The changing face of hotel receiverships

01 January 2000
The changing face of hotel receiverships

There is a widely held myth that accountancy firm Touche Ross was the UK's second biggest hotelier in the early 1990s. Legend has it that the vast number of hotel businesses failing during the slump had left the practice's insolvency division swamped with hotel property.

But this tale has always embarrassed the practice, the actual position of which was "more like sixth or seventh" in terms of bedrooms. Nonetheless, with about 40 hotels on its books at the depths of the recession, it gives a startling picture of how many properties in the hospitality industry fell into receivership.

Four years and many casualties later, the number of hotels in receivership has subsided to a trickle, say commentators. Chris Day, managing director at property agent Christie & Co, says instructions for hotels in receivership are noticeably down. "At its worst we were getting two or three hotels a week; it's now one or two every couple of months," he says.

The downward spiral started in the late 1980s, when hotel properties were buoyant and interest rates comparatively low. At that time, banks willingly put up capital for purchases and redevelopments. The recession brought rocketing interest rates coupled with poor trading performances, and many hotels were unable to meet the interest repayments on their debts.

In the early 1990s, the banks moved quickly to put hotels into receivership. By 1993, however, they had become more willing to support hotels through a difficult trading period.

Independent hoteliers appeared to take the brunt of the recession. According to Andries de Vaal, partner in charge at Touche Ross's management consultancy division Greene Belfield-Smith, it was inevitable that they would be hurt the most. "If two of your 10 hotels are losing money, you hope that the other eight will keep you afloat," he says.

Without the financial resources or the substantial marketing budgets of larger groups, a high number could not keep afloat. Provincial hotels also suffered, as national chains could at least rely on London business to shore-up less successful operations.

William Barney, head of hotel consulting at KPMG, agrees that location, marketing and operating methods all contributed to some hotels' slide into receivership. But, he adds, those that made an effort to communicate with their banks were less likely to be put into administration.

Yet the idea that the groups escaped unscathed is false. Alan Maynard, of Arthur Andersen's hotel and leisure consultancy, suggests that smaller national chains suffered considerably. Resort Hotels, Principal Hotels, Crown Hotels and Baron Hotels were among the victims.

open-minded banks

"Many receiverships arose because of the financial situation of a group," says Maynard. When banks lend to specific hotels in a group, these may become "cash cows" whose operating profits are used to prop up the weaker hotels. If they then become unable to service the debts, a lender may want its money back.

In the case of Principal Hotels, Barclays Bank put up the money for the group to buy six hotels from the ailing Crown Hotels group in 1991. Yet the same bank pulled its financial backing six months later.

When hotels are sold out of receivership, it is usually because the bank thinks it can get a sum that reflects the potential earnings of the hotel.

According to Maynard, the banks are now more open-minded about whether to hold on to a hotel or sell it. As occupancy rates and average achieved room rates creep up, buyers are easier to find. "Hotels with facilities like golf courses, such as Shrigley Hall, Pott Shrigley, Cheshire, that allow them to trade in different markets are easier to sell," according to Horwarth UK's consultant, Mark Phillips. But most experts suggest that anything with a positive cash flow will sell.

And the good news is that most hotels sold out of receivership are today being bought by legitimate hotel operators, rather than speculators as in the 1980s, according to Christie & Co's Chris Day. As a result, new owners are now operating within their means, giving them a greater chance of survival.

Properties that do not sell out of receivership tend to be at the bottom end of the market - often poorly converted, outdated guest houses or hotels. Alternative use is often their only hope.

Since 1989, the seaside resort of Eastbourne has lost 100 small hotels. In 1991, derelict hotels blighted the seafront and hoteliers and local businesses accused the council of failing in its responsibility to maintain the town as an attractive resort. Today it is a different story. A dynamic partnership of private and public sector groups has reinvigorated the town and created record occupancy levels.

According to John Clarke, chairman of Eastbourne Hotels Association, small hotels were hit hard by the recession. As the owner of the 12-bedroom Cherry Tree hotel, he understands all too well how many smaller hotels were forced to stop trading or change their use. "While the big hotels could discount to maintain their occupancy levels, small establishments couldn't afford to. The knock-on effect of discounting was immense for small hotels," says Clarke.

But he admits that the 185 surviving hotels are leaner, fitter and operating more viably than before. And while many other UK seaside resorts have been crippled by large numbers of hotels that have either fallen into disrepair or whose incomes come mainly from DSS residents, Clarke contends that Eastbourne has evaded this.

"The town council is aware of the devastating effect this can have on tourism," says Clarke.

Director of tourism Ron Cussons explains the town's policy: "We need to have 2,000 beds in every standard to sustain the town's conferences. However, to prevent overcapacity we have introduced three zones - A to C. Zone A is our sea-front and we protect that like mad. It's very difficult to get change of use in that area".

Inevitably, the number of guest houses in streets behind the sea-front is declining, and they are reverting to other uses. "We want to have enough bed-space, but only of the right quality and in the right location," Cussons says.

The Eastbourne marketing group, part of the Eastbourne Business Partnership, was formed in 1992 with the objective of boosting jobs and income by projecting a younger, more dynamic image for Eastbourne.

One happy result of its work is that occupancy levels in Eastbourne reached twice the national average for the 24-month period of 1993 and 1994. Conferences, such as October's International Children's Conference, introduced a new generation of visitors to Eastbourne. Lesley Pizzey, director of marketing for the business partnership, hopes that conference delegates impressed with the town's facilities will return with more business.

Michael Reid, of property agent Fox & Sons, says: "We've moved a long way from being a bucket-and- spade resort. The town is becoming more business-orientated and investment in the infrastructure, in terms of rebuilding the beaches and the seafront, has helped enormously. However, hotel property prices have fallen by about a third."

Proof that the town's new image works comes from the fact that all 15 of the town's bigger hotels that were repossessed or in receivership during the recession have now been sold. Of these, only three were converted to other uses. n

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