March 2024

Navigating the hotel finance landscape in 2024

Chris Field, Head of Care & Hospitality

The finance market for the hotel sector remains dynamic, with significant interest from lenders to support viable projects. Proven net cashflow, alongside robust sector experience, remains pivotal, and we’ve observed several lenders opening doors for businesses at the start of the year.

Shift away from ‘traditional’ finance – there’s a growing demand for short-term finance (bridging), possibly due to the availability of opportunities in the market where hotels are either closed or lack financial trading information. Experienced operators are seizing such projects to expand their business/portfolio, often involving substantial capital expenditure.

Overseas investors
Overseas buyers are active in diversifying their investments into the UK hotel market, seeking both ‘trophy assets’ and attractive yields. While UK lenders are selective when it comes to non-domiciled individuals and companies, a few lenders are notably busy catering to such demands.

Lender appetite & policy
Some lenders are adopting a conservative stance, focusing on larger hotel transactions exceeding £10m. Others prioritize “branded” hotels, a minimum number of beds, or selective locations, particularly in or near UK city centres.

The 2023 trend continues into 2024 with a bustling refinance market. Hoteliers seek better deals or a commercial approach to lending, driven by expiring loan facilities or lack of appetite from incumbent lenders. While many operators seek to release capital for hotel improvements or expansion, some will face challenges such as historic trading evidence, covenant breaches and pressure on cashflow and “debt service covered”.

Many operators aim to refinance to:

  • Add rooms (STPP)
  • Refurbish existing rooms and trading areas
  • Shift focus/target market – transitioning to bespoke wedding venue offerings, for example
  • Introduce alternative accommodations like glamping pods, rural lodges, camping/glamping/yurts

Alternative uses
Many UK hotels are now leased on short-term agreements by the Government/Home Office to accommodate immigrants, refugees/asylum seekers and homeless people. While this generates substantial income for hotel owners, lenders remain cautious due to uncertainties regarding the longevity of such agreements. However, some specialist lenders are keen to lend against these assets.

Looking ahead, challenges may arise at the end of such agreements, necessitating significant capital expenditure or property improvement plans for franchised models to bring the hotel back to standard. Additionally, operators may face difficulties in advertising/selling rooms with little notice, particularly with agreements lacking renewal.

In summary, the hotel market remains vibrant, with readily available finance and competitive costs. Lending policies have softened slightly to facilitate transactions, and lenders are actively seeking new business. With inflation under control, we anticipate a reduction in the cost of finance in the Spring/Summer, as economists expect the Bank of England Base Rate to fall.

For intermediaries only.

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