First ever UK Hotel Investment and Lending Report published

The Real Estate Research Centre at the Business School (formerly Cass) has published the first ever detailed report into the hotel investment and lending market, in collaboration with Berkeley Capital Group.

Using data from STR and analysis by Savills, the UK Hotel Lending Report 2020 identifies the UK hotel investment market to be valued at year-end 2019 at approximately £135 billion. This represents approximately 12 per cent of the total investible UK institutional real estate investment market, which has an estimated size of £1.1 trillion.

Other key findings from the report into a sector that has been among the hardest hit by the pandemic include:

• Lenders have substantially grown their loan exposure to hotels since the Global Financial Crisis of 2008–09. Between 2010–2020, hotel investments grew by 175 per cent (£45 billion) and debt origination by 141 per cent.
• During the first half of 2020, average lender targets on interest coverage ratios increased to an average of 2.2x (generally 1.8x would be considered low and 2.5x would be the desired minimum mark). Some lenders, however, require 4x, especially for managed hotels with no, or a less strong, brand association.
• 78 per cent of lenders prefer financing hotels with a franchise or renowned brand image. Hence, independent hotels have found it easier to raise finance in the turbulent market conditions caused by the pandemic by joining a brand.
• Average hotel senior lending margins increased to 305 basis points (bps), from 270 basis points, for the six months between December 2019 and June 2020 at an average loan-to-value of 58 per cent; by December 2020, the average margin was expected to be 300bps–400bps for a hotel of good credit quality.

The report also sources data and sentiment from an in-depth investor and hotel owner survey, showing the extent to which UK hotels have restructured their businesses and cut unnecessary costs.

• The change to zero-hour contracts for hotel staff has been one of the biggest cost savings for the sector, which is also expected to see staff reductions of between 20 and 30 per cent in the short to medium-term.
• Investors and operators have explored alternative revenue-generating activities since the start of the pandemic. The most cited activity was “hosting key workers” followed by “home-office” room alternatives. However, room rates for these activities are 30 to 50 per cent lower than the usual room rates.
• Renowned brands such as Marriott and Hilton have received further enquiries from independent hotels to join the franchise and been more proactive in finding ways to accommodate them. This trend was already developing but has been accelerated due to the level of demand from independent hotels during the pandemic.

Overall, and despite the pandemic, hotel lending continues to have a strong place in lenders’ real estate loan books and loan exposures are expected to remain constant.

In particular, lenders confirmed that they still see long-term value in key city centre hotels in areas such as London or Birmingham and suggest that the current effects of the pandemic will not affect their long-term view beyond 2020.

New origination for 2021 is expected to be concentrated in debt funds, but larger transactions will still be done by banks and insurers. Both banks and alternative lenders are open to looking at leased hotels as well as those with operating contracts.

The individual leverage situation of a hotel’s current business operations and track record when making a lending decision are significant. In terms of loan sizes, the most liquidity lies in the lending market between £50 million and £100 million. Lender diversification and loan availability for smaller loan sizes is much more limited.

Dr Nicole Lux, Senior Research Fellow at the Business School (formerly Cass) and author of the report, commented:

“The hotel sector has been one of the hardest hit due to the pandemic, and this was especially the case in 2020. Much has been reported on hotel occupancy and closure rates, but this report brings further insight into what lenders have been doing and considers the sector and its future.

“It is the first comprehensive report for the hotel sector that brings together lending market and investment data with additional insights gained in extensive interviews across owners, operators, investors and advisors regarding their latest market concerns, experiences and ideas.”

Lissa Engle, Managing Director at Berkeley Capital Group [‘BCG’], added:

“Berkeley Capital Group [‘BCG’] is proud to spearhead the launch of The UK Hotel Lending Report and we have brought together a best-in-class steering committee from Savills, CMS, Taylor Wessing, Castleforge and CREFC Europe to ensure the report provides both comparability with the main lending report as well as a holistic perspective on the market.

“Along with detailed interviews and surveys of key industry players, the report estimates the value of debt secured against UK hotels at £15.1bn in June 2020, which accounts for 9% of total outstanding CRE loans on lenders’ balance sheets at year-end 2019. As the first UK lending report which focuses on a specialised asset class, The UK Hotel Lending Report will become an annual publication with all proceeds benefitting WiH Global [‘WiH’], a not-for-profit and global community who believe that by collaborating, we can have greater impact and create a hospitality industry that is more diverse and inclusive.”