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‘Unsustainable' plans threat to hotel market

09 November 2006
‘Unsustainable' plans threat to hotel market

The hotel market is in danger of overheating because of "unsustainable" and "ludicrous" loan rates and business plans, industry experts have warned.

During a panel discussion at the British Association of Hospitality Accountants conference in London last week, Karen Smith, consultant at HVS, said top-end prices were storing up problems for the future.

"We're seeing very high loan-to-value ratios, very aggressive yield structures and very aggressive future projections," she said. "Unless the market keeps powering on, they investors and operators] could be storing up problems."

Peter Anscomb, corporate director of leisure for Royal Bank of Scotland, agreed. "I've seen a valuation for 28 times EBITDA [earnings before interest, tax, depreciation and amortisation]," he said. "It's daft. It's not sustainable. The market is becoming increasingly unprofessional."

He added that a slight change in interest rates or shift of focus to another property sector would be enough to cause repayment difficulties.

Business plans are being resubmitted based on the good trading results in London's hotel market this July, August and September, according to Anscomb. "This seems a very dangerous approach," he said.

Paul Mitchell, finance director of Choice Hotels Europe, described the current market situation as "absolutely ludicrous".

"We've been offered numerous deals with rental values of up to 140% of EBITDA that we've walked away from," he said. "You don't have to be an economist to see how that doesn't make sense."

Mitchell said the offers had been made by naïve investors without hospitality industry experience.

A prominent lender to the leisure sector called for more debate on the issue. "In a professional capacity people will say ‘everything's wonderful and we're here to do deals'," he told Caterer. "You can't opt out of the market. But personally I wonder why so many people are concerned. There ought to be more debate. It's taken a while for people to have the courage to express their views."

By Ben Walker

E-mail your comments to Ben Walker here.

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