United Kingdom debt providers have become more skittish about financing hotel projects amid pressure in the industry to drive performance margins against a heady backdrop of increased costs.
Strong demand for hotels and resilient pricing power are viewed positively by U.K. banks, but the difference between success and sluggishness is narrow enough to keep some bankers from sleeping well at night, according to recent panel hosted by business advisory HVS London.
Paola Orneli Bock, vice president of hotel properties at Aareal Bank, said underwriting is under intense scrutiny.
“All eyes are on debt servicing and loan-to-value ratios,” she said.
Bob Silk, relationship director for hospitality and leisure at Barclays Bank, said lending to hotels based on LTVs is a “fraught prospect.”
“We’re having the same conversation we had when we formed this division 25 years ago, and it goes back to people, place and product. Loans do not pay the bills. For us, now it is business as usual, but it is just that more than ever we’re selective,” he said.
“Lenders will become more selective and circumspect. Existing borrowers that are over-leveraged, that’s a tricky conversation,” he added.
Silk’s advice to lenders in the hotel space: “Constantly consider and reappraise to see if the hotel has a definite competitive advantage, and engage early if there are warning signs.”
Lenders are more likely to approve refinancing on an existing hotel than a loan on new construction, the executives said.
“We’re seeing more refinancing requests for stabilized assets, with those requests not automatically going to the clearing and alternative banks. LTV is done as a formality, something to use from a leverage view, but our comfort is increased by going into the details, making sure the business plan stacks up,” said Theo Hajoglou, director of real estate at Cheyne Capital.
Bock said her bank underwrites on performance, but location and sponsors have become very important in overall analysis.
Who, What and Where
Callum Laithwaite, senior vice president of debt origination at Starwood Capital, said in difficult periods it is inevitable lenders revert to favoring the tried and tested, notably mainstream and full-service hotels.
“In our view, undifferentiated product will struggle. In luxury and lifestyle [hotels], where supply is limited, owners can push rate above inflation. And the other end is domestic-driven budget [hotels],” he said.
Silk said the landscape is not so easily pigeonholed.
“We’re refinancing a London luxury hotel, but we also have equity in a ‘bed factory’ in the West End [of London], and a midscale hotel there, too. And on a country-house hotel. There are lots of businesses in what you might describe as the ‘squeezed middle’ that are robust and that we will lend to,” he said.
Silk added that when lenders prefer borrowers with deep pockets, that does not necessarily just mean those with cash, but also experience and management ability, especially in development.
“That said, we have very limited appetite for development, as it always seems to go wrong, and it’s more difficult to stabilize [earnings before interest, taxes, depreciation and amortization]. It costs a lot of capital and time. We’ve done our fair share, but now it is not top of our list,” he said.
Cheyne Capital’s Hajoglou said there are financing opportunities in the U.K. for office conversions.
Different, but the Same
The bottom line is that more time is being spent on how deals are structured.
Dan Williams, head of hotel and real estate finance of Virgin Money, said he is increasing amortization profiles for the right assets, which now is not just for London properties.
Cash flow and track records are still the most likely to gain the most attention.
“Cash flow makes sure projects can service the interest … sponsors are investing in the product to keep it competitive … [and] they cannot get cash out until they have achieved their business plan. Everyone must stand behind their guarantees,” Silk said, adding that 75% of what he has reviewed this year is refinancing.
Silk said bankers need to also look at where cash flow is originating — that is, from the consumer. There is simply less discernible income out there.
“It used to be the case that a [residential] mortgage could be gained with some help from the bank of mum and dad or for five times salary, but now with interest rates, that is not happening,” he said.
He gave a personal example of a friend’s child.
“His wife is pregnant, and with twins. Childcare was going to be £1,800 ($2,356) a month but now will be £3,600 a month, or £43,200 a year, which for even fortunate members of society equals or more than equals one annual salary, and with increased mortgage rates, well, something has to go, and that could be travel,” he said.
Bock agreed but said vacations will continue to be important, just perhaps shorter ones.
“There is an indispensable need to shut down the computer and phone,” she said.
“[The industry needs] to have a pause to gain clarity on the interest-rate environment, and then we can get on with things. The uncertainty needs to come to an end,” she added.
Lukasz Finance 
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