On 11th and 12th September, Manchester played host to the 20th Annual Hotels Conference bringing together key players from the UK hospitality industry. It was a great opportunity to catch up with contacts, make new ones and share thoughts on the state of the hospitality market as well as expectations for the future.
Here are my key takeaways from the event:
1. The operational perspective
Operationally many hotels are doing well. There has been notably improved occupancy levels, particularly in London where occupancy growth had previously been lagging behind the regions. Combined with continued ADR growth, that has led to a solid uptick in RevPAR. At the same time inflationary cost pressures are starting to abate – reducing utility costs being a prime example – meaning it has been a strong past 12 months for the sector as a whole.
2. Transaction volumes
On the flip side, despite the positive operational outlook, investment volumes remain low. Whilst many felt the pricing gap between buyer and seller had narrowed, it remains evident and continues to affect deal activity. As a result valuations are proving tricky given the reduced number of comparables in the market.
3. Cost of debt
Another reason for reduced deal volumes is the rising cost of debt which was of course a big topic of conversation. Debt is available but it is more expensive and can be harder to find for larger deals and portfolios. Prospective borrowers should not ignore the swathe of alternative lenders in the market – identifying a lender and financing structure that works for you is more important than ever. Private investors who are less reliant on debt and are interested in the hedge hotels can offer against inflation should take note.
Construction costs are continuing to rise (albeit less so than previously) which combined with high interest rates and the associated cost of debt has challenged viability on a number of development projects.
Whilst assessing ESG credentials of a new scheme remains as important as ever, for many funders it is often a case of ensuring that their minimum thresholds are met. We do not yet appear to be in a situation where higher ESG credentials will reliably result in better pricing. Operators are generally willing to sign-up to the social and governance requirements which owners are increasingly seeking to include in leases and management agreements, however they are often more cautious taking on environmental covenants since this is often where additional costs start to mount up.