A gradual decline in values over the past four years means that, price-wise, it's a great time for buyers to enter the hotel market. But with funding more difficult to come by than ever before, many prospective buyers are simply unable to capitalise on the opportunity in front of them. Elly Earls reports
Since the collapse of Lehman Brothers in September 2008, the hotel industry has witnessed a gradual decline in values, putting prospective buyers in a great position - provided they have the funds.
"When looking at the overall economic cycle, it would suggest that now is a good time to buy a hotel," confirms Julian Troup, head of the UK Hotels Agency at Colliers International. "There are some well-priced hotel assets out there and if buyers can improve the trading performance, they should look forward to not only an increase in asset value but also an increase in value based on the creation of goodwill in the medium-term ahead."
Unfortunately, of course, it's not quite that simple. "In terms of price, now is a good time to buy," acknowledges Fleurets director Paul Hardwick. "But purchasers generally need to take a longer-term view of hotel ownership, as driving and improving returns will be slower and harder work in many cases."
The market also differs considerably depending on the location of the asset. "London has very much remained in a ‘bubble' since 2008," Troup explains. "Values have held up and, in certain circumstances, continued to rise."
Jeremy Jones, director of corporate hotels at Christie & Co, adds: "London is attracting lots of international cash from very discerning buyers, who are primarily buying in Mayfair, Knightsbridge and Chelsea."
Yet, outside London, it's a considerably different story. While "lifestyle" locations, such as the Lake District, the Cotswolds and other national parks are seeing a significant amount of interest from buyers, activity in the provincial market remains slow. "Provincial hotel values have been impacted most by the recession," says Hardwick.
"It's a combination of depressed trading conditions, reduced property values generally, lack of confidence in the rate of economic recovery and paucity of finance. Market activity has increased over the last year or two, although hotel sales have been dominated by distressed or pressure sales."
However, this phenomenon is not necessarily a negative for prospective buyers. "If it's in a great location, but it's in poor condition and needs repositioning, capex or refurbishments, that's what most people are looking for," says Paul Bartrop, director at CBRE Hotels. "If they can buy it at the right price where they see upside, by maybe adding a brand or a badge to it or repositioning it as a four-star rather than a three-star, that is very attractive."
"If" is the operative word in situations such as this, as many banks are unwilling to offer funding to under-performing hotels. "Distressed sales can offer buyers excellent opportunities, although typically this sector is dominated by purchasers that are able to proceed with significant levels of equity," Hardwick remarks.
Moreover, buyers need to remember that the hotel failed for a reason, according to Trevor Watson, director of valuations at Davis Coffer Lyons. "You have to be very clear as to how you're going to turn the business around and you have to make sure you're not paying a price, which effectively reflects your expertise rather than the vendor's," he notes.
But it is funding that presents the greatest challenge to prospective hotel buyers, regardless of the type of asset they're looking to buy. "Banks are only really lending to what they perceive to be a cast-iron, solid-gold opportunity where everything fits," Bartrop notes. "And even then, they'll only lend up to 60% of the value."
The sales process has also lengthened significantly over the past few years, largely due to the more in-depth due diligence that is being undertaken by purchasers and their funders. "Most deals are taking between six to nine months," Bartrop says. "It's very different to 2007 when it was more like four to six months."
It has, therefore, become more important than ever to appoint an experienced agent, and for solicitor Shainul Kassam of Fortune Law, there are several factors to take into account. "Compile a shortlist of agents and focus on experience," she advises. "Make enquiries into recent deals and potential sites that the agent has in his or her sales portfolio. You also need to make sure your agent clearly understands your requirements and budget for the project, as well as considering the fees. Lastly, seek independent legal advice before signing the agent contract."
Once an agent has been appointed, the accounts verified and the buyer is satisfied that the hotel meets each and every one of their criteria (See hotel buying check list box on previous page), the only thing that remains is to close the deal. "Appoint a representative for completion verification and contact employees and any relevant trade unions about the take-over," Kassam recommends. "You'll also want to prepare an announcement in advance to be sent to employees, suppliers and other relevant parties."
But most importantly, in the current market, make 100% certain that the cash is in place. "Make sure cash is on deposit and you don't need third-party approvals," Jones concludes. "Cash is king; if buyers can show the money, the asset is theirs."
Finding funding through a broker
Paul Lantsbury, previously a chartered accountant, took ownership of Kemp Townhouse in Brighton in March 2012, only four months after putting in his original offer.
"It was about the same length of time as a residential purchase, but there were a few more hoops to jump through," he recalls. "There were two things that really prolonged the process - getting the funding and taking over an existing business with staff."
Fortunately, Lantsbury, who had limited experience in the hospitality industry, had enlisted the help of an experienced broker, something he feels was absolutely invaluable for securing funding. "As well as getting us access to a mortgage product we couldn't have got ourselves, he held our hand through the application process and helped us draft documents and business plans in a format the bank wanted to see," he explains.
He also has no regrets about his decision to take on a business with an existing team of experienced staff. "I wanted to run and manage the business but I didn't want to be tied to the building 24-7," he remarks. "That's part of the reason we went for this particular place - it had a good team of staff who could take care of the operational side."
Hotel buying check list
Know your budget
This should take into account projected financials, the current condition of the hotel, which includes the property itself as well as china, glass, silver, linens and any requirements for refurbishment. Work out how you are going to raise the required financing.
Know the business
In this market, the most important thing is knowing the business you plan to purchase. Does the hotel rely heavily on one major client? What are the demand drivers in the area and where is your business going to come from? Why is the owner putting the business up for sale?
Know your accounts
Prospective buyers need to be looking at profitability, with important key performance indicators (KPIs) including average room rates and revenue per available room (revpar). Make sure these figures can be verified; VAT returns are a great starting point for confirming revenue levels. After this, it is important to take professional advice from an accountant who is familiar with hospitality businesses.
Know the vendor
Ensure the current owner has the capacity to sell the business. Check against any bankruptcy proceedings and search at Companies House against the directors of the company. Also consider what the vendor is planning to do post-sale. Is he going to open a competing business down the road? Have you asked him to sign a non-competition agreement?
Know the building
Carry out a structural survey to make sure it will stand up for the next 10, 20 or even 100 years, and if you plan to refurbish the asset, ensure that you know what your capital expenditure (capex) costs will be. Don't forget to take into account whether the building is listed and what planners' attitudes will be if you want to extend it.
Save some cash for upgrades
Longrose Buccleuch Management, a dedicated hotel business primarily focused on developing, operating, managing and consulting in the branded and unbranded hotel sectors, acquired Sheffield Park hotel from the receiver of the Pederson Group in May 2011 and, following a refurbishment programme under a franchise of Hilton's upscale DoubleTree brand, reopened the 95-bedroom hotel in August 2011.
"The hotel had a good team of staff and had had significant capex [capital expenditure] invested in the property, but it suffered from not having a branded presence in the very competitive local market," says Longrose Buccleuch director Andrew Rouse. "Our plan was to invest in upgrading the property to make it suitable for inclusion in the DoubleTree by Hilton franchise system."
As the hotel was a distressed asset, the legal process was more complicated than it would otherwise have been. "You need experienced investors and a good banking relationship," Rouse explains. "The bank supported the transaction on the basis of the trading history of the hotel, the experience and track record of the management team and a solid business plan which had the support of Hilton Worldwide."
Since its rebranding, the hotel has gone from strength to strength. "The hotel is currently achieving 129% fair share in the local market and is ranked number five of the 300 DoubleTree hotels worldwide for customer satisfaction," Rouse concludes.
Get the existing team on board
Ian and Christa Taylor took ownership of the Abbey hotel, Bath, in January 2012 after four years of hotel hunting. "I owned the Cotswold House hotel and the Noel Arms hotel in Chipping Campden until I sold them in October 2007 and had been looking for another property since then," says Ian Taylor.
The experienced hotelier had a very specific list of criteria his next purchase had to meet. "I wanted the hotel to be in a city with good business during the week and at the weekend and I also wanted to be within two hours driving distance of London," Taylor says. "I probably looked at in excess of 25 different propositions but it all boils down to getting the location and the quality of the asset, as well as what you can do with it."
Indeed, since taking over the Abbey hotel, Taylor has made quite a few changes, creating the Allium Brasserie as well as an alfresco terrace, and refurbishing the public lounge area and reception. "We've managed to get the team on board and get them to buy into the new vision so they've been very excited," Taylor remarks. "In terms of the business, we've managed to hold our own and are actually a little bit ahead of where we were this time last year."