how that has changed after the 23 June vote, will determine the number of brand flags in any portfolio, panelists said.

For privately owned hotel management and development company Splendid Hospitality Group, each hotel project would still be viewed on its merits, according to Boghani.

“Although banks might be more comfortable with brands, meritocracy is at the heart of all we do,” Boghani said, who added diversification is good in any market.

“We are looking at a student hotel project, but to get planning permission in the U.K. for hotels is horrendous,” Boghani added.

The banks largely disagree.

Barclay’s Saul, who said most of his lending was senior debt, made an analogy with chicken restaurants.

“(Kentucky Fried Chicken) does not need to do so much work as a local chicken fast-food restaurant,” Saul said. “Brand is essential. They have upselling dynamism and asset value.”

Panelists said there was increasingly a need for certainty of delivery and productivity. An uncertain world requires more certainty, they said.

Mark Wynne Smith said JLL’s number suggested 60% of new supply was branded.

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