Hotel property prices ride trading gloom
Hotel property prices are holding firm but could fall if poor trading continues in the long term, forcing companies to adjust the asset value of their portfolios.
With demand outstripping supply, there are few real bargains to be had, and current values show no signs of decline, say hotel property agents.
Hotel values are based partly on the profitability of the business but the current climate of poor trading, particularly in London, has led to fewer hotels coming on to the market.
"We could see things move in three to six months' time if more properties appear on the market, but there are no signs of this happening yet," said Jeremy Jones, associate director at Christie & Co. "There are no distress sellers and it is unlikely we will see any until 18 months down the line."
But with the fallout from Iraq still uncertain, profitability in the hotel sector could fall further, he added.
Nick Barber, director of Atis Real Weatheralls, said: "Well-run hotels that have invested in their business will find their values hold. But if hotel performance falls, companies may have to adjust their asset value."
However, property agents believe hoteliers are likely to hold out rather than sell at a low price, which will keep the market static for longer.
"With such low interest rates, it will be a long time before people will feel exposed and need to sell," said Gerard Nolan, director hotels and leisure at FPD Savills.
And when that happens, Nolan predicts many investors will swoop on hotels, particularly in London, with a view to turning them into private dwellings and serviced apartments, which can have higher yields.
Sale-and-leaseback deals could be further affected by changes to stamp duty made by Gordon Brown in the Budget. "We are concerned that these could represent a very significant addition to the cost of doing deals," said Derek Gammage, managing director of hotel consultant Insignia Hotels.
Under the plans, to come into force in December, commercial property leaseholders must make an up-front stamp duty payment equivalent to 1% of the total rent payable in the life of the lease. Before, the tax was based on the average of one year's rent.
Over to you…
David Coffer, chairman of Davis Coffer Lyons and president of the Restaurant Property Advisors Society, believes leisure has been stamped on again
The announcement that stamp duty on leasehold properties will be levied at 1% of the capitalised value of rental paid under the entire lease term will have far-reaching effects.
Previously, most commercial leases attracted about 2% of the average annual rental in stamp duty.
The Inland Revenue suggests indexation of 3.5% per annum discount to reduce the blow, but reserves its position on RPI- and turnover-linked leases.
With lower rentals, the implication may not be onerous, but the fact that the leisure industry prefers at least 35-year leases makes it horrendous.
From the valuation point of view, lenders will see their assets subject to a further deduction on assignment and will adjust loan-to-value ratios accordingly. There will also be implications on new lettings, for which such a capital cost will be factored in to any rental bids.
Has the Government really thought this through? In attempting to close the loophole relating to stamp duty avoidance schemes, they have penalised industries like ours which took long leases because of other tax advantages and because backers like the security of longer tenure.
What could evolve is a more liberal association between landlord and tenant - perhaps a form of partnership or franchise rather than a lease document.
The industry has until 1 December to make alternative proposals - not a lot of time to speak with one voice and express its concern at the effects these proposals will have on our already weakened sector.
Source: Caterer & Hotelkeeper magazine, 24 - 30 April 2003
