Many hotels are going to need substantial war chests to adjust and adapt

COMMENT During the early stages of the pandemic, long-term structural changes were not being accelerated in the same way in the hotel market compared with other asset classes, such as retail. Ultimately, a hotel has traditionally been simply about providing lodging, and those first few months of the pandemic – while challenging on an operational level – were not instantly disrupting that fundamental offering. However, as we had to learn to live with the virus, things started to move. We began to see glimpses of a new trajectory last summer, with that now firmly bedding in with a shift towards coastal, country and suburban stays, to the detriment of city centres. City locations reliant on foreign and business travellers may continue to struggle, as domestic tourists “staycate” for their summer sun and dose of nature. City hotels are having to reposition themselves in the market to attract a greater share of British guests. We have also seen this happen in Southern Europe, where resort hotels have been pivoting towards domestic demand. Polarisation of demand Boutique operators, rather than tour hotels, have been the beneficiary of this because, increasingly, consumers are opting either for super-luxurious six-star hotel stays as a treat or for budget offerings. The traditional lynchpins of travel – the three- or four-star hotel market – are underperforming on a relative basis, waiting for the return of foreign and business travel. This means that many hotels are going to need substantial war chests to have the capex necessary to adjust and adapt to this changing market. For example, hotel operators seeing a fall in their traditional lines of demand may find switching to an aparthotel model a sensible option, given that people are likely to want more of their own space for health reasons post-Covid. Local market City centre hotels will also need to think inside-out, focusing on their local communities and providing what they want, rather than ensconcing foreign and business travellers within their domain. But the problem is that available capital has fallen. As in any recession, liquidity has dried up the ability of traditional investors to invest in the hotel sector, which has been hampered by the difficulty in securing working capital and refinancing facilities. Equity has also run dry, and banks are increasingly concerned about the ability of equity to finance both the capex required to reposition hotels and the increasingly important eco-regeneration of buildings needing to meet ESG targets. Traditional sources of hotel financing will also be taking a step back from the sector, as loan-to-value and income covenant breaches will have to be dealt with across existing lending books. This will result in regulatory capital calls and a retreat to traditional “safe” lending such as residential mortgages. That is going to create a funding gap which specialist hospitality lenders can look to fill. We believe there will be opportunities to acquire hotels, help refinance portfolios and lend to investors who are acquiring hotels over the next year or so. Alastair Carmichael is investment director at HB Titan Photo © HB Titan