In January and February 2023 we spoke, at some length, with a dozen or so of our hotel agent, friends, and asked them three questions?
•Do you see 2023 (and 2024?) as a ‘Buyers Market’
•Is there any geographical location/hotel style that is in, or out of, favour?
•Your thoughts on discount levels compared with recent peaks?
(With a general invitation to let us know if there was anything else they wanted to say?).
We received an extensive set of responses and so we decided to split this report into two short articles.
Is there any geographical location/hotel style that is in, or out of, favour?
We received some contrasting views.
‘Leisure currently offers a better return than corporate hotels. The opportunity to invest and re-position in a well-regarded leisure destination, will offer good growth prospects over a corporate led Monday to Thursday destination’.
‘Everyone wanted leisure-based hotels during the ‘staycation’ boom year in 2021. Demand reduced in 2022 but buyers still look forward to long-term prosperity for UK leisure – this has come from both corporate and private buyers’.
‘But the majority of long-term money is looking for budget hotels in town or city centres’.
‘City or town centre branded hotels are available at a substantial discount to replacement, so represent good value, in these times of construction inflation’.
‘Hotels to be repurposed can now be acquired at sensible prices, as can underinvested hotels, and over leveraged hotels’.
‘Groups are selling off non-core assets in order to invest in their core assets, to hold into the long term’.
‘Small hotels that have struggled, and not had investment, can be a good alternative for buyers with an appetite to physically increase the building footprint’.
‘Ground leased assets are available, but these are all but unsaleable, due to the lack of debt availability’.
Your thoughts on discount levels compared with recent peaks?
‘Difficult to generalise, on an asset-by-asset basis, what is a ‘normalised’ EBITDA in the current environment, also based on location and segmentation’.
Largely location driven, good provincial stock in a honeypot location is more resilient than over supplied locations, with little kerb appeal’.
‘Provincial yields could rise up to 3% but more likely 1% to 2% – which is relevant but not catastrophic for sellers.’
‘Demand currently exceeds supply and valuations should hold up as a result – we don’t see a discount’.
‘Assuming a steady state of target return and applying the ‘new’ banking terms it is very easy to see a 20% drop in values from 2019. It is however uncertain whether this is actually happening in the hotel sector, as it has happened in some sections of the property sector’.
‘Prime opportunities are still holding their own, although there have been some examples of reductions in value’.
‘A fall in EBITDA and a ‘blind’ move in yield, could lead to under valuation advice’.
‘Values are very asset specific – hard to draw conclusions as to whether values are falling universally – some assets have increased in price where trading is strong, recent capex incurred, good location and further add-on opportunities’.
‘Under performing and under invested hotels will definitely attract lower prices’.
‘Sales in a hurry will attract discounts’.
‘Alternative use buyers may offer the higher prices’.
‘Not so much discounts but more creative thinking – vendor loans, deferred payments etc – to help with the less amenable debt market’.
‘Some buyers are definitely taking a watch and wait approach’.
‘PE funded groups having strong growth targets are wanting to build their estates, undeterred by present challenges’.
‘Early 2023 is challenging but the operational and transactional market will improve as we progress through the year’.
‘We are seeing more retirement sales and where owners disagree on longer term strategic aims’.
‘Cash remains king and a cash buyer you can expect to secure a better deal’.
Hotel Finance Conclusions?
It’s good to see hotels remain a preferred asset class with lots of interest from investors who see these as inflation proof.
Everyone is looking for a discount and an added value angle, especially if they are a ‘cash’ buyer.
Leisure hotels are still popular (there was a recent survey which said 80% of British people planned some form of staycation in 2023).
If you are a buyer, we suggest you don’t wait too long for hotel values to fall, as there will always be keen buyers for the right asset in the right location.