• Lehman collapse

The collapse of Lehman has created trauma across the world's financial markets. But in the medium term, the unwinding of Lehman's property interests will prove the most engrossing aspect for the hotel industry,

On the European side of the Atlantic, its stake in the joint venture that owns the LRG Holiday Inn portfolio in the UK and the owned hotels within Le Meridien are the highest profile assets.

What the administrators at PricewaterhouseCoopers made clear on Monday was that there will be no fire sale. In fact, they pointed to the situation for previous complex administrations, such as that following the 2001 collapse of Enron where some positions are still being unwound.

Realistically, however, the disposals will not take that long. In the case of LRG, the other partners, Realstar and GIC, are no doubt already involved in discussions to buyout Lehman's stake.

Provided the shareholder agreements are in shape, this should prove a relatively straightforward as both GIC and Realstar are well capitalised.

For Starman, the joint venture between Starwood Capital and Lehman, Starwood Capital will be in the driving seat to sort out the situation.

Meanwhile, those hotel companies backed by HBoS must be breathing a sigh of relief although significant changes will probably be on the horizon.

The takeover of HBoS by Lloyds-TSB has left the latter's management firmly in charge and it is hard to see their historically conservative approach shifting in favour of some of the racier elements of HBoS's lending practices.

In particular, Lloyds-TSB will surely frown upon dabbling both in equity and debt on the scale HBoS has done. The existence of Lloyds Development Capital means that there is some appetite for equity but given the current environment more risk is never really going to be acceptable.

The size of the task ahead for Lloyds in integrating HBoS will mean that the drilling down to the integrated finance operation with HBoS will probably take a few months. And this may well mean that there has been time for a degree of normality to descend in the wider market.

The big risk is if any of the businesses within integrated finance have a meltdown in the meantime. The hotels look reasonably robust but the house builders backed by HBoS are in a far from healthy position. A failure here might precipitate drastic action across the board.

The hotel interests of HBoS encompass Rocco Forte Hotels, the Fairmont Savoy, De Vere (which includes the conference wing and Village Leisure), City Inn, Macdonald and 155 Travelodges held in partnership with Prestbury following a sale and leaseback.

Other hotels interests include Capital Hotels; a 50% stake in Moorfield which owns the 24 Mercures bought from Macdonald, and Kew Green and Shearings; a 50% stake in aAim which has the sale and leaseback of Principal; and a stake in Edinburgh's Missoni through its 50% holding in the Kilmartin Property Group.

Dealing with these stakes has been made all the more difficult by the widespread description in the case of Lehmans about its "toxic real estate operations". Lehmans had recognised the problem and had tried to spin-off these interests into an entity that was rapidly dubbed "bad bank" and thus probably ensuring the failure of the exercise.

HBoS had also been looking to offload some of its debt in its property deals but the joint venture structure of playing with both equity and debt made this difficult in the good times and next to impossible in current conditions.

Christie & Co's appointment to market Kew Green's Stansted property for £27.5m, the jewel in that company's crown, is linked to the need to raise funds.


HA Perspective: The wider ramifications of the Lehman collapse are still to be felt but, with Bank of America's take over of Merrill Lynch and the nationalisation of AIG, there ought to be more of a preciously scarce commodity available: certainty.

But so far, the market turmoil continues. What is certain, however, is that this turmoil will have to end shortly or the whole financial system will fall over.

There is no shortage of gloomy hyperbole about the outlook. Heaviest hitting is probably Alan Greenspan, the former head of the Federal Reserve, stating in the wake of Lehman's bankruptcy that this was a once in a lifetime incident.

And the favourite quote currently seems to be Warren Buffett's warning that derivatives are "financial weapons of mass destruction", made in his 2002 annual letter to shareholders of Berkshire Hathaway.

It is possible to pick holes in the facts under pinning some of the prognostications. Lehman, for example, is not a 158 years old bank. Rather, it is just 14 years old, having been spun-off from American Express in 1994. A decade earlier, Amex had snapped-up Lehman after it had nearly self-destructed. The crash of a major investment bank has precedents.

And this week, Europe's largest single property acquisition was completed, the Eu1.9bn acquisition of the headquarters of Banco Santander. Royal Bank of Scotland, HSH Nordbank and Bayern LB led the lending consortium. Property lending is taking place.

But there is no denying that a $613bn bankruptcy is bad. When coupled with the current stock market turmoil, it looks really bad.

Certainly, it looks like being haircuts all round for the banking community. But the debt mountain it had created looked ever more unstable and it is appropriate that the avalanche has mostly fallen on its head. The banks, particularly the investment banks, will surely end the current period much smaller than at the start.

Perhaps the biggest risk is a regulatory backlash that leaves business tethered to governments, creating a period of slower growth as political bureaucracy smothers economic innovation.

Sentiment is a fickle beast and prone to wild swings. A year ago, Hotel Analyst was a bear on the market. I was critical of inflated asset prices and argued that significant falls were necessary.

Now, however, I find myself on the side of the bulls. With pundits aplenty predicting economic collapse, anybody that predicts a moderate slowdown is viewed as a Pollyanna.

But commodity prices are dropping, and dropping fast. Oil is now well below $100 a barrel. Thanks to this and the general economic slowdown, there is scope for further interest rate cuts as inflation also heads down.

The underlying fundamentals of the hotel industry – the secular rather than cyclical trends – remain robust. In fact, I would argue that these underlying fundamentals are the strongest they have ever been in history thanks to globalisation.

Let's just hope the current problems do not derail these positive long-term trends.

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