• Valuation challenges

The current calls in the financial markets for an end to mark to market for financial instruments may soon find an echo in the property industry.

Many loan agreements require an annual valuation, often at the year end, and the stage is set for an ugly New Year for many borrowers in the hotel sector and there will be calls for a rethink on valuations. Whether such a rethink is desirable, however, is questionable.

There is a school of thought that suggests banks will not want to call in loans that breach covenants, particularly if interest and principal is being repaid and the breach is only "technical".

But if a borrower exceeds loan-to-value ratios, a now chastened and markedly more cautious bank might force this to be put right. Maybe by insisting on further capital injections the bank ends up forcing the borrower into default but even then, the bank may figure it is better to be first in the queue than last in terms of bringing assets to market.

Talking to debt financiers, at least those relationship bankers involved in the hotel industry, suggests that the default position is not to call-in a loan provided interest is being paid.

More than one debt financier has told me that, on some deals, they will not be seeking to exercise their right to a revaluation "because there is no point in knowing the bad news".

Even if, as seems likely, next year sees a trading slowdown that causes widespread problems in making capital repayments, there is a consensus of opinion that banks will not, in the words of one well-known debt financier, "attack hospitality".

He added: "All banks are aware that if they cause a run on hospitality assets then everybody will be in trouble."

This is a widely held view among lenders experienced with the hotel industry. The fear is what happens when other parts of their respective banks become involved, particularly if there is regulatory pressure for banks to tighten lending criteria.

Valuations that substantially mark assets down will damage both borrowers and lenders. But at the same time, by not marking down assets, the current stand-off between buyers and sellers will continue and there will not be the clearout that every market trough needs.

Derek Gammage, EMEA head of property advisers CBRE Hotels, makes clear that valuers are under increased pressure. "Every line of our work is being picked over," he said. His valuation work is made all the harder in the absence of a transaction market, which he describes as "double dead".

So far, relatively healthy trading has supported valuations. Yields have moved out a little thanks to the higher cost of, and much more difficult access to, debt but reasonable profitability has underpinned values to date. It is falling profitability that will drive a significant fall in values.

This week TRI Hospitality's HotStats figures were grim for August. TRI described them as "dismal". In eight out of the 10 cities across Europe surveyed, profit dropped. In six cities, the drop was double digit.

Optimists will see August as a blip and pessimists will see it as confirmation of the coming meltdown. The valuers' task is not going to become easier any time soon. Sorry Derek.

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