Sleeper_March-April

Sleeper March/April 2009
Head Ofﬁce
Hotel Analyst www.hotelanalyst.co.uk
Debt debate bedevils conferences
Availability of debt was the issue which dominated discussions throughout the autumn season of hotel
investment conferences
The autumn hotel investment cost of debt was similar to where it was Marken and was just as gloomy. He said that there would be distress in 2010
conference season drew to a close at before the crisis more than a year ago. forecast that the recession was going to and 2011 when the debt in deals done in
the end of November with the ﬁnal The threat in the current environment be much deeper than many expect and it 2006 and 2007 became due. “There will
major event on the calendar seeing debt was for deals where debt had been would take three, four or even ﬁve years be a lot to look at,” he predicted.
ﬁnanciers facing a grilling by a group of heavily swapped out. Here it was difﬁcult before the recovery begins. Ryan Prince of Realstar also warned
hotel owners. to negotiate an exit for both the bank and Inﬂation was no longer a threat thanks that the prevalence of bond holders rather
The HOFTEL conference in London the borrower. It might take three, four to the collapse of what Bootle viewed than banks with debt meant solutions
reﬂected a more balanced perspective or more years for some deals to work as a commodity price bubble. The bank would be very difﬁcult. “You can’t have
on the current situation, with the banks through, it was feared. bailouts would also not be inﬂationary, discussions with bond holders,” he said.
arguing that while the current climate is A particular threat was the commercial he predicted as wealth had been The world is moving back to a situation
difﬁcult, 2009 will see changes. mortgage backed security market where destroyed and the bailouts were simply where hotels are viewed as a complex
Since the collapse of Lehman Brothers there was effectively nobody for the helping in part to replace it. All major asset, added Prince. “We will be back to
the debt markets have been frozen and borrower to talk to. It is possible that ﬁre countries would experience deﬂation, he the same group of four or ﬁve buyers and
no thaw is expected until the new year. As sales will ensue. argued. And cautious bank lending would not 50 who were chasing yields that are
one former banker remarked at HOFTEL, An even gloomier prognosis was put contribute to weak GDP growth. better than ofﬁces.” Investors who didn’t
“The psychology and motivation of banks forward a week earlier at Deloitte’s 20th For commercial property, Bootle was understand the complexity will be hurt,
is to do nothing. Everybody is measured European Hotel Investment Conference. similarly pessimistic stating he believed he predicted.
on liquidity at the year end.” Nick van Marken, lead partner in the outlook was similar to residential Barbara Cassani, Executive Chairman
He was, however, optimistic that by corporate ﬁnance in Deloitte’s hospitality on which he has been a consistent bear. of Jurys Inn, challenged the negative
the middle of 2009 banks would again be division, said: “Greed has turned to fear. Residential values in the UK had reached consensus: “If you have a good business
building up their loan book. The news is uniformly bleak.” a point of being 35% above the long run model then you are ok. Did you think the
An existing banker viewed the current The cost to the ﬁnancial services average. They had now declined by 13% last two to three years would continue?
situation as an opportunity for the hotel industry so far has been $1,000bn and had a further 25% to fall, he said. Stop whining and get back to business.”
industry “to save itself”. People had and other industries were now being In the US, where residential values Sir David Michels, a non-exec at
been making projections on an upward impacted, said van Marken. So far 26 had hit 26% above long-term trend, the Strategic Hotels, Jumeirah, Marks &
only trajectory, now there is a return to airlines had gone bust but he expected drop had been 18% already and there was Spencer and easyJet, said the current
normality. The current difﬁculties were the number to more than double. For another 10% to come. With the exception situation was extraordinarily predatory.
about people not understanding what hotels, just $20bn of deals has been done of Germany, most other European At the end of October, at the Annual
normality was, he added. compared to $100bn in 2007. markets had similar overvaluations of Hotel Conference held in Manchester, Sir
Banks were still lending but it was There had, however, so far been residential property. David said hotels were in for a sustained
being done to a lesser level and was more little distress in the hotel sector apart Barry Sternlicht, CEO of Starwood rough period. “Unusually, we are among
focused with most debt only available to from the rapid shrinkage in the market Capital, argued that Bootle was not the last to suffer. I believe our turn has
core clients in core markets. capitalisation of listed hoteliers which pessimistic enough. He said that come.”
It was admitted that it was probable globally had gone from $71bn in 2007 to Starwood Capital started in the early While the ﬁrst thing to do should be
that some banks were using market $33bn in 2008. 1990s when “real estate was a four letter to cut costs, the key exception was the
disruption clauses to restructure loans Looking ahead, van Marken predicted word”. But “back then real estate was sales and marketing budget. Sir David
as banks were losing money on many a difﬁcult environment. Trading is going isolated, now the problem is global”. said that studies of previous recessions
loans. “Banks are not averse to losing to worsen, multiples and yields will While this is a different kind of showed companies that increased sales
relationships if they need to for economic depress further, covenants are going to recession - “this cycle will be longer and and marketing came through downturns
reasons,” said the banker. be breached, there will be forced sales to more brutal” - he believed that there best.
In his view debt had been under priced pay down debt and raise cash, and there would be similar kinds of opportunities
for years and now it was being repriced will be distressed sellers. that there were almost 20 years ago.
at a more realistic level. Given the falls in Roger Bootle, Managing Director of Marty Kandrac, a Managing Director
interest rates, this meant that the overall Capital Economics, spoke before van at the real estate group at Blackstone,
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