• MWB hits the crunch

The credit crunch has rapidly emerged as everybody’s favourite excuse for a deal not being put away.

The latest utterance comes from Marylebone Warwick Balfour who has delayed the sale of its Malmaison chain “as a result of the current uncertainties in the markets”.

MWB chief executive Richard Balfour-Lynn said that the four bidders remaining in the auction had had trouble lining up debt finance. Rather than push ahead, dealing with one buyer at a time, it was decided to postpone the sale. The 21 hotels, comprising both the Malmaison brand and the Hotel du Vin chain, were expected to sell for up to £700m with a buyer announced by September 14. Balfour-Lynn claimed that all four bidders remained keen to buy the hotels.

No schedule had been formally announced so it seems strange that MWB has gone public now. Perhaps the plan is to take some of the sting out of the mounting pressure on MWB following the earlier failure to sell the hotels to Vector Hospitality, the would-be REIT that was to have floated in June.

MWB has until the end of next year to offload the hotels as it has committed to breaking itself apart by this date.

The half-year results from MWB, issued yesterday, put a property valuation on Malmaison and Hotel du Vin of £553m, an uplift of £165m since the end of 2006. The valuation excludes the market value of the operations, the brands and the goodwill of the business.

EBITDA at the hotels grew modestly by 3% in the first six months of this year to hit £10m against the £9.7m for the first six months of last year. Revpar was up 6% to £91.

However, the period showed a pre-tax loss of £2.71m thanks to costs of development (there are five hotels due to open in the next 12 months) and refurbishments at existing hotels.

In addition, there is the £4.6m of costs incurred as a result of the aborted Vector float which brings the total loss at Malmaison to £7.32m for the six months.

While the turmoil in the credit markets has certainly made deals difficult to get done, it is the deteriorating prospects for property investments which seems set to cause more pain in the months ahead.

When the Vector float was pulled, it was blamed by the backers of the attempt on the nervousness among investors about where commercial property returns were heading. The answer to this conundrum seems increasingly bleak.

According to the Investment Property Databank, August saw returns from UK commercial property at their lowest level for 15 years, hitting zero. The stagnation was caused by capital growth dropping back 0.4% with the 0.4% growth in income (rental) return failing to offset the fall.

Although the index only includes retail, offices and industrial, it seems unlikely that hotels performed markedly different. Certainly, the point made by IPD that the era of double-digit returns from property is at end is pretty much unarguable.

This is no reason to panic: property returns have historically been single digit even in periods of much higher inflation than now. The drop represents a return to normality rather than a sudden retrenchment.

What does matter is how the market reacts to this change in direction. The movement has been fairly sharp so far, dropping faster than even the gloomiest of predictions.

According to pricing in the still fledgling property derivatives market, capital values in commercial property in the UK are set to drop by between 4% and 5% in 2008.

There has been a flood of money moving into property over the last few years thanks to returns that have outpaced the equities market. With clear signs of order being restored with property returns returning to sit somewhere between gilts and equities in the long-term, the reaction of the new investors into the market will be key.

If the reaction is one of calm, with investors sticking with the great potential over the medium to long term, then the usual roller-coaster ride can be avoided – or at least made less pronounced.

Hotels also have a key advantage over other commercial property in that revpar is set to keep on growing at a faster rate than the income from most other commercial property. According to the latest forecasts from PricewaterhouseCoopers, revpar in the UK is set to grow by 6.2% this year and again in 2008.

In London, revpar is set for 10.6% in 2007 and 9.2% in 2008. The provinces are to see 3.8% in 2007 and 4.7% in 2008.

PWC remained bullish despite substantial supply increases on the horizon: Room stock in London could grow as much as 11,500 over the next four years. In the provinces, room stock is set to rise by 35,000 rooms or 7% between now and the end of 2008.

The robust revpar forecasts are despite an expected slowdown in GDP growth to 2.8% this year and 2.4% in 2008.

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