How COVID-19 Pandemic Has Affected Hospitality Lending Activity Predominantly In European Assets
By Korosh Farazad, Founder and Chairman of Farazad Group of Companies
COVID-19 has had a tragic impact on the hotel industry when lending transactions and liquidity reduced significantly since the pandemic began. Most of lenders have largely pulled back or put a full stop to new lending in the European hospitality industry. The market has slowed down as new investments are on hold due lenders exercising more of a conservative underwriting approach.
However, In April 2020, PPHE Amsterdam headquarter hotel group managed to secure a rare GBP 180 million hotel development loan for their new luxury hotel in London, despite hospitality real estate being hit hard by the COVID-19 crisis. The art'otel London Hoxton located in East London near Old Street, featuring 343 keys 27-story building with five floors of office space, gym, spa and art gallery is one of the few financing deals closed in this sector since the lockdown.
Boris Ivesha, President and CEO at PPHE, cited "We are pleased to have secured funding to develop art'otel London Hoxton with Bank Hapoalim B.M. which has been a long standing partner of the group funding several of our other key properties, including Park Plaza Westminster Bridge London which opened in 2010." He added "We believe the project has the potential to deliver attractive risk-adjusted returns for shareholders whilst further expanding our art'otel brand."
The Savills research said that "In the short term, in cases where hotel properties do come to market, prospective purchasers are likely to include cash buyers, parties with strong lender relationships, and those with access to more expensive debt than pre-COVID-19 levels, which could have a knock on effect on pricing." There are more lending protection to the lenders for instance covenants, interest reserve, hotel management agreement, insurance provisions, and underlying due diligence.
Costar research added that overall UK GDP Growth forecast has declined 9.9% in 2020. Knight Frank is also anticipating that the struggle of the economic downturn will likely have a more lasting impact on the performance of the regional UK hotel market, as corporate budgets are likely to be reduced, while the level of unemployment will influence the disposable income available and therefore the propensity to spend on leisure-based experiences. A further point put forward by Knight Frank cited on 8th April 2020 that the main focus of hotel sector's now is to remain in business, with cash conservative and liquidity among all the current concerns. Despite challenges caused by the period of lockdown.
Knight frank estimated that the sector in UK will rebound strongly once the economy recovers and travel restrictions are lifted. It is anticipating a V-shaped, stepped recovery with occupancy growth to be stronger during the initial phase of recovery but the rebound in revenue per available room to be fully recover once travel restriction are eased and long-haul inbound visitor return.
In conclusion, it is clear the hotel owners are having trouble to seek loan financing, particularly from new lenders. Hotel owners will need to come up with new strategies such as reaching out to lenders with an established relationship, extending the term of any existing loan - requesting an interest payment holiday to ease cashflow concerns and read-through whether it can take benefit from the government loan schemes that has been created to support UK businesses including hospitality sectors. Nevertheless, we are still faced with some challenging times.
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