The attack on the sector's notoriously under-demolished failing hotels resumed at this year's International Hotel Investment Forum in Berlin, with calls for sites which were not commercially viable to be closed for the good of those which were.
Banks in particular were accused of using ‘pretend and extend' policies to keep hotels open, because of fears over realising losses if they were sold. It was thought increasingly likely that images seen in the UK pub market – which saw 39 pubs a week close last year, according to British Beer and Pub Association – could and should be replicated in the hotel sector.
Desmond Taljaard, COO Starwood Capital, said: "You're just keeping the vagrant on the street. This is a sector which lacks Darwinian evolution – some hotels are more dinosaur than chimpanzee. The consequences of these hotels surviving are not good for the industry.
"Clearly there's not a moral or social responsibility on the part of the banks, but it's a big concern to me. Why would you build a big swanky hotel when the musty-duvet hotel down the road is kept going?"
Taljaard's call was echoed by Paul Collins, director, CBRE Hotels, who has been working with NAMA (Ireland's National Asset Management Agency), and said: "There are some hotels which just should be sold."
Taljaard was unable to estimate how much of, for example, the UK market, should be removed for the benefit of the remaining hotels. A lack of visibility of the sector, in particular of those assets held by the banks, makes it hard for a clear assessment of which sites could be truly said to be in distress, the definition for which varied at the conference, from hotels which had breached loan-to-value covenants to those unable to service their debts at all.
It was generally agreed at the distress panel that over-exuberant lending was to blame for the distress associated with many assets, which may under less pressured circumstances be viable businesses.
There were calls for owners to be brutal in their assessment of what a property could realistically operate as, with some sites thought more suited to a shift from four-star to budget rather than a less radical solution such as a brand change. Taljaard commented: "As regards regional UK, you have to question how long the four-star can compete…you'd rather have some of your money back than none at all."
Other discussions at the conference looked to a more hands-off solution to many sites' distress, that of riding a recovery in trading back to a higher valuation. Jeremy Hill, head of hotels at Christie & Co, said rising trading was one of the essential components needed to move the sector forwards. He said: "The losses haven't been realised yet. There's been some short term debt refinancing, but that just brings the same problem back in a couple of years unless there's been some capex or an improvement in trading."
Robert Koger, president, Molinaro Koger, added: "Once investors are convinced that the worst is over, you will see a lot more aggressive bidding. The banks that we're working with are fixed on a certain price and if they get that they'll sell. Values will continue to increase and that's what will drive transactions, as opposed to values falling and banks just cutting and running."
Jonathan Hubbard, managing director, Jones Lang LaSalle Hotels, concluded: "For the banks to get comfortable again they need to see more transactions. The economic view is quite bullish, but across Europe there are varied dynamics. We need to have a clear out of the assets that aren't bouncing back."
Several advisory groups used the conference to launch their latest transactions data, which have indicated increases in 2010 and likely growth in this year. The HVS European Hotel Transactions Report saw a doubling in transaction volumes last year, forecasting that deal volume would "gradually pick up" during 2011, with an increase in distressed sales likely as trading improved and bank lending increased.
Deloitte supported an increase in transactions, with Nick van Marken, global head of advisory – tourism, hospitality & leisure at Deloitte, adding: "2010 saw global transaction activity approach c.$25bn in value. Europe saw a strong upsurge in deals, with a total of c.Eu6bn in overall transaction volumes. He added that he expected 2011 to see growth of "potentially" 25% to 50% in deal activity in Europe, with a return of portfolio deals, although risks remained on the downside.
Arthur de Haast, global CEO, Jones Lang LaSalle Hotels, said: "There are definitely distressed assets out there, but the banks have been taking a long-term view. It wasn't a bad strategy – I'm not sure it was a strategy – but it has worked out. We still expect debt to be a challenge in 2011. We could get a double-dip in pricing for secondary markets."
HA Perspective: With photos of shuttered pubs appearing frequently in the UK press, some observers have concluded that the short-term pain may be replaced by a more sustainable supply. However, the issues that have led to the fall in the number of pubs have shared some characteristics with hotels, but not all.
The key difference is that demand for hotel rooms is increasing. The issue is mostly one of capital structure, at least for chain hotels, rather than obsolescence. Lack of cash to refurbish the properties can push them into effective obsolescence, particularly if they are competing with nearby hotels that have enjoyed adequate capex.
Most of those calling for hotels to be demolished really mean "sell them to me cheap". The banks are showing no signs of playing this game, having seen how some investors made excessive profits in the aftermath of the 1990s recession.
Across Europe there is a case for shutting down hotels in a handful of difficult locations with excess supply. Ireland is the main culprit. Even Spain is probably OK outside of the Costas.