Over the last couple of weeks, a series of mini shocks across the world have triggered worries that we might be on the verge of another financial crisis. The collapse of Silicon Valley Bank and Credit Suisse, persistent inflation and rising interest rates are all a cause for concern.
Some people have connected all this to commercial real estate with the suggestion that it might be the next sector to feel discomfort. Chief among those concerns is the fact that anybody looking to refinance in 2023 is going to find things much more expensive than they did in 2018.
A new report by London’s Bayes Business School looking at European commercial real estate lending makes for interesting reading.
“Overall, current rates mean variable loan interest rates starting from 4 per cent across Europe and starting from 6% in the UK for prime stable assets, which explains the level of current fixed rates and double digit expectations for junior financing,” the reports said.
The rise is thanks to a steady rise in Euribor and Sonia rates over the past year.
This is the big picture but what does it mean for hotel investors?
“Yes, it is more expensive, and it is harder to find banks, but we have been able to get some good solutions for our clients. There are lenders - the traditional lenders and debt funds can be more picky and more selective, but we are still seeing activity. The overall cost of debt over the past couple of years has definitely eaten into profit,” Brien Giuntini, partner - hotel capital markets EMEA at Cushman and Wakefield told Hospitality Investor.
He added: ”It is unlikely that margins or the underlying cost of capital is going to improve in the short- to medium term.”
Lenders have also started reducing the LTVs on offer in order to protect their interest cover ratios.
“In hotels, we have seen senior LTVs reduce to around 50 per cent from 55-60 per cent previously and all-in cost of debt has doubled from 3.5-4% at the end of 2021 to 7-8 per cent now. While some hotel lenders have not restarted active new lending post-Covid and the lender universe is smaller as a result, for many banks and alternative lenders, hotels remains an attractive asset class,” said Chris Gow, head of debt advisory UK and Ireland, CBRE.
He added: “As an example, CBRE has recently closed a £200 million portfolio refinance for Vivion Investments on their UK regional portfolio with an alternative lender and acted for Zetland on the 5* Morrison in Dublin working with a UK based Bank.”
This change is just an admission that the macroeconomic situation is very different to what it was only a couple of years ago.
“People are asking a lot more questions, looking into details more. You know, 2019, when, everything was happy, there was a bit more competition to place money. Now, they're more selective,” Giuntini said.
Reassuring demand
For obvious reasons commercial real estate is lumped together as a sector but in reality it is multiple different asset classes with different dynamics affecting each one. Rich Hill, formerly of Morgan Stanley and now senior vice president and head of real estate strategy and research at Cohen & Steers, explained this really well on a recent episode of Bloomberg’s Odd Lots podcast:
And if you think about commercial real estate, everyone thinks about it as a singular asset class, but it's really 15 different property types under one umbrella. In many cases, those 15 different property types don't necessarily all act the same.
What drives multifamily fundamentals might be much different than what drives retail fundamentals. And we haven't even really started talking about some of the sub-sectors like healthcare, for instance, or data centres or cell towers.
There's a whole host of different property types that are out there. Yes, commercial real estate is a singular asset class, but in many respects, as a strategist and a researcher, I'm covering 15 different parts of the economy that all have a singular commercial real estate umbrella, but they have different fundamental drivers, right?
Hospitality isn’t retail or office. Even during the worst covid outbreaks when countries relaxed lockdown restrictions people wanted to travel and this has kept being the case. Hotels have also been able to match inflation by increasing daily rates, without — in most cases anyway —an impact on bookings.
“I think they've done quite well, the hotels, the operators, and having that track record makes it a lot easier to get the financing, especially if [debt] multiples are based off the trailing 12 months. It's hard to say things are bad in hotels, where operationally they've done really quite well, and taken advantage of the holiday seasons, even if people aren't traveling, the staycations and whatnot have definitely helped,” Giuntini said.