Lenders still in conservative mode, but favour hotels

Hotel investors looking to finance deals in 2024 should see lending conditions and options improving as the year goes on, according to experts in the sector. However, lenders will still favour core markets and asset types, with appetite for risk remaining contained. 

Investors that remember the use of disparaging terms like PIGS – referring to economies including Portugal, Italy, Greece and Spain, which were often regarded as ‘risky’ bets in the wake of the global financial crisis – will have observed that hospitality fundamentals in recent times have inverted this view. Despite economies including Italy and Greece still performing sluggishly throughout 2023, their hotel stock has shifted into a core category, due to solid demand and performance.

Recent research from Deloitte backs this thesis, suggesting that while lenders appetite remains strong for hotel assets in the most touristic countries of Europe, lenders' sentiment has deteriorated elsewhere. “As a consequence of the increasing appeal for good quality assets (with strong fundamentals) from investors, the outlook of lenders is generally positive in France, Italy, the UK and Spain. However, in Germany, Ireland, Poland and the Netherlands, investment volumes have been low (sometimes due to limited supply) and lenders’ negative sentiment for this market segment remains,” reports Deloitte’s European debt & capital advisory team.

Inflation and interest rates

Elsewhere, caution abounds despite inflation easing, triggering expectations that interest rates will fall in the US and Europe. For Colliers, the European Central Bank (ECB) could push the key interest rate below 4% by the end of the year, enabling  financing conditions to stabilise.

“The financing environment will favour market growth in 2024 with volatility settling in the first half of 2024 followed by a slight drop in debt costs in the second half of the year,” says Achim Degen, CEO of Colliers in Germany. “We expect the possibility of having left the interest rate peak behind us combined with a significantly larger supply of properties to boost market activity, which would send out a positive signal to the entire sector.”

However year-end predictions do little to inspire change in the first quarter of the year for a broad number of lenders. With the prospect of swap rates on the rise again in the first few months of 2024, banks are still in wait-and-see mode. AEW suggests that the cost of borrowing (tied to 5-year Euribor swap rates) is expected to peak in Q1 2024 at just above 3.5%, and stabilise below 2% by mid-2025.

A conservative position from central banks is also impeding a major shift in financing terms. In December, the Bank of England rebuffed interest rate cut talks, saying that rates needed to stay high “for an extended period” in the fight against inflation. In the US, a report released in mid-January showing that consumer prices increased more than expected in December – with the CPI rising 3.1% month-on-month and 3.4% compared to a year earlier -  also complicating the Fed’s near-term options. The Fed has already suggested that three interest rate cuts could happen in 2024, but the first could now come “later than the market is hoping for”, according to Quincy Krosby, chief global strategist for LPL Financial. Chicago Fed President Austan Goolsbee said he also needs to see more data before cuts can begin, with the Fed still eyeing an inflation target of 2%.

Finance alternatives remain

Despite this complex scenario, “a lot of opportunistic capital is looking at the market and concluding that it’s a great time to be a debt investor,” says Jai Patel, managing director and co-head of real estate debt at ICG, an experienced provider of hospitality debt solutions. Patel says that the hospitality space is one of the asset classes presenting interesting opportunities, “backed by strong cashflows with higher quality sponsorship” he notes. “At the same time, ESG is a big focus across Europe as all buildings need strong credentials to attract occupier and investor demand.”

 ICG Real Estate currently has around €6bn AUM across debt and equity, with the debt business representing about two-thirds of its overall real estate book. He notes that a lot of global firms, including US lenders, see Europe as the next big debt opportunity. In this evolving environment, alternative lending is here to stay. “Regulations mean that it’s harder for banks to be lenders on direct real estate, and capital charges continue to trend higher,” Patel notes. “Meanwhile, with estimates that the refinancing wall in Europe over the next couple of years could be as much as €300 billion, there will be more than enough space for alternative lenders.”

Refinancing wall

CBRE anticipates that Europe’s debt funding gap could reach €176 billion between 2024 and 2027, after a total of €640 billion in private real estate debt was originated across Europe between 2019 and 2022. “These estimates provide a broad gauge for the scale of the refinancing issue and indicate the sectors and markets facing the largest challenges,” says Chris Gow, head of debt & structured finance Europe at CBRE. “In practice, we should recognise that lenders and borrowers have been agreeing loan extensions and amendments to allow more time for the market to stabilise and for funding issues to be resolved in an orderly way.”

Recent refinancing deals indeed underline that capital is interested in providing solutions for high-conviction segments. In November, hostels group Generator completed a highly complex €750 million global refinancing. This featured a combination of European debt facilities and private bond issuances of around €440 million for Generator’s European arm, backed by Ares Management, and US debt facilities of circa $330 million for Generator’s US arm, backed by Generator’s existing lenders Waterfall Asset Management and Värde Partners. Said Jason Kow, CEO Queensgate Investments: 'This is one of the largest and most innovative real estate financings that the market has seen in years, involving multiple outgoing lenders across 10 countries.” Generator Group earned €225 mln in 2023 (vs €180 mln in 2019) recording an EBITDA of €75 mln (vs €50 mln in 2019), an overall earnings uptick of around 40% compared with 2022.