1 Hotel cover.indd - Nicola Cottam

Key Issues: Sale and leaseback
It is safe to say that it is at present, a sellers’ market. We have seen an almost unprecedented level of corporate
activity in terms of various transactions, and really, some unprecedented prices paid for assets. If you look at the
London market in particular, it is quite commonplace now for yields from an investment perspective of 5% and
below: in very simple terms, 20xEBITDA. Whichever way you cut it, there is an intense amount of interest in the
sector and that has driven investment yields down, and, as a corollary, capital values up.
It is worth noting that hotel prices in the UK have increased 70% over the last seven years, but 50% of that 70%
has been witnessed in the last three years. That is partially because hotels are a relatively scarce asset, and there is
an awful lot of money chasing it. Much of that comes from the Middle and Far East, where investors are, in simple
terms, looking for risk diversity and London is seen as a safe place in which to invest. There are also a lot of wellfunded
venture capitalists looking for a home for their money. If you were to put that in an economic context,
you’ve got demand-pull price inflation.
In addition, hotels were viewed as an investment in years gone by. Now they are seen as a real estate asset class. (In
reality, they’re not: the fact of the matter is that a hotel is still a hotel, and it was a hotel 30, 40 or 50 years ago. So
in terms of the fabric of the asset, little has really changed in that respect.)
There is one more thing: the economy. Looking at the hotel sector as an investment structure, you look at what drives
hotel performance, it is basically the economy, and the economy as far as 2007 is concerned is pretty positive.
The thing we always have to be wary of in this sector is the occurrence and impact of geopolitical events, similar
to 9/11 or the July 7 bombings. That’s one of the factors that shape the hotel market in London. The provincial
sector is largely driven by what’s happening with the domestic economy, alongside such other overheads as wage
costs, visitor numbers, utility costs and going forward, things like the green levy and the cost of distribution and
reaching the market.
What drives London above that is actually geopolitical events. The exchange rate has less bearing than it did say 10
years ago (although when it is favourable it brings more American visitors, which is handy as they are big spenders)
but geopolitical events do have a marked effect. Those kinds of shocks have an effect over time of depressing
visitor numbers.
In our experience particularly in relation to 9/11 and an unprecedented numbers of subsequent geopolitical events
– SARS, foot and mouth, the Gulf War among them – London took quite a knock, although we are not aware of
any resultant business failures.
What generally happens in the financial community, those of us who lend to hotels took a very pragmatic view
that this is a cyclical industry, and if we hold tight, we and our customers will come through this.
What we tended to see in London with the hotels’ performance levels, the cyclicality was like an undulating U. But
when you get these events, it’s more like a V. The shock is quite damaging, but very, very short term.
March 2007 Hotel Report Guide to UK Hotels l © William Reed Publishing 30