Alternative hospitality products could offer higher returns, although lack of available stock remained an issue for those wanting to invest, heard attendees at Hotel Analyst’s Hotel Alternatives Event held last week in London.
An increased enthusiasm for the sector from both investors and lenders meant that platforms were expanding, as alternatives moved closer to the mainstream.
Bob Silk, relationship director, Barclays Bank, said that the bank was happy to consider alternative assets, including caravan parks, which he described as having “good asset backing, good income streams and are stable across the cycle”. Silk said that, as with any lending under consideration, “you need revenue trajectory, you need to know the competitor position. The trouble with data is at there can be so much available that you can go blind trying to take it apart. We lend on Ebitda – we don’t think about loan-to-value, it’s illusory”.
Shona Pushpaharan, head of hotels and real estate finance, Clydesdale, commented: “Some of the alternatives, like student accommodation, are seen as real estate, not hospitality, so you have to take more of an LTV view. Then with developing, with student accommodation and aparthotels, the buildings are very similar, so if you’re comfortable with one then you’re comfortable developing the rest. It’s location, brand, who’s operating. We’re looking for people who can build.”
The lenders all agreed on having some equity involvement before they would commit. Mark Quigley, managing director, UK, real estate finance, Beaufort Capital Management UK, said: “They need enough equity, we need to see the whites of their eyes, we need to see the cash. If there’s no cash equity that would cause us concern. In terms of location, the reality is that we need to be far more discerning about micro-location. You need to delve into the weeds to make sure it’s the right place. If it’s student accommodation it needs to be so close to the university that the students can roll out of bed and into the lecture theatre.”
The bankers were cautious about alternative forms of lending, in particular ground rents. Martin Smyth, executive director, Coutts, said: “We are seeing a lot of competition from alternative lenders. We are comfortable with mezzanine finance and equity coming in, we see a few ground rent structures we aren’t comfortable with, as borrowers are cutting their equity down to zero. One plus one doesn’t equal two when you split the ground rent and the leasehold interest. Borrowers are using the ground rent in lieu of equity. We’re not convinced if we sell these assets when they are distressed there will be a market.”
Bob Silk, relationship director, Barclays Bank, added: “I’ve been doing this a really long time and I’d like to stick to my knitting and if you’re a borrower and you want to borrow up to 90% from a variety of sources, you may not own your asset for very long as values go up and down. If you want to borrow a lot, being careful what you wish for. The equity in your house doesn’t pay your mortgage, the pound in your pocket does.”
For the investors, opportunity to build on existing portfolios was key. Laura Brinkmann, VP, real estate, Brookfield Asset Management, said: “Brookfield are eager to invest where there is the potential to operate, adding value, as opposed to fully-stabilised branded real estate where you have no input into asset management or operation.”
Erik Jacobs, partner, HORECA Investment Partners, pointed to how Generator was able to build up a portfolio at a time when real estate suitable for conversion to hostels was relatively cheap. He said: “We continue to look at platforms in Europe. The price sensitive of the hostel market is strong, it’s hard to increase prices. To seek a city centre site which works as a hostel, where the cost of real estate is now higher, doesn’t always work.”
Hostels were one of a number of products feted at the event, with serviced apartments hailed by a number of speakers because of their similarity to the hotel sector and their increased popularity amongst corporate travellers. Ed Fitch, partner, Cushman & Wakefield, said: “Serviced apartments help volatility in a way that hotels don’t. People tend to treat apartments better than hotel rooms and they have a fraction of staffing requirements than normal hotel rooms. Corporate travellers are using serviced apartments more and more. Brand recognition has become a factor, they are policy compliant and the traveller really likes the product.
“Serviced apartments are delivering the experience that people want, blurring the lines between business and leisure. Airbnb is a channel to sell your product, and has normalised the product. Serviced apartments tend to be in strong city centre locations with strong underlying value – the branding of the market helps and they are liked by the institutional investors. A barrier to investment has been a lack of supply, but that is starting to come through.”
Looking performance, Thomas Emanuel, director, STR said that serviced apartments had seen 81.8% occupancy in 2018 in the UK, against 77.9% for hotels, with rate GBP36 higher. He said: “Of course you’re going to pay more for a three-room apartment and serviced apartments are still predominantly upscale and city-centre based.” Emanuel forecast an 11% growth in supply in the UK for 2019 in serviced apartments, against 3% for hotels, falling in 2020.
HA Perspective [by Katherine Doggrell]: Dealing with the complexities of hotels has left many investors fully primed to invest in the alternatives market, a situation which does not, as yet, seem to have the traditional hotels grumbling too much – perhaps because the global hotel brands were too busy getting into the alternative sectors themselves.
For the lenders, as long as they could see the route to revenue, they weren’t too phased by handing over a bit cash, even for developers, as long as they were committed to having skin in the game. And with mature markets in Europe no longer offering the returns from hotels which some investors were seeking, creeping over into hostels, serviced apartments and self-storage units was becoming very un-alternative indeed.
But for all the ‘oh they’re just like hotel rooms’, they were not without their issues. With many of the alternative brands still in their proving stage, investors had to use their nous rather than banking on flags. Demographic changes and Brexit were also likely to make waves, not least in the student sector. And, with delegates being told that Millennials were moving away from ownership and into experiences, how were they going to fill all those self-storage units? At least the ageing population offered solace for those looking at care homes.