Hotel Analyst
with a value of EUR10.2bn. The data showed properties within the IPD hotels database delivered a 6% overall return to investors in 2011.
Slotting will require banks to
classify each of their income- producing property loans into one of five categories, or slots: strong, satisfactory, good, weak or default. Against each one, capital will need to be set aside to cover the risk of default – the higher the deemed risk, the more capital will need to be allocated. The concept was introduced
in 2011 by the Financial Services Authority, when a suggested framework for the slots was made available for discussion. Following a consultation the initial FSA parameters were dropped, but it appears slotting will be introduced in some form into UK banking activities; and it will affect around GBP212bn of outstanding loans. IPD has modelled the likely
effect of the introduction of slotting, using information from its own database to see how risk- weighted capital would react under the slotting regime, if there were a downturn similar to that experienced recently. Taking data on 3,442 commercial property assets across the UK, worth GBP56.6bn at the peak of the market, they ran three models to see whether the proposed capital reserves were appropriate to actual risk. The findings were not good
news for real estate investors and commercial borrowers. Slotting will demand that banks set aside more capital as insurance, so as a result they will have to deleverage their loan books. This has the potential to depress the commercial property market once more, and could have a negative impact on capital values. IPD also sees a danger that
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slotting will become a box-ticking exercise that will take banks away from a regime of detailed risk analysis. And it is only by analysing actual risk factors, says IPD, that safer property lending will take place. The slotting route will also encourage banks to hold aside a disproportionately high amount of capital as insurance against low risk property lending. This, predicts IPD, will lead to a situation where banks overprice the cost of high quality, low risk lending, with a consequential negative effect on new development. As a result, investors will need to look to foreign lenders, or unregulated sources, to access the funds they need. “Tracking underlying property
data on the security of income as well as values is vital to being able to gauge the real underlying risks of lending against income producing commercial property and IPD will continue to make data available for further research,” said Tily. “We see potential for a more
risk-sensitive UK regulatory regime that would provide capital cost incentives to lend in an economically efficient and stabilising manner. We hope to do further research using the IPD Databank to inform the debate.”
HA Perspective: Since the start of the banking crisis banks have been asked to do the splits, shore up their balance sheets and at the same time lend more. Now the Janus-faced approach
of the authorities is set to demand an ever more impossible balancing act. And unfortunately hotels are likely to be hit disproportionately hard.
Despite having a relatively
good recession when compared against other commercial
134 NOVEMBER / DECEMBER 2012
WWW.SLEEPERMAGAZINE.COM
property sectors, hotels are still seen as exotic by property lending generalists. They will be popped into the lower slots, despite good relative performance, thanks to the higher perceived risk.
Puma lies low
Puma Hotels has had the disappointment of having its half year figures qualified by auditors.
Deloitte added a warning note to the accounts, noting Puma’s high “net current liability” which sees debts outstripping current asset values.
Puma’s problems date from
April, when Spanish operator Barcelo decided to exit leases it had signed in better times, to manage the Puma portfolio of hotels in the UK regions. As a result of Barcelo’s departure, Puma was obliged to write down the value of the rental income stream from the portfolio. Barcelo’s GBP20.25m exit
penalty was small compensation for the write-down, which saw the Puma portfolio valuation fall from GBP458.4m to GBP213.5m. Against this, Puma has debts of GBP332.3m, predominantly supplied by Irish Bank Resolution Corporation, formerly Anglo Irish Bank. The debt facility is currently
due for renewal at the end of 2013, though maintaining it until then ties Puma to certain conditions. Puma, which is now managing
the hotels with the support of Chardon Management, insists in its accounts that the hotels are profitable and cash generative; but in the current climate, profits are not covering much more than the interest charge on the debt. The other opportunity which
Puma had originally seen, that of improving certain properties with extensions and additional rooms, is also looking an unattractive choice in the short term, with regional UK hotel markets still weak. The deal with Barcelo was
struck in the heady days of 2007, when Puma was known as Dawnay Shore hotels, having been created by Shore Capital and Dawnay Day three years previously. The Spanish manager agreed to 45 year leases on the 20 Paramount hotels, which it would rebrand. At the time, the addition of
20 new hotels, in a new country, was an aggressive expansion step for the Spanish hotelier; and the leased model looked to lighten its portfolio in a way that aligned its activities more with the style of the major international chains. Under the terms of property
leases, rents had fixed uplifts for the first four years, after which they were index linked. According to the formula, the September 2011 rent increase was 5%, taking Barcelo’s outgoings from GBP31m to GBP32.55m. The agreement also included the potential for additional payments, subject to improvements in profitability. In late 2011, Barcelo publicly announced they would withdraw from the UK, if their requests for a reduction in rents were not met. Puma, while it acknowledged it had received a letter from the Spanish manager requesting a revision in rents, issued a stiff rebuttal saying it would enforce its rights under the leases “to the fullest extent possible”. With such a hard ball attitude, Barcelo decided that buying its way out was the least expensive option. Puma is 49.9% owned by the
AIM listed Hotel Corporation, which, as a result of Puma’s troubles, has seen its shares fall
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