If you’re a hotel owner looking to relieve debt by selling a business, there’s more opportunity than you might think, says Robert Walters

The hotel market has enjoyed a rather frothy time of late, with domestic post-lockdown demand driving increases in rate now being matched by occupancy and revenue per available room (revpar) returning to 2019 levels. The lifting of lockdown saw huge numbers of people wanting to go on holiday in the UK, since buoyed by overseas travellers lured by a weakened sterling hinting at good value.

This has been echoed in investment interest, which remains high with transaction levels also back up to 2018/19 levels, featuring both traditional real estate-focused funds and private equity funds, with KSL’s investment in the Pig Group being one of the most notable deals.

Of course, the problem with froth is that it lacks substance, and I am concerned that challenges lie ahead. The obvious one is the swiftly changing economic situation, especially in terms of inflationary pressures. This hits particularly in terms of the costs of the operation. But inflation also has a very negative effect on the cost of living of the guests. And, with around 38% of the UK market being domestic, is that going to affect the choices people make in terms of the number of times they travel, where they travel, where they stay and how much are they prepared to pay?

Demand in certain locations, particularly London, is being supported by overseas travellers and the threat to a hotel owner would be to believe that the current run of form is sustainable long term. Planning for a downturn would be prudent, alongside addressing ongoing problems with staffing.

The big elephant in the room is debt. If you’re a hotel owner, and leveraged, I would be disappointed if you had not been carefully checking your banking covenants and monitoring how close you are to breaching them, especially if on a floating rate and immediately absorbing the blows being issued with such horrible frequency of late by the Bank of England. And if you’re on a fixed rate, it is only a temporary respite as you ponder what will happen when you come to refinance.

Hotels are operational businesses, almost living and breathing entities, and not simply lumps of real estate

Now, the thing about the problem with debt, is that it’s a double-edged sword. For existing owners, it’s potentially problematic. But for investors, especially those heavy with cash, it’s a massive potential opportunity.

There is no shortage of capital out there looking to acquire and while there are plenty of funds happy to wait in the hope they can “bottom-feed” in the market, owners don’t need to wait to fall prey. If you can work with a strong investor with long term ambitions, then it is possible to find help for funding as well as acquisition. The key is to be extremely well prepared for such interactions. Owners will invariably benefit from working with advisers who have strong relationships with sources of capital. Hotels are operational businesses, almost living and breathing entities, and not simply lumps of real estate.

The key at the moment is to protect what you have through stringent cost management. But it’s also important to continue to invest. And that might be a challenge for some owners: maybe they don’t have access to capital, or the capital they have is too precious, but effective investment strategies can make all the difference.

A key area for immediate review is the software employed by the business. There are multiple options that can significantly help your business keep costs down as well as looking at the ways you drive business to you, for example broadening your range of distribution channels to include a strong direct presence and thus reduce dependence on (potentially costly) online travel agents.

Good hotel asset managers (often in concert with other advisers) can help in navigating change, whether planned through capex projects or repositioning, or reactive due to market challenges, through to assisting owners in preparing for sale. There are plenty of owners who are fantastic hoteliers, running wonderful hotels, but when they look to sell they don’t always put themselves forward in the best possible light. We know what to expect, and we know how to prepare.

And in this market, in the coming months, while cost management will always be essential, a clear strategy is critical. Endurance will continue to be needed but preparation will be all.

Published at: https://www.thecaterer.com/news/debt-sure-bet-threat