Experts at an HVS-led webinar suggest there
is more deal activity at hand with a ‘meeting-in-the-middle’ around values to
quench strong investor demand.
LONDON – The hurdles are lower and the triggers
getting easier to pull. But while conditions in European hotel M&A are
improving, the pace of deal making, and investment value trajectories, are
still modest compared to 2019.
Year-to-date volumes cited as part of an
online discussion hosted last week by HVS Hodges Ward Elliott, indicate a 9% deal
increase in 2024 over 2023. Deals totalled €1.81 billion (US$1.98 billion)
versus €1.67 billion last year.
Charles Human of HVS Hodges Ward Elliott,
leading the webinar, said: “Expect an increase in transaction activity in H2 if
interest rates come down mid-year.” He added that full-year volumes could reach
€14 billion in 2024, back to their 18-year average. However, he also said that
2023 volumes were €10.8 billion, 19% below 2022 and 60% below 2019.
The reality is settling in that the world has changed and if you want to sell an asset it has to come at a reasonable price. People’s expectations around pricing have definitely changed over the last year or two.
Ramsey Mankarious
Separately, Tom Oakden, managing director,
Hilltop Hospitality Advisors, which compiles independent ‘sold’ and ‘for sale’
deal databases, said: “By the end of February we had around €3 billion of
transactions. That is around a billion ahead of where we were this time last
year. Almost everywhere we look there is activity.”
So, to revisit the “hurdles and triggers” editorial formula from
September 2023, here’s an update six months later framed in the context of the
HVS webinar.
Graeme Smith at AlixPartners led the
discussion with Human. On an expert panel were David Fattal of Fattal Hotels/Leonardo
Group; Louise Gillon of Leumi UK; Neil Kirk of London & Regional Hotels;
Ramsey Mankarious of Cedar Capital Partners; Katie Morton Lee of NatWest Bank;
and Scott Wolfe of Pro-invest Group.
Narrowing bid-offer spreads
Differences in perceived value from buyers
and sellers has probably been the highest hurdle to dealmaking in the European
hospitality sector. In a sense, that’s self-evidently true because deal prices
reflect most if not all other contributing factors. But as Human said: “We are
generally seeing more deal activity with a meeting-in-the-middle around values.
There’s strong investor demand and an increasing realization among sellers that
to get a deal done requires price adjustment.”
Ramsey Mankarious of Cedar Capital Partners
said: “The reality is settling in that the world has changed and if you want to
sell an asset it has to come at a reasonable price. People’s expectations
around pricing have definitely changed over the last year or two.”
Scott Wolfe of Pro-invest added: “We are
focussed on acquisitions at the moment, and we are seeing that bid-offer
spreads have come down as owners are accepting that values have started to
shift.”
Echoing observations that market
participants were more willing to negotiate, Neil Kirk of London & Regional
Hotels said: “There’s always going to be a solution, it’s just a question of
apportioning returns.”
Easier interest, inflation rates
Interest rates appear to be leveling and
while they are still higher than in much of the recent past, lenders and
borrowers are looking to the future with more certainty. Human said: “We think
that interest rates have more or less plateau-ed.”
There is a looming €90 billion (US$98 billion) funding gap across the European real estate sector and within that a €4.5 billion shortfall emerging over the next three years in the hotel segment. 'This will trigger distressed deal activity as not all of this will be able to be funded.'
Graeme Smith
Equally, inflation is easing, and less
intense wage, energy and cost pressures are injecting confidence into deals
that, ultimately, pivot on the future operating cashflows generated by
hospitality assets.
Debt distress
As existing loan arrangements mature, Smith
said there is a looming €90 billion (US$98 billion) funding gap across the
European real estate sector. Within that, he spoke of a €4.5 billion shortfall
emerging over the next three years in the hotel segment. “This will trigger
distressed deal activity as not all of this will be able to be funded.”
Alongside the eye-catchers, the market
appears to be dividing into lower and higher quality assets. While stress on
owners is a factor – reflected in the ‘Deals or Distress for the Hospitality
Sector’ title of HVS webinar – it is seemingly easier to get deals over the
line where asset quality is better. “Usually there is a reason an asset is
distressed,” Fattal said. “Sometimes it is bad management but often it is
simply not a good enough asset.”
Debt deflation
Most see high inflation as a bad thing
because it effectively devalues money. Nominal-value debt hurdles lowered by
high inflation are temporary and arguably ultimately illusory if lenders act to
recuperate their real-terms losses in other ways.
That said deals may become easier to seal
if inflation increases the cashflows need to service years-old debt. Smith
reminded delegates that “cumulative inflation has pushed up by almost 25% since
2019.”
We do expect to see more distress. We think it’s inevitable because of the raised costs of debt. But we also see much more in the way of structured solutions than pure distress selling. There’s a more creative set of buyers out there today.
Charles Human
For owners with loans arranged five and more
years ago, 25% UK inflation means 25% lower debt in real terms. Clearly, the
impact varies with differing currencies’ rates of interest, inflation, and
foreign exchange. Increases in room rates, meanwhile, ease the pain caused by
higher operating costs. Smith told the webinar that RevPAR have risen about in
line with inflation.
Interest cover ratios
Little wonder, perhaps, that lenders appear
more interested in interest cover ratios (ICRs) than loan-to-value (LTV)
numbers. “It comes down to the key thing which is debt serviceability,” said Morton
Lee of NatWest Bank.
Gillon of Leumi UK said she looks at LTVs
and it’s possible those figures may lead to reductions in asset values. “But
that’s not going to limit the debt you will ultimately get,” she said. “That’s
driven by debt serviceability.”
Smith added, “If interest rates remain
high, hoteliers who can’t grow profit margins will eventually face distress
either when debt matures or through the steady erosion of cash reserves which
in turn may to lead to more distress.”
Eye-catching stimulus
Several high-profile transactions assets –
including the totem-pole like BT Tower in central London – are sending some of
the clearest signals that M&A in Europe, while far from raging, is firmly
back on the agenda. BT Group agreed to sell the Tower for £275 million (US$353
million) to New York City-based MCR Hotels, which plans to use the landmark as
a hotel.
Other eye-catching deals include the
Mandarin Oriental in Paris, and the Edwardian/Starwood Capital sale. Less may
be said about the deals which come about because of operational or financial
distress. But as hurdles get generally lower these may also be triggered.
Human of HVS, added: “We do expect to see
more distress. We think it’s inevitable because of the raised costs of debt.
But we also see much more in the way of structured solutions than pure distress
selling. There’s a more creative set of buyers out there today.”