The slow drip-feed of hotel assets onto the market by banks looks set to accelerate this year, according to a new report by Christie & Co, which has identified stabilisation in prices for the regional UK as a driver.
As trading fundamentals improve, banks have moved to realise their holdings in the sector, not only in the UK, but globally. This trend seems likely to continue as the appetite for the sector increases, driven by acquisitive Reits.
Jeremy Hill, head of hotels at Christie & Co, said: "The sector is in a crucial phase of its recovery and one that is likely to be protracted. As trading performance continues to improve, banks will come under further pressure to release assets to the market and to fund new investment."
The company’s Business Outlook report found that 39% of the hotel deals handled by the group last year had some element of distress. In the UK, there was an increase in average prices achieved for London assets last year, this increase was countered by a slight decrease in the provinces. This led to a negligible increase of 0.1% for the UK overall, compared to a decline of 19.5% in the previous year, a figure which will have reassured potential investors that the bottom of the market has now been called.
Hill said that, with the sector continuing to wonder what banks’ next move would be, they must decide whether they believe in the future of the businesses they have an interest in – and in their ability to deliver sufficient returns in an acceptable time period.
He added: "With a number of refinancing or restructuring exercises due to take place across the sector, banks will have an opportunity to fund capital expenditure programmes in return for greater stakes in the businesses involved. Lenders who choose not to release additional funding for capex programmes may find themselves with permanently impaired assets on their books – an interesting dilemma for banks who retain assets."
The view was supported by Jones Lang LaSalle Hotels, who commented this week that transactions in the EMEA region were projected to increase to $13.1bn, with bank-driven sales driving a significant portion of this figure, particularly in the UK, Ireland and Spain. Japan was forecast to lead the Asia Pacific sales, slated to reach $3.5bn in 2011, as banks took a view on initiating structured sales. Hotel real estate sales in the Americas are expected to total up to $13bn in 2011, driven by, the group said, "the breadth of equity, an increased number of bank-forced sales and easing levels of leverage, with the bulk of activity taking place in the US".
The UK market has seen evidence of banks ending the period of ‘pretend and extend’ and reviewing what is best for each of their holdings. RBS has sold the Grosvenor House and the hotels that it has under the Hilton flag, but is also thought to be considering taking ownership of Jarvis Hotels, after failing to find a buyer for the business, which is rooted in the provinces where trading has been weak. RBS is the main lender to the company alongside HSBC and Bank of Ireland, and is thought to be looking at a restructuring under which the banks would take control.
In addition, Lloyds Bank Group, which has found itself with a number of hotel assets after its merger with HBoS, is thought to be mulling the sale of both Menzies Group and Mint Hotel (formerly City Inn).
HA Perspective: Whatever route the banks take, the measured approach that has so far been in evidence suggests that, barring unseen events, the flood of distress forecast at the beginning of the downturn is unlikely to materialise. While this will disappoint those anticipating a bargain, it will reassure owners and potential sellers fearful of a sudden drop in values provoked by a slew of assets coming to market.
And perhaps more importantly, the hotel industry has yet to have a "Meridien moment", the sort of high profile collapse that tarnishes the whole sector which occurred back in 2003 when Terra Firma’s acquisition went spectacularly wrong.
It may yet happen of course with a sharp rise in interest rates the most likely catalyst. Fortunately, this looks unlikely in the near term.