Much talk on sustainability focuses on climate and natural resources, but sustainability also affects the long-term health of real estate assets that has real implications for employment, economies and destinations.
LONDON—With the years of throwing money at any deal whatsoever long behind the hotel industry and the probability of a dip, if not a recession, likely, deal structures now need to be as thorough and sustainable as calls are for climate and waste sustainability, lenders say.
Speaking at the Hotel Investment in Europe Conference during a session titled “A focus on debt,” four banker panelists spoke of the specific uncertainty surrounding deals amid the general uncertainty of geopolitics.
The two are not disconnected. A bad deal can lead easily to the redundancy of a building, which has environmental and employment considerations, among other troubles.
“It is difficult to find good opportunities to service. There are bad deals out there that we would not go near, and we have to be prepared for the downturn,” said Joan Bertran, global head corporate real estate and hotels, Banco Sabadell.
Michael Young, relationship director, hotels and leisure, Santander, said the right hotel in the right market in the United Kingdom can still fill up quickly, but it’s important to be careful in this business climate.
“We are in a time of big political uncertainty. Topline revenue per available room is starting to soften, and some cost inflation is coming through the (profit and loss account). There is a trading environment where it is hard to operate, and thus credit teams that are cautious,” he said.
Young said he a mandate in the U.K. to lend for sums in excess of £10 million ($12.3 million) for debt for acquisitions and refinancing.
“The weak pound (sterling) is a natural stabilizer, but that is obviously that way because of the uncertainty of the U.K. as an investment market,” he said.
Panelists were quick to state uncertainty is a global issue, not just a British one.
“It is a cycle of 10 to 12 years lending to people with a memory of five,” said Bertran, who has approximately $6 billion of debt on his books.
It is difficult to say too many deals have been made in past years, even if supply now is considered a very real pressure. Bankers are under pressure to add debt to their books and see challenger banks and other alternative lenders active and perhaps not as cautious, panelists said.
Bettina Gräf-Parker, managing director, special property finance, Aareal Bank AG, said in upcoming years demand might not be able to absorb supply as fundamentals change, but currently hotel costs are being covered.
She said regional U.K. is looking a little difficult, and while in the last few years an asset might have had to overcome one major hurdle, it might soon need to do so over multiple ones.
“We’re underwriting our finances based on that, and probably for urban hotels, not borderline ones,” Gräf-Parker said.
“Some transactions have been badly structured and have too much debt loaded into them, so there is pressure on debt serviceability,” said Shaun Talbot, senior director, Clydesdale Bank, who is responsible for a U.K.-centric debt between £10 million ($12.3 million) and £50 million ($61.5 million), most notably for development and acquisitions.
He said many hoteliers are looking at an uphill battle.
“Owners will have to run faster to stand still. What we are seeing now will hit the ground in two to three years,” he said.
“And in London, prices go up and up and up,” Talbot added.
“(Low) interest rates will help, but it is nicer to service the debt now,” Gräf-Parker said, adding she has exposure to approximately £8 billion ($9.8 billion), 30% of which is hotels, including some large cross-border portfolios.
The competition for traditional banks preferring to lend senior debt comes from multiple sources, including pension and insurance companies, domestic banks, India and the Middle East.
“Pension funds, insurance companies? We have lost this part of the sector. More opportunities are in secondary markets with relationship clients,” Bertran said.
“We do compete with domestic banks that are super-competitive, but we have found our niche, cities, good locations, and we also do portfolios that might not be all city center, which we can do as one underwriting project,” Gräf-Parker said.
The scenario is not helped by debt being easily available, they said, although they stressed the great sea of debt has been lowered.
“Money is not a problem at the moment, and you can find the right investor. Sometimes the mezzanine lenders are aggressive, and do we want to compete with them,” Gräf-Parker added.
Talbot said competition is becoming more of a challenge in key locations.
“It comes down to experience, what the numbers look like and the key demand drivers. There is a piece even across the four bankers here that will be our niche, not theirs, too,” he said.
“And relationships, again. Some banks were there, and always have been, when the going was tougher, rather than those that have now come in as the yields are not strong enough in other real estate classes,” Gräf-Parker added.
Young said while challenger banks are working at margins that his cannot reach, the full suite of services traditional banks can offer—and that they do so throughout the cycle—is attractive to investors.
“Some clients do have more savvy than just to look for the cheapest solution,” Young said, adding he was seeing a rise of debt being required for ground-lease structures, especially in the U.K.
Brexit is adding uncertainty, too,
“As long as we do not know what will happen, we do not know how to price the risk,” Gräf-Parker said. “What assumptions do you base your predictions on.”
“Structure is sustainability,” she said.
“It is a competitive environment, but we do not want to chase the next transaction and not be sustainable,” Young said.
Bertran said that sensible attitude does lead to friction inside of banks as there is a lot of commercial pressure to grow, but there also is a requirement to keep the bank safe.