Welcome to the next in our series of blogs where we look at hot topics in the lending markets.

This blog focuses on the UK hotel sector and we discuss the marketplace outlook for the sector.

We asked our friends at Bank Leumi UK and Hospitality Options for their perspectives on the matter.

Louise Gillon who is the head of hotel finance at Bank Leumi UK told us:

“As the UK’s vaccination scheme continues at pace, it’s time to think about a vacation. With the latest figures revealing that households saved over £45 billion more than during the same period in April 2019, this would suggest much of the population may currently be able to afford a holiday. However, with countries going from green to amber to red faster than dodgy traffic lights, it is little wonder a staycation boom is imminent as people enjoy a well-deserved break.”

“Following on from ‘freedom day’, there’s much to be optimistic about for the leisure and hospitality sectors, providing new variants and case numbers of Covid-19 remain under control and restrictions don’t return through ‘overenthusiasm’ over caution. Coupled with the fact that close contacts of people in England who test positive for Covid-19 won’t have to self-isolate if they have received both vaccinations or if they are under 18, the UK looks set for a ‘staycation boom’.”

“However, subprime city locations reliant on foreign and business travellers may continue to struggle this year, as domestic tourists look to coastal and country locations for their summer sun and dose of nature. City-breakers and domestic business travellers will be attracted to prime, trophy hotels as luxury and comfort rockets up their list of priorities. Without wealthy foreign tourists, these hotels are having to re-position themselves in the market to attract a greater share of domestic guests.”

“In the absence of clarity, the hotel sector may be reliant on domestic tourists to prop up the market until international visitors can return to our shores. From a financing perspective, hotel projects should always be undertaken with a long-term viewpoint – so this is unlikely to impact reaching stabilisation, providing Covid-19 case numbers stay under control.”

Mark Butler who is the managing director at Hospitality Options Ltd had very similar views from a marketplace perspective – he commented:

“The hotel sector closed overnight and has been in and out of lockdown ever since. It is still in hibernation in many locations however there are many reasons to be optimistic”

“Rural hotels are experiencing good growth and the staycation market is seeing a boom through the summer and this is widely predicted to continue into autumn and beyond.”

“The corporate hotel market remains heavily exposed to the current constrictions of government COVID policy, but consensus is building that there will be a strong bounce back as restrictions are lifted and confidence grows. Our view is that many people have an innate desire to return to ‘in person’ conferences, meetings, events, concerts etc and hotel room revenues will rebound strongly over the next 12 to 18 months.”

“The jury is out on when and how strongly international travellers begin returning to the UK, but they have been a very significant contributor to the larger Cities hotels market, and we expect government to do what it can to  restore confidence.”

“In many respects, the ‘trading week’ has been inverted, with the Monday-Thursday corporate market disappearing, whilst lots of families and couples have decided to ‘get away from the house’ and enjoy themselves with friends and family over the weekend.”

We asked Louise and Mark what their thoughts are in this market from a lending and operational perspective and any tips for those in the sector.

Louise added “As a boutique lender with specialist knowledge and the ability to be flexible, we think there is a real opportunity right now to step in and fill the gap left in the market by other players. High street banks are largely still not lending, meaning there is more demand for boutique lenders like ourselves. The volume of business crossing our desks, from both new and existing customers, is testament to this and the hard work of our experienced and dedicated teams at Leumi UK.”

“Hotel development projects have really been undertaken a lot by investment funds following the outbreak of the Covid-19 pandemic. There’s money waiting to go there, just not from traditional high street lenders at present.”

“Another unique factor coming out of the Covid-19 crisis is significant competition among active mezzanine providers and emerging debt funds to sweep up the opportunities out there. That said, the type of debt offered is different, banks offer facilities usually around three to five years, whereas debt funds act on a considerably shorter timescale. How we structure our facilities therefore ensures we offer sufficient support to both existing and prospective clients rather than be opportunistic, given that our core approach to lending is to be relationship-driven with a long-term mindset.”

“From a risk perspective, the threat of long-term systemic risk to the banking sector seems unlikely. Most lenders have operated sensibly since the return to business following the Global Financial Crisis (GFC) with a clear demarcation between debt and equity risk.”

“However, the nature of the Covid-19 crisis and economic fallout was nothing that we’ve ever witnessed before, and so certain elements of the real estate sector look likely to either never fully recover from the impacts of Covid-19 or will emerge from the pandemic with an entirely different investment offering tailored to the new environment.”

“That said, debt fund and bank debt are not the same. Banks generally offer 3-5 year funding, debt funds considerably short. So the watchword is buyer beware.”

Mark added:

“To survive and prosper, hotels must thoroughly review their operating structure, to ensure their cost base is commensurate with forecast sales income. Tough decisions may be necessary on costs and management will need to work hard on renegotiating terms with their suppliers and challenge themselves on the staffing structure.”

He also went on to talk about operational excellence in which he stated:

“It is critical for operators to understand in detail its revenue streams, and objectively review the broader customer offering and service levels. To try and become “best in class”, hotels that just rely on bedroom income will suffer for the foreseeable future. City centre hotels have been severely affected by people working from home, however those with leisure facilities and a good food offering are experiencing growth, particularly at weekends.”

With regard to lenders/creditors and investors he stated:

“Banks are concerned at the level of debt taken on by borrowers, largely as a result of the CBILS/ BBL schemes and across the property sector there is a mountain of rent arrears to resolve.”

“It is vital that hotel operators communicate openly with banks and creditors to try and reach a good outcome for all. Key to this is building confidence in the borrower’s business plan.”

“Management/ operators must have a well thought through set of financial projections that can be reasonably justified and defended. Clearly, trading performance of the last 16 months or so cannot rationalise the forecasts for the future, but we are seeing some evidence that those customers who have been communicating with their lenders/ creditors, having taken decisive action to bring in new sales, marketing and digital initiatives are receiving a fair hearing. If not, all is not lost.”

“In general terms the private investor and private equity market is awash with cash and new investment will be available to operators that can justify the quality and location of their facilities/ offering and are willing to agree a good rate of return to those investors…..the right investors will not be afraid to support the business through a process that involves certain creditors having to settle for less than they are owed, if it means the business can survive and prosper.”

Damian McGann – Director at Funding Friends stated that hospitality was a key sector and one that the team at Funding Friends have deep experience in. Our view is that the UK market will remain strong in the medium term following the inevitable short term bounce and as a result will remain an attractive asset class for banks to lend into.

Winners in the sector will have a good brand and positioning as well as a sensible cost structure relative to the experience they are attempting to create.

Strong location will remain a factor however the city / tertiary / rural debate is more polarised in opinion long termfollowing the pandemic and time will tell how that plays out.

He concluded that having the right financing structure is key and we are happy to advise on refinances / new borrowings and hotel developments.

Bank Leumi (UK) plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority (www.bankleumi.co.uk)

Funding Friends Ltd is a broker not a lender and is regulated by the FCA and a member of the NACFB (www.fundingfriends.co.uk)

Hospitality Options Ltd are strategic advisors to hospitality businesses and happy to provide a “healthcheck” to management teams  (www.hospitalityoptions.co.uk)