Comment: Kevin Murphy on IHIF19 March 2010
Whether from the operators, developers, owners, asset managers, brokers or consultants, the feeling that emerged from on the first day of the International Hotel Investment Forum 2010 was one that could best be described as “more hopeful".
Cautious optimism was not that much in evidence, perhaps for participants’ fear that voicing their feelings about recovery in that manner might prejudice its arrival. What was soon clear was that any recent easing has really been more in the last few months a slowing down in the previous rate of loss or previous almost universal falls in the normal performance criteria from 2008 through 2009 across the globe.
By the close of the event, ‘hopeful’ still seemed to be the dominant mood ˗ "hopeful" that the worst was over. It was perhaps too early to predict a steady recovery as serious concerns remain in the areas of both existing and future financing for new or stalled development projects, and the shifts in consumer usage and overall travel whether for business or leisure are still fragile for all destinations with few exceptions.
There was a clear and almost universal belief among the attendees that for existing European hotel performance, the worst may be over for both recent occupancy and ADR downturns but there is no speed or likely 'rush to glory' in what may be the potential recovery in 2010. What is clear and threatening in varying degrees across the world including Asia Pacific is that there is a major overhang of recent debt that needs to be reset in the next one to four years for many existing hotels and that will add more complication to those in difficult trading cycles.
Among the positive signs there was an indication that some banks, if not actually eager to lend again, are going to eventually allow more credit into the market. Some are already willing to do so but LTVs (Loan to Values) will certainly be much lower. Covenants, whether given by the borrower or their operating partners to mollify the lenders, are going to be more challenging and the feasibility of new projects is going to be more closely studied for some time.
In the immediate years leading up to 2007, there were two dominant pools of capital, both traditional and securitized, which competed and frequently made debt both easier and cheaper for many. Going forward that will be different as much of the CMBS style debt will neither be popular nor available, and traditional lending will carry enhanced security documentation and new requirements will be more stringent.
There was some eulogizing on a number of the panels that "where the industry went in terms of financing hotel development in 2006 - 2007 was where we never should have gone" …but what was clear was that there will now be greater concentration by all on whether or not that (new) hotel in future is able to service its debt.
Hotel company development personnel will now need to work closer with and help banks in making their decisions going forward if new development is going to continue where it is needed. This will be likely more important in Asia where many banks do not maintain widely experienced hotel specialists in house to the degree more often seen in Europe and the USA.