Hotel Industry Confidence For Coming Year Sharply Divided

LONDON, 15 February 2012 - Leading hotel operators, banks and investors reconvened at the annual GVA Hogan Lovells TRI hotel conference in London on 2 February 2012 where keynote speaker David Orr, the former CEO of Mint Hotels, presented to a packed house.

Entitled "An Olympic Year for the Hotel Industry?", the conference explored the current and future state of the hotel market. A panel session with industry leaders debated the impact of non-disturbance agreements (NDAs), the use of asset managers to ensure optimum performance from assets and the impact of "loan to own" as an acquisition strategy. Key points from the panel session were:

  • banks were focussed on hotel earnings as well as their loan-to-value ratios;
  • the anticipated "tsunami" of debt default flooding the market with cut-price assets has not occurred, resulting in the endurance of loss-making "zombie hotels";
  • banks remain reluctant to sell their debt at a substantial discount, making "loan to own" acquisitions a less viable option;
  • NDAs are considered useful to encourage brands to invest, but an imbalance of power in favour of the large brands in NDAs could "lock hotels into a loss" and be a hindrance to re-financing;
  • hotel owners could benefit from an asset manager to monitor the performance of their asset, particularly if the operator of the hotel were highly incentivised.

Over 170 delegates were surveyed about their confidence in the prospects for the UK hospitality industry over the next 12 months, with the results revealing a sharp divide in industry confidence compared to the previous year, and an increased expectation of insolvency-related transactions.

  • Levels of confidence: 45% of respondents were pessimistic or very pessimistic about the prospects for the UK hospitality industry over the next 12 months (an increase from 29% in 2011), whilst 35% were optimistic or very optimistic (a decline from 53% the previous year).
  • RevPar: A consistent two thirds in both 2011 and 2012 believed that the revenue per available room (RevPAR) would increase the following year however of those who thought it would increase, 83% thought it would increase in London only.
  • NDAs: Almost half of respondents thought that NDAs were a hindrance to owners' ability to finance, with the remainder split equally between those who thought they did not and "don't know".
  • Insolvency: 91% expected a combination of restructuring, refinancing and forced/distressed sales to generate most transactional activity in 2012 (up from 84% in 2011). However, opinion was evenly divided as to whether buyers would be using loan to own strategies.
  • New Developments: Almost no-one expected a "return to normal" or a big uptick in development.  The expectation that the main driver of deals would be normal investment activity collapsed from 10% to 5%, and new developments from 7% to 3%.

Jackie Newstead, co-head of Hogan Lovells' hotels, leisure and gaming practice, who canvassed delegates on the outlook for the hotel sector in 2012, said:

"This was once again a great event, the ideal opportunity to gather industry experts together and gain an authoritative view of market. That insight suggested cautious optimism despite market conditions, with, unsurprisingly, insolvency related activity highlighted as key in the next twelve months."

Ian Thompson, director and co-head of Hotels at GVA said:

“We were delighted with the attendance for this year's event, and the feedback we received was very positive in terms of providing guidance in what remains a challenging market. Despite the understandable caution there are reasons to be excited by 2012 such as the Queens Jubilee in the Spring and the Olympic Games in the Summer. Investor confidence is beginning to return, evidenced by the significant upturn in deal flow during 2011. We believe that 2012 will see continued opportunistic investment perhaps with a greater diversity of product coming onto the market. There is no one ingredient to success although location remains the dominant key to success.”

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