Costs and hurdles rise for financing UK hotels

According to The UK Hotel Lending Report 2020, ‘78% of lenders prefer financing hotels with a franchise or renowned brand image...in the turbulent market conditions caused by the pandemic.’

Average hotel senior lending margins increased to 305bps (from 270bps) in the six months between December 2019 and June 2020, and to up to 400bps by December 2020, for an average loan to value of 58% and hotels of good credit quality.

Hurdles for managed hotels and independents (as opposed to those leased or with operating contracts with big brands) are high, with lenders frequently requiring interest cover ratios up to four times net income. ‘Lender diversification and loan availability for smaller loan sizes is (also) much more limited’, the report says.

The report finds that the better liquidity is for transactions between £50 mln and £100 mln, with new origination in 2021 predicted to be concentrated in debt funds rather than banks.

Dr Nicole Lux, senior research fellow at The Real Estate Research Centre at the Business School and author of the report, commented: “The hotel sector has been one of the hardest hit due to the pandemic, and this was especially the case in 2020. Much has been reported on hotel occupancy and closure rates, but this report brings further insight into what lenders have been doing and considers the sector and its future.’

Lissa Engle managing director of co-collaborator and hospitality specialist Berkeley Capital Group said they estimate the value of debt secured on UK hotels at June 2020 as £15.1 bn, accounting for approximately 9% of lender exposure to UK commercial real estate.

The report was  supported by a steering committee comprising Savills, CMS, Taylor Wessing, Castleforge and CREFC Europe.

The survey can be bought at: https://www.berkeleycapitalgroup.com/lending-report/ with all proceeds benefitting not-for-profit diversity group WiH Global (Women in Hotels).