MANCHESTER, England— Global capital, poised to buy distressed and underperforming assets during the pandemic, remains largely unspent, and that has caused some investors to rethink allocation strategies.
At a panel titled “Windfall or Shortfall” at the recent Annual Hotel Conference in Manchester, Guy Pasley-Tyler, director of portfolio and fund management at Archer Hotel Capital BV, said competition for hotel assets has been high among investors that are well-placed, disciplined and patient.
He said while his firm is fond of off-market deals, Archer sees "2022 as a selling opportunity, not a buying one, a situation we never expected.”
Another option for capital is to add rooms to owned assets, which Pasley-Tyler said Archer is doing for four or five hotels.
Neil Kirk, chief operating officer at London + Regional Hotels, said it's difficult to look the industry in aggregate.
“With a platform, we can add on to it on a single-asset basis, and this is where we see value," he said. "When some of the froth has come off, can you add, or do you need to restructure?”
Moderator Pippa Harrison, director of capital markets, sales and leasing at business advisory Avison Young, said approximately 2.1 billion pounds sterling ($2.4 billion) has been invested so far in 2021, with 1.48 billion pounds sterling spent in London and 687 million pounds sterling spent in the regional markets.
That London business constituted a 12% drop from investment volume in 2020, while transaction volume in the regions constituted an 80% increase, which hints strongly at an uptick in staycations.
The median price per bed in both markets increased notably, by 19% in London to 339,574 pounds sterling per bed and by 46% in regional U.K. to 101,523 pounds sterling. Still, the number of assets sold dropped 19% year over year in London, and declined 34% in the regions.
Lily Wecker, vice president of investment and head of hotel portfolio realization at Zetland Capital Partners, said the first half of 2021 has been difficult, but she is hopeful.
“We saw [in the first six months of the year] 75 to 100 basis points higher in lending, and lending based on cash flow only, but since the summer a lot of hotels have done better than our initial budgets. Slowly the banks are coming back, and there are refinancing opportunities,” she said.
Matt Lederer, hotel acquisitions director at Castleforge Partners, said the turning point was roughly halfway through the year when clearing banks started coming back into the market.
Pasley-Tyler said his firm deployed approximately 380 million pounds sterling in deals in 2020 in which the quality of sponsorship and the asset itself was high. However, he added, isolating the future value in assets on the market is proving more challenging.
“This year, [what] we’re seeing [in the] U.K. is quite expensive. In Europe, a high amount of debt is maturing at the end of next year, notably in Spain. Margins are to compress in the next few months,” he said.
London + Regional’s Kirk said debt providers are in a similar position as investors. They also have a need to place capital and largely cannot.
“Recovery is expected in 2023, so there will be higher margins [in earnings before interest, tax, depreciation and amortization]. For simple business plans, there is lending, and banks do not have the same pressures they had during the great financial crisis," he said.
“Some liquidity issues might come, and the banks all have little tear sheets that might make things harder next year,” he added.
Starting Afresh
With fewer options for deploying capital, investors are taking time to reassess.
Environmental and social governance of assets and portfolios is a major consideration, Zetland’s Wecker said.
“ESG is crucial part of our financial thinking," she said. "We complete a due-diligence survey across all hotels we partner with. We would not shy away from an acquisition that does not have a high ESG score, but we put much emphasis on that post-closing."
Kirk said the time of reassessment offers unique opportunities to get things right.
“Our guests want to know what we are doing and what we are getting right, and as much as our investors are [wanting to know]. ESG is front and center in everything we do in terms of our business objectives,” he said.
Pasley-Tyler said an asset must expel any “dirty secrets” early on, and that he scrutinizes an asset’s energy efficiency, including water and waste, immediately.
“The thing really coming in for us [in our capital-allocation decisions] is climate risk, not just the hotel’s but the immediate area’s. A lot of insurers have become very spooked by some of the flooding seen in Europe this year,” he said, adding that his firm’s 20th employee to start next February is an environmental specialist.
Castleforge’s Lederer said how hotels are run and how they engage with the local community as stakeholders are equally important.
“The standard you are shooting for remains the big challenge. Investors will want to tick those boxes, but we do not know what those boxes will look like right now,” he said.
Labor Challenges
The elephant in the room is staffing, panelists said, noting that third-party help is welcomed in combating the labor shortage.
“Recruiting staff to new buildings is harder than doing so for an existing building. We need government help around staff," Kirk said. "The question employers ask of themselves is why would you chose to work in hospitality when you might think hospitality will be closed down in three months?
“We need clarity that we will not be closed down again,” he added.
Pasley-Tyler said amid a perceived lack of stability in the hospitality industry, “jobs in Amazon or healthcare might appeal more."
“We need creative ways of attracting and retaining people, without necessarily just putting up wages and adding pressure on our ongoing cost structure,” he added.