The turmoil in the credit markets has derailed a number of hotel deals in the past month but fears of a “buyers’ strike” have so far prove unfounded.
Large portfolio transactions which require large amounts of debt to be syndicated have been the main casualties so far.
In fact, the only type of buyers that have markedly reduced interest is private equity. And PE was becoming increasingly cautious in any case.
According to Jones Lang LaSalle Hotels, the first-half of this year saw Eu9.3bn of deals in Europe with private equity taking a 23% share. Last year, PE’s share was 43%.
JLL found in its Hotel Investment Highlights that high net worth individuals and institutional investors are replacing PE buyers. HNWIs accounted for a bigger share of deals in the first-half than PE, while institutions raised their share from 5% to 17%.
PE has been exiting at a faster rate. PE sold eight times more hotels in the first half this year than last year, and accounted for a third of all hotels being sold. Corporates remained the big sellers, representing half of all sales.
While big PE deals have all but been frozen out, smaller transactions are still going through. Given that most deals in the hotel sector, even portfolio ones, fit the small to medium size categorisation, the situation is at present a long way from a crisis.
There has been a risk adjustment – arguably this was much needed – that has seen the price of debt go up by as much as 100 basis points for these smaller PE deals. And more equity is being required. But PE deals are still possible at the smaller end of the market.
With more expensive debt and higher proportions of equity required, a lowering of prices can be expected. But so far, the repricing is looking muted.
The best hotel assets are going to continue to obtain keen prices. The buyers that remain in the market are more strategic and more focused on obtaining the right assets than picking-up a mixed portfolio of properties.
The robustness of prices will rapidly change if the contagion in the credit markets spreads and slows down the overall economy, hitting hotel trading performance. At this point, nobody is certain about how deep the current malaise is or how long it will last.
For the big deals, postponements of the debt syndication seem the order of the day in most cases. A racy bid for a major hotel player looks unlikely given that banks are struggling to off load the debt they are already committed to.
The amount of buyout debt that is seeking a home is put at between $130bn and $225bn, across all industries in the US. And it is estimated that it will be well into the fourth quarter of this year before there is any hope of clearing the back log.
The most high profile of the current major hotel transactions is Hilton and this looks set to be tucked-away pretty much as planned.
The banks involved – Bear Stearns, Bank of America, Deutsche, Goldman Sachs, Morgan Stanley, Lehman Brothers and Merrill Lynch – are picking-up 80% of the debt – some $21bn – and seem content for the time being to sit on Hilton’s paper.
The split of the holding is even with the exception of Bear Stearns which has a slightly bigger share.
According to sources close to the deal, there has been no attempt to either delay the closing or restructure the transaction.