The sector must look to more inventive methods of financing in the face of a banking market which does not favour it, as loans continue to be tested, was the message from the International Hotel Conference in Venice.
Greater involvement from operators meant that Hilton Worldwide, which has previously deployed key money and support for guarantees, confirmed that it was now planning to offer mezzanine financing.
Patrick Fitzgibbon, senior vice president development, Europe and Africa, Hilton Worldwide, told the conference that the move was part of a burgeoning trend: "The government stimulus for new growth hasn't worked. Coming into the European markets in the next couple of years you will see a lot of mezzanine lending into distressed assets."
The hotel sector is also due to see a test of investor interest this week, with reports that Bank of America and Goldman Sachs are reported to be selling $2.66bn of securities backed by debt from the 2007 buyout of Hilton Worldwide, in what is the largest CMBS to come to the market since the credit crisis.
According to the Wall Street Journal, the collateral on the CMBS issue consists of Hilton properties, as well as franchise and timeshare operations. The issue also includes an underlying senior loan that must be extended every year.
Back in Venice, attendees were not confident of being able to count on more traditional lending. Sumner Baye, president, International Hotel Network, said: "Lenders don't like the hospitality industry. People look at ROI as very important and you don't always get that from our industry."
For some, there was hope that trading was improving, taking the pressure off existing loans. Wolfgang Neumann, consultant and former CEO of Arabella Hospitality, said: "It's far too early to declare a recovery, but there's reason to see optimism – corporate spending is back, but leisure spend is cautious."
Fitzgibbon added: "I'm cautiously optimistic that we're climbing out of the worst. It's not been as bad as any of us thought it would be. There's generally a comfort level that governments are doing the right thing. It's all about confidence and so much of what we need is about confidence."
Taking Fitzgibbon's cautious optimism down a shade to caution, colleague Simon Vincent, president, Europe, of Hilton Worldwide, echoed the forecasts from STR Global pointing to next year's London performance being less spectacular than this year.
"It's still on a knife-edge," said Vincent of the recovery.
Russell Kett, managing director, HVS, added: "For those who think it's over, please don't think it's over. In trading terms we're fighting our way out, but in capital terms how can we restructure the mess we're in?"
With limited financing to go around, the Capex bomb weighed on the minds of delegates, with concerns over the future impact of underfunded hotels. Fitzgibbon said: "You can tighten the screw only so far. The Capex bomb is ticking.
"It depends on the product, the market and the owner, many hotels just don't spend a 5% FF&E. It's all about branding and really delivering consistency. You have to be brave enough to allow hotels to leave your system. The problem has been many hotels sold at inflated prices three years ago."
HA Perspective: The Hilton move should not be mistaken for a sign that hotel operators are again prepared to become involved in ownership.
The mezz financing is a short-term bridge to allow deals to get done. Borrowers – the owners of the hotels Hilton is managing or franchising – will be offered favourable rates for a few years but then these rates will ratchet up, giving owners an incentive to refinance the mezz piece.
In addition, mezz is only going to be available in mature markets such as Western Europe. Key money might be available in emerging markets but Hilton has no interest in exposing itself to the financing risk in such territories.
Other operators are likely to emulate Hilton's approach if they are not doing so already. The pressure on pipeline is such that creative solutions are needed.