These deals are far from a fad
The sale-and-leaseback approach cannot and should not be dismissed as simply the latest fad in hotel financing. In fact, I believe it is a vital tool to enable hotel companies to run their businesses more effectively.
The approach is not new. Europe's largest hotel company, Accor, has been leasing properties for years - but it is becoming increasingly popular because any hotel company wishing to raise money in today's market has severely limited options.
The stock market is all but closed to hoteliers wishing to obtain fresh investment and the reluctance of debt providers has seen them demanding raised levels of equity participation. The only viable way forward for any hotel company wishing to raise money to expand has been sale and leaseback. And expansion is the only option for quoted hoteliers who need growth to satisfy shareholders.
The sale-and-leaseback deals conducted so far have enabled hoteliers to restructure their property portfolios and raise money for expansion. In the case of Hilton Group's sale and leaseback to the Royal Bank of Scotland, a deal on which my company advised, the transaction provided a solution to two of Hilton's strategic desires: first, to provide cash for acquisitions (it funded the Scandic deal) and, second, to enable Hilton to reduce the concentration of its property portfolio based in the UK.
It should be remembered that a hotel management company that owns its own hotels is in two businesses: operating hotels and holding real estate. To be effective as a real estate business, value must occasionally be realised. Sale and leaseback provides that opportunity and enables operating companies to retain control of the asset.
Although leases are not new, the latest lease deals being conducted increasingly take on a new approach. Rather than the property investor simply offering a lease on a set rent that leaves the operator with a fixed liability, it is often the case that the investor wants to forge a partnership with the operator of the hotel.
Turnover-based leases and the like enable the investor to more fully share in the success of the property while at the same time allowing the operator flexibility through the trading cycle. Commonly, an investor will employ an asset manager to monitor the investment. This intermediary gives the non-specialist investor the comfort to take performance-based rents and, crucially, protects the residual value of the property asset.
The emergence of skilled and effective professionals to do this work is helping to bring a number of new investors into the hotel business.
Far from being "bad for business", as some commentators have claimed, sale-and-leaseback deals have enabled those operators enterprising enough to adopt the practice to drive forward their businesses.
Derek Gammage is managing director of Insignia Hotels
