Solid foundations20 December 2012
2012 has been a difficult year for the European hotel market, as liquidity for developers has faded away. Max C Luscher of KPMG, Hotel Management International’s new associate partner, looks at why successful financing is always underpinned by a successful hotel.
Hotel Management International: How do you assess the current situation of the financing market for hotel projects?
Max C Luscher: Unfortunately, the general situation with regard to hotel property financing is still tense for a variety of reasons. The euro crisis has created uncertainties, one of which is that increased capital requirements limit the opportunity for new business. At the same time, many banks mistrust each other and refuse to lend each other money. On top of that, several financiers have withdrawn from the market for commercial property loans, especially hotels, to focus on core financing and low risk.
Will hotels receive any financing in 2013?
Current financing strategies are very selective. Hotel development projects are often only financed when existing business models are easily duplicated, successful models in which the financier, developer, operator and even the end investor run a manageable risk.
What are the financing terms you foresee?
We rarely see a loan-to-value ratio of over 60%. And margin spreads are high, sometimes up to 300 basis points above Euribor. For larger portfolio transactions with opportunistic aspects, sometimes this is up to 500 basis points over Euribor.
Also, indicators such as debt service coverage ratio and interest coverage ratio will be based on a detailed analysis of relevant hotel performance derived from market data.
In addition to property and hotel business risk, project development risk has to be taken into account. This is not just the possibility that risks may arise from delays in construction or an increase in construction costs; financiers also take the risk that project development financing must be rolled over or converted into, for example, inventory financing, in case no final investor for the project is found. These circumstances are simply not popular with banks.
What are the factors required for successful financing?
The alpha and omega of successful financing is a successful hotel, and the success of a hotel depends largely on the operating performance of the hotel business overall. Existing hotels often have performance data that can be analysed and, for project developments, diligent planning calculations are needed. In any case, it is advisable to obtain neutral advice and carry out a detailed due-diligence process.
What is the ideal hotel operating contract?
It depends on the perspective - the hotel operator's or the property investor's. But, in the long term, whether management or lease, a contract is only optimal if it takes into account the vital interests of all parties involved, and a fair distribution of the economic risks and rewards. The success or failure of a hotel is based, in many cases, on the disadvantages of a hotel-operating contract in place for just one party.
What approaches do you see for hotel development projects?
In many markets, there is cut-throat competition from an economic and hotel management point of view. A new hotel must be designed so that it can take market share from existing competition.
Are there differences between city hotels and resort hotels?
Definitely. If you analyse the circle of potential investors for hotels, you quickly come to the conclusion that hotels in urban locations are clearly preferred by investors. Many institutional investors have fixed investment criteria from which they will not deviate. Consequently, resort hotels are less fungible than city hotels, and the ability to sell quickly if necessary is very important to banks.