The lending landscape in 2013

John Wagner George Sell Uploaded

The event was held at Le Meriden on London's Piccadilly and the scene was set by David Bailey, senior director at CBRE Hotels. At previous conferences I have attended, the prevailing atmosphere on finance panels has always been pretty gloomy, with the most striking feature being an air of pessimism and a reluctance on the part of lenders to loosen the purse strings.

It was encouraging then, to hear Bailey place the hotel market against a general context of a GDP upgrade, a rise in retail and export sales, house prices growth and a general increase in confidence. Bailey said there is a genuine cause for optimism in the market and cited a fourth monthly rise in hotel profits (source: HotStats), an improving debt market, an influx of US buyers, and increased deal activity. CBRE Hotels is expecting a busy 2014 despite a lack of available stock, said Bailey before handing over to a panel which addressed the question that hoteliers across the country want to know, regardless of size or type of property.

Titled Who is really lending in the UK on hotel development and on what terms?, the panel was moderated by Saar Sharon, vice president asset management, PPHE Hotel Group, and the panel was made up of Bob Silk, relationships director, hotels team, Barclays Bank; Merzak Kaddour, head of hospitality and leisure, Clydesdale Bank; and Sarah Green, business development director, hotels, Royal Bank of Scotland Corporate Banking.

Saar Sharon prefaced the session by saying that the entire hotel pipeline for the EMEA region is a whopping 13,000 hotels totalling 250,000 rooms, so there is definitely finance available and the market is moving.

But when the bankers themselves came to speak it became evident that the activity levels varies widely between institutions.

Bob Silk of Barclays said his bank is much more active than in recent years, but that it is mainly funding acquisitions rather than new-build projects: "Development invariably goes wrong in terms of timescales and cost - we are very wary of new development but we have been much busier funding acquisitions, particularly in the provinces."

Sarah Green of RBS was frank when it came to the conditions the bank imposes on borrowers: "As a lender, we have to be happy that there is a strong cash trading business that will repay our debt. The non-financial criteria are very important - management experience, credibility etc. Having a brand is a reassurance, particularly a global brand with marketing power and a reservations system. Location is also key, as is a thorough feasibility study and contractors with a proven track record. Deals require a bigger equity stake than ever before. We require a minimum of 25 per cent equity from the borrower, more typically in the 35 per cent region, paid up front and in full. Our average loan-to-value is 60 to 65 per cent."

Clydesdale Bank's Merzak Kaddour was even blunter in the assessment of his institution's position: "We are not in the development finance market at the moment, and we're only lending to existing customers."

The panel then debated whether they would rather lend to a property which has a management agreement in place, or a franchise. Bob Silk was happy with either, saying: "Management and franchise agreements are fine - leases are harder to lend against due to rent reviews." But Kaddour said: "Management agreements written before the financial crisis aren't fit for purpose. White label franchise agreements can perform better than management contracts."

But it wasn't all doom and gloom. Bob Silk offered the audience some encouragement by saying the cost of debt is coming down and credit conditions are slowly but surely easing, and Merzak Kaddour reminded them of the three, unchanging, main criteria in any deal: risk, return and relationship.


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