By Michelle Norman, former Professional Services CEO
Hotel bookings are back to the levels seen post pandemic and for many providers, guest numbers are the highest they’ve ever been.
Of course, we all know that the boom in bookings isn’t flowing straight to the bottom line. What with increases in product and service costs coupled with a corresponding hike in employee wages and that’s assuming that you can find the staff mean that maintaining margins remains the holy grail for many operators. So, with this backdrop, what’s investor appetite for the hotel industry?
According to Savill’s latest Hotels Spotlight report, transaction activity for the first half of 2023 is still 66% below the average levels recorded over the previous 10 years and activity is being fuelled by private investors who are more able to take a long term view rather than be constrained by rising inflation, economic uncertainty and interest rates.
Many industry insiders share the view that hotels represent strong investment potential, particularly against other commercial property such as offices where income is effectively fixed and vacancies means no income at all.
Despite the investment potential, activity remains low due to a smaller pool of investors looking to secure the most lucrative deals. If transaction activity is slow, what about traditional lending, are hotels getting access to cash to help ignite future growth?
Like many industries, hospitality has seen increased costs, supply issues and with the cost of living crisis, the economic uncertainty continues to hover.
Perhaps the biggest challenge for hoteliers is refinancing, current estimates suggest that more than £43 billion UK Hotel debt is approaching maturity. Much of this historic debt was secured at low rates likely to never be seen again, so it’s unsurprising that traditional lenders are nervous about borrowers’ abilities to meet higher repayments against a backdrop of economic uncertainty.
Hotels have the potential to reap long term income and profit rewards but for those looking for traditional bank lending, how are they able to secure the cash?
- Segmentation is key Like any other service industry, hotels need to be distinctive and be laser focused on what they offer and who they are offering it to. Lenders seem more comfortable supporting hotels at the top end of the market who can command higher rates and those at the budget end who can drive volume sales. Once you’re clear on your hotel’s target segment, this flows through to every part of your business, from customer acquisition and marketing to pricing and service levels.
- Drive Operational efficiencies Maximising occupancy is always going to be a top priority but not at the expense of driving out costs and optimising margins. Whether the opportunities lie in a drive to digital, flex pricing or reducing service levels, be laser focused on improving operational efficiencies. Evidencing your ability to service debt through improved efficiency is key.
- Data is everything Uncertainty is what keeps lenders awake at night, so using data to derive evidence based insights is key to keeping your lender happy. That’s not just the traditional cash flow planning but customer feedback, SEO metrics too.
- Contingency Plan If the pandemic proved anything it was the resilience of the hotel sector. Show your lender that you are ready to flex not just your pricing but your routes to market, cost base and service levels.
- Sustainability Plan Lenders continue to be under pressure from investors and other stakeholders to evidence their focus on sustainability. Hoteliers therefore need a laser focus on all things ESG not just to satisfy traditional lenders but to appeal to the potentially more attractive Green lender.
- As interest rates are likely to remain higher than we’ve seen over the last decade, hotels like many other service industries may continue to be at the behest of the banks but by following our five point plan, there might also be an opportunity to not only reassure your lender but deliver improved revenue, margins and profitability.