• Bank liquidity continues to worry

Bank liquidity is set to remain a central problem in the current recession, according to a panel speaking at the 4th New Year Hotel Investment Summit held last night in London at the May Fair Hotel.

And until banks start lending again the view was that "we will bump along the bottom" in the words of Charles Romney, from co-organisers CMS Cameron McKenna.

Marten Foxon, formerly of Broadreach Capital and InterContinental Hotels, said: "There is evidence that people were still in denial [about the severity of the recession] up until Christmas. Banks claim they are still open for business, they are not."

Foxon did not believe that a high profile failure of the likes of Le Meridien was needed to start the transaction market moving. He believed that the bid / ask spread had come down over the last few months.

"Availability of debt is the issue. If you have cash then you can do deals. Until liquidity returns people will be sitting on the sidelines," he said.

Ryan Prince, vice chairman of Realstar Group, said that without leverage few deals will be done, as even supposedly cash-rich buyers such as sovereign wealth funds require leverage to make a deal work.

He claimed that there is still an unwillingness to transact on the part of vendors. He cited an example of making an all cash offer to an administrator only to see it rebuffed.

The events that will crystallise activity was refinancing, he added. He forecast that trading would be poor until the third quarter of 2010.

David Orr, ceo of City Inn, said that he had the finance for his three current developments in Amsterdam, the City of London and Leeds. "Looking at the long-term view is where you need to come from," he added. "We are mindful of not damaging our business unnecessarily."

Speaking separately to the panel, Philip Camble, a director of Cushman & Wakefield Hospitality, one of the co-organisers of the event, said that currently there was a "toxic combination" for hotel values of rising yields and falling income but this would ultimately lead to transactions coming back.

He noted that yield spread between leases and management contracts had widened to 1.7% in 2009 from 0.7% in 2007. There was currently "operator hunger" to do deals, he argued, pointing to the lease Starwood was prepared to sign for the W in Leicester Square. In addition, even major brands were now offering equity stakes, key money, lower fees and stepped fee structures.


HA Perspective: Banks are, not surprisingly, being fingered for most of the blame in the current crisis.

But there is a major issue in terms of inertia. In a falling market, buyers are rewarded for not proceeding.

Talking to attendees at the event revealed a range of views on the bank lending environment. A new business manager from a leading UK bank (yes, they do exist still) was adamant that his bank was doing deals on reasonable terms (that is more like those around in 2003 than 2007). He did admit that lot sizes had to be small, however.

A banker with a prominent Irish institution said, however, that only deals with existing clients would be considered and then 50% leverage was as high as he would go.

It is clear that a number of adjustments still need to be made in how people are approaching this market. Expecting bank lending to be there in the fashion it had been until the summer of 2007 is foolish. It will be a long time before liquidity on that level returns, if it ever does. And for bigger deals, £50m or certainly £100m plus, debt remains largely absent.

The big hitters, among which Foxon and Prince can include themselves having sat on either side of the £1bn transaction for 73 UK Holiday Inns in 2006, are waiting for the return of syndicated debt.

But even if this were there, it is doubtful the transaction market would leap into action. Talking to a well capitalised Asian operator, his view was to sit on his hands and wait until the end of the year when he expects there to be "more opportunities".

In fact, this debate is a chicken-and-egg causality dilemma. When there is sufficient momentum behind the belief that we are near the bottom of the value plunge, money of some form will be available to do the deals.

There are early signs of a thaw in the credit markets, particularly in the US. Even in Europe, notably the UK, some indicators point to a loosening. LIBOR, for example, is now down to 2.25%, a spread of just 75 basis points about the Bank of England Base Rate. Encouragingly, the cut of 0.5 pts in the Base Rate of last week was fed through pretty quickly.

And an optimist might argue that given the severity of the crash since September last year, the momentum ought soon to be there. But optimists seem a bit thin on the ground right now.

Joining the pessimists is investment bank Close Brothers which today warned that losses in commercial property could cause another credit crunch. In the UK the bank predicted that there could be a fall of £140bn in values and a consequent £125bn debt refinancing bill.

About half of the £250bn of UK property debt needs refinancing over the next four years, it is estimated. And unlike the 1990s when debt was relatively straight forward the complex structures today present bigger challenges.

For example, talking to the owners of securitised bonds to reach a settlement is hugely more problematic than negotiating with a bank or even group of banks.

There are certainly challenges ahead. According to CB Richard Ellis, commercial property is now 35.5% cheaper to buy today than at its peak in the summer of 2007. And this fall has largely been driven by yield shifts as rentals have until this autumn held up.

Until the trading outlook becomes a little clearer, there seems little to tempt buyers to back into the market in the short-term in the face of near certain further falls in value.

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