With some owners trying to ride out the fall in property prices, finding a hotel property might not be easy. However, due to the economic downturn, a lot of businesses have failed and been placed in administration. Ben Walker offers some timely advice on how to go about buying a hotel.
As with all UK property, the hotel sector has not escaped the general economic downturn. The fall in property values means that a lot of hotel owners who ordinarily would be selling are not. In the independent sector, quality operators who can ride the recession out have little incentive to sell since, unlike the early 1990s recession, low interest rates make even relatively large amounts of debt serviceable. The result is a shortage of quality businesses coming to market. On the other hand, inns and hotels which have failed and been placed in administration are presenting opportunities to buy assets at reasonable prices.
INCREASE IN DEMAND
There are encouraging signs from the major leisure property agents that demand is picking up. “There has been a noted increase in enquiries and viewings over the last two months,” says Simon Stevens, a director at Christie & Co.
The dream of buying and running your own hotel is alive and well, perhaps even more so now that the recession is forcing many to seek alternative ways of making a living.
“People who have been made redundant are thinking of selling their homes and adding the proceeds to their redundancy packages. This will enable them to buy a lifestyle business outright or with a minimum of debt,” Stevens adds.
Unsurprisingly, demand is strong for hotels in areas with enduring tourist appeal, such as the Lake District, Edinburgh, the Cotswolds and the West Country, but there is a shortage of quality supply. In London, the availability of stock is even more of a challenge, according to Colin Hall, head of London hotels at licensed property agent Colliers Robert Barry
“I’ve got a number of clients who’ve been looking for 18 months but cannot find anything worthwhile to buy. Owner-operators believe that the Olympics will add value to their businesses and cannot be tempted to sell,” he says.
CASH IS KING
The banks have modified their risk exposure and are now generally unwilling to lend more than 60% of value, although a reputable and experienced hotel finance broker will be able to secure the best available deal for you. Cash buyers who can act quickly and autonomously are purchasing “trophy” hotel properties in the £3m-plus bracket. At the cheap end of the market, free-of-tie leasehold inns can be had for about £100,000.
New entrants pursuing their hospitality dream will have to work hard and smart to identify opportunities in a market where supply and funding continue to pose challenges. The hotel sector is cyclical, however, and values are unlikely to fall much further. Those who succeed in purchasing a carefully chosen business now should be well-placed to benefit once growth returns.
IS RUNNING A HOTEL FOR YOU?
Before making a start you’ll need to honestly ask yourself: are you cut out for the hotel trade? Running your own business is hands-on and you’re likely to find yourself doing a bit of everything – VAT returns one minute, cooking breakfast the next. The hours are long and there’s no going home at 5.30pm.
Can you smile at guests day in day out? Remember, no matter how cheerful and helpful you are, it will never be enough for some customers. Do you already have experience in the hospitality trade? If not, do you possess the necessary transferable skills?
WHERE TO FIND PROPERTIES
Sign up with reputable and specialist licensed property agents who operate in your targeted geographical area. A directory is printed at the back of Caterer each week, where you will also find classified advertisements of businesses for sale.
Agents like to work with committed prospective buyers, so once you’ve made contact, call your agent every Friday to find out what new instructions the company has taken on. This will keep you ahead of the game.
HOW TO RAISE THE FINANCE
Lenders are cherry-picking clients in the current climate, so first you need to establish your purchasing power, says Hugh Caven, founding director of hotels broker Walbrook Commercial Finance.
Estimate your cash position, then talk to an experienced broker who can identify the funding packages available for your entry level. Make sure that you have allocated sufficient funds to cover the costs of purchase plus a healthy amount of working capital.
Now you can begin your business plan. Include your CV, but only highlight relevant achievements and experience, such as team building, book-keeping, stock control and IT. Then explain the rationale for your new venture, statement of means, and mission statement.
Hospitality newcomers are advised to go on relevant training courses. Basic food hygiene courses and cellar management will all beef up your business plan. In particular, a licensing course is mandatory in order to take over a licensed property.
Be warned, however, that without a track record in the industry it is highly unlikely that you will secure funding for a business based on trading forecasts. Now is not the time to be predicting massive sales growth. The business must be able to demonstrate the ability to comfortably repay your borrowing requirement.
FREEHOLD OR LEASEHOLD?
If you can afford it, a freehold provides an asset, but the purchase can be a drain on capital that could be more effectively invested in the business. If you take a lease, make sure it’s on acceptable terms. Is the rent affordable? Who’s responsible for the repairs? Can you freely sublet or sell it on?
More flexible arrangements can be struck in the current environment in an effort to meet both sellers’ and buyers’ expectations and prevent deals falling through. Henry Jackson, associate at property agent Knight Frank, says that deferred payments, whereby a buyer pays the bulk up front and then the remainder once up and trading, can smooth the way. Another available option is to buy a two-year leasehold before buying the freehold.
BUYING A BUSINESS OUT OF ADMINISTRATION
The need to ask tough questions is even greater when buying a business out of administration. Paul Hardwick, head of hotels at chartered surveyor Fleurets, says it is crucial to fully understand why the business failed.
Is the business model essentially flawed, or did the previous owners simply overspend and manage poorly? What can you learn from its failure and what will you do differently to ensure its future success?
A complete repositioning of the business with a new set of suppliers may be necessary. Morale is likely to be low among any remaining employees, who will need to be committed to the new venture. Again, debt funding may be difficult to obtain in such cases, particularly if the hotel has ceased trading.
INCREASE YOUR CHANCES OF SUCCESS
- Do not settle on the first property you see. Try to see as many as possible of the type you want to buy and visit them on quiet as well as busy days.
- Ideally you need to see three years of trading accounts. If the business has weathered the last nine months well, with constant turnover or a minimal drop, then it’s more than a good bet.
- Use your head, not your heart. Don’t abandon your original business plan by falling in love with a beautiful property which doesn’t meet your needs.
- Once you’ve found a business, research its location and market thoroughly. If the hotel is heavily reliant on one local employer make sure this vital source of revenue is not about to relocate.
- Check with the local planning department for any imminent developments such as new parking zones or hotel openings that could affect your business.
- Once trading don’t spend big money straight away – gradually change the property once you get the money coming in.
- In order to keep your hotel in good condition, a general rule of thumb is to spend at least 4% of your annual turnover on maintenance. Be prepared for the worst by having a cash reserve.
In February Christie Finance, the sister company of Christie & Co, helped hospitality newcomers Kerinda Green and Russell Meyers, both 45, to buy the Seawood hotel in Lynton, Devon.
The couple, who previously worked in the sales department of IBM, acquired the Grade II-listed 12-bedroom property – for an undisclosed sum off an asking price of £895,000 – 10 months after they had approached Christie Finance. The hotel was in a good state, with average occupancy of 60% during the season.
Christie Finance secured the majority of the funding for the deal through lender Abbey at 1.95% over the base rate, while another bank was offering interest as high as 8.5%.
“Not only did our agent Chris Field secure us the majority of the funding at a very good rate, he also introduced us to an accountant, a solicitor and a structural surveyor,” says Green.
“Chris was helpful and knowledgeable and supported us right though the process and has also stayed in touch since. In five months since completion we have progressively built up a steady flow of trade, culminating in a very good summer so far. We are meeting all our targets.”
The latest trading survey from PKF shows that independent and chain hotels in Edinburgh and London are faring better than those in other locations.
In the first six months of 2009, average revenue per available room was down 5.7% in Edinburgh and down 7% in London compared with the same period a year earlier. This compares to an average decline of 15.8% for the whole country (excluding London). Edinburgh was the only city in the survey to record occupancy growth in the first half of the year.
TRI HotStats data confirms that London and Edinburgh, along with Aberdeen – thanks to its current shortage of supply – are the most profitable city locations for hoteliers.