In 2020, nothing is as usual in the hotel sector. From a smooth ascent, it was blown off course and plummeted into free fall. It will take time to climb back up. And some businesses won’t make it. So it’s only logical that financiers are extremely cautious before taking on hotels in distress or supporting new hotel projects. I recently discussed this with my colleague Ben Thomason, Head of Debt Advisory for Colliers, and our expert on hotel financing.
In the past few years, banks and other financiers viewed the hotel sector as increasingly attractive. With the rapid growth in guest numbers and room rates, it seemed that growth was here to stay. As hotel revenues rose and margins improved, new operators emerged. Consequently, we saw financiers lowering the risk profile for the hotel business model. Until 2020. Now the majority of banks have almost entirely cut off the financing flow to the sector.
No longer untouchable
Most banks are currently focusing primarily on existing customers. For new businesses we expect that they will look at the business model with increasing caution and apply greater sensitivities to forecast projections. How viable is the company? Does the hotel target tourists or business travelers? Are guests mainly local or from abroad? How intense are seasonal variations? All these questions help them to assess the risk. The hotel sector is no longer untouchable. That has become all too clear this year.
New financiers to fill the gap
Sources of finance haven’t dried up all together. Some banks remain active, and specialist debt funds and insurers are prepared to fill the gap. These lenders are subject to less stringent regulations than banks and often have in-house teams that specialize in hotel risk assessment. Hotels are still an interesting long-term prospect as they usually generate high revenue streams. You just need to understand the ins-and-outs of the business.
Weak financial buffers
Despite all the good years, at this time the financial buffers of some hotels are not strong enough. The pain will start to show at year-end, when their reserves have run dry and government support measures come to an end. The impact will be most severe on specific at-risk groups, just like the corona virus itself. Hardest hit will be the hotels whose buffers are too weak, whose rents are too high, who are over-leveraged or who haven’t invested enough in maintenance, data and marketing. Hotels that invest time, money and energy in technology and client engagement will survive. Right now it’s vital to ensure smart and active communication with customers.
The hotels that cannot cushion the corona blows or with little chance of a speedy recovery will go out of business. But that might not be a bad thing. It could create space for transformation or sow the seeds for new hotel concepts. Which can only improve the quality of the hotel market as a whole.
Just as on Mount Everest, it’s the fittest climbers that reach the top first. And this innovative and resilient sector has plenty of fit players. They’ll be jostling for position at the top. Financiers have an unrivaled view of the strengths and weaknesses and can lend a helping hand. Like the Sherpas, they support you to the summit, or leave you behind at base camp.