Why finance providers are still willing to back hospitality investors

Berlin — There is significant appetite to finance hospitality projects, but hotel owners still need to make sure their projects have institutional appeal, according to a panel of experts speaking at the International Hospitality Investment Forum (IHIF) today in Berlin.

Key factors in securing finance include sustainable themes, a commitment to the hospitality sector and a dynamic location, delegates heard, as Stephen Morita, managing director of Eastdil Secured, moderated a lively debate.

Recent research backs the thesis that a shortage of finance may well be holding back a potential flood of hospitality investment.

Appetite to lend

However, all three panellists said they had an appetite to lend in the current climate. Said David Gorleku, managing director, real estate debt strategies, Blackstone: “The sectors we like haven’t changed dramatically in the current environment. We tend to look at what is happening in our own portfolio when deciding which themes to lend on. It’s not just about the current performance of an asset, but whether we feel the theme and sector offer continuation.”

Bettina Graef-Parker, managing director, Aareal Bank, said that “cash flow and sponsorship are very important”. She explained: “We are very relationship based. We see that hotels are sometimes flavour of the month, sometimes not. But we need sponsors that are committed to the hotel industry and have a long commitment to the hotel industry, just as we have.”

She added: ”We finance over 250 hotels and compared to all the other asset classes we have the lowest loan loss provisions in the hotel asset class even though it’s the largest asset class on our balance sheet. Furthermore, we have no NPLs in the hotel space.”

Debt and equity

Jens Blomdahl, senior vice president of hospitality specialists KSL Capital Partners noted that his firm was active both on the equity and debt side. “We are seeing slightly smaller ticket sizes in the debt space, with an appetite for more structured loans such as mezzanine,” he said. “We spend a lot of time in core markets. That means the UK, given the large liquidity of the market, plus Iberia, where operating fundamentals are looking like the area is in for a really strong year. I think beach-front resort hotels are a great pick.”

Added Gorleku: “Current debt is more expensive and less available. So we have to have more of an asset-by-asset approach. We do like the leisure trend, we see that business travel will take longer to come back, but we have a long-term focus.” He said: “We really like experiential travel, large global cities like Paris and Rome, and see the rise of more in person face to face business. If you can capture all three of those trends you are looking at potential outperformance.”

In terms of the key finance markers, Graef-Parker said that some parameters had changed in the current high interest rate environment. “The biggest question when we had zero interest rates was what LTV do you go up to. Now we’re asking what coverage you go up to – we’re not speaking about yield on debt any more.”

She added: “We haven’t changed our ideal ticket size or market. We’re granting mostly senior loans in the 50-60 per cent range, focused on city centres or major resorts. My pick for a single, strong location? Would have to be city centre Paris.”

In the last two weeks, both the ECB and the Bank of England raised interest rates, in a sign that the war on inflation is not yet over. In a briefing note, the ECB said that “the inflation outlook continues to be too high for too long” and reiterated its medium-term inflation rate target of 2 per cent.

However, many market watchers suggest that the ECB may have entered the final cycle of rate rises. While the latest rate rise was its seventh in a row, it was also the smallest raise of the series.