Financial Crisis: Good Prospects for Hotel Projects
Attractive interest rates and low prices are very good prerequisites for hotel developers
During the last ten years the European tourism market has experienced several severe highs and lows. The year 2000 brought an exceptional boom in overnight stays, whereas the burst of the new economy bubble and the terrorist attacks on the World Trade Centre in America shortly afterwards were the worst exogenous shocks to have a sudden effect on the industry since World War II. Nevertheless, although hotels in different locations recorded a decline in demand for overnight stays after these events, most of them only did so for a limited time. After “9/11”, American guests in particular tended to refrain from visiting European destinations, all the more so because of the unattractive exchange rate between the Dollar and Euro. However, this deficit in demand was compensated quite soon as a result of travel within Europe and from the Middle and Far East.
Now, the financial crisis is on everybody’s lips. All parties involved in the market are busy analysing and evaluating the possible consequences which could result from the current situation. At the same time, the hospitality industry in general has no real need to worry: Worldwide travel will continue to increase considerably. Although there will probably be a shift in the source markets all over the world– as could be caused by the increase in travel from China and India: Europe is and will remain one of the most attractive touristic markets. Hence, it is not the decisive question for the hotel industry, whether or not to invest in this sector, but rather when and under which conditions to do so.
In recent years, investment activities in the hotel sector – spurred on by the weakening market in office buildings – showed an above-average increase. There also was a higher demand for hotel real estate by institutional investors whilst less and less suitable properties were available with the result that in some cases there were some substantial price increases. The big sale of available real estate was fuel for the hotel development market, which in turn benefited from very good terms of financing and a remarkable availability of risk capital.
The financial crisis is now dramatically changing this situation: Risk capital has been withdrawn from the market at a breathtaking pace, financing funds have become scarce and companies are reducing their travel budgets because of the bleak economic prospects which will have a short-time effect on the pricing margins in the hotel industry. At first glance, the prospects for the further development of hotel capacities do not seem very bright.
If, however, we take into consideration that a hotel development can easily take up to three years from the first idea to the moment the hotel is opened and that generally it takes another three years to stabilise its turnover, we can see that the present “snap-shot” of the general economic situation should only to a certain extent influence the general decision to invest. If we take a closer look at the present situation, we will also recognise that the soon to be expected pressure on prices for overnight stays will indirectly also put pressure on the purchase price of those hotels that need to be sold during this phase. This tendency is reinforced by the fact that there will be less potential customers as a result of risk capital being withdrawn from the market and demand hence no longer being stimulated.
Prevailing financing options have been reduced to a conservative approach in which loaners expect a much stronger share of risk i.e. equity capital by the developer/owner. A comparison with recent years, could give the impression that conditions have become extremely bad. However, if we take a look at this development in a slightly larger time context, we will come to the conclusion that the conditions for financing as we knew them in recent years were an exception rather than the rule and that in the past the requirements of hotel projects by financing bodies were very much more demanding than more recently. From this point of view, we could also speak about a process of normalisation in the broadest sense which will leave only a small scope of action for speculations in the hotel investment business and for people without the necessary expert knowledge in the world of hotel development.
In this respect, it pays off to do counter-cyclical investments in the present situation: The fact that conditions for obtaining loans have been tightened is partly compensated by much better interest rates; prices for hotels and above all for land will be put under pressure and one or the other project which was initiated during the phase of high prices will be put “on ice” for the time being and will hence reduce the number of potential future competitors. These conditions are very good for developers in combination with a first class hotel operator and hotel concept, which being perfect will be “the enemy of the good”.
Or, to put it Warren Buffet’s way: “most people are interested in [investments] when everybody else is. But the best time to be so is when nobody else is interested in investments.”
By Matthias Lowin, Managing Director of Feuring Hotelconsulting GmbH, Mainz
Susanne Hoffmann
ReComPR for Feuring
+49-6131-21632-21
Feuring – Visionary Hotel Development