Today’s hospitality lenders are placing ESG at the top of their lists, while prioritising asset cashflow amid the ongoing inflationary environment, according to experts in the sector.
The evolving economic climate has demanded increasing agility from debt providers, says Stephen Morita, managing director at Eastdil Secured, who describes an “interesting last 48 months” for the sector. “From COVID-19… to global fiscal and monetary stimulus; then the war and significant inflation… followed by the largest rate hike you've seen in the last 40 years.” He notes however that hotel investment remains one of the more resilient parts of real estate: “As the world has shifted, we've seen probably a much broader appetite for hospitality.”
Focus on ESG
The sector’s increased popularity flanked by macroeconomic movements has forced lenders to get much clearer on lending credentials, says Jasna Ahrer, head of hotels & tourism, Erste Group Bank, noting that “we are among the few banks that really have a dedicated hotel team. So we have a team of six people financing only hotels, student housing and serviced apartments… we like diversification.”
She adds: “In the last few years, the market has changed: the limiting factor is actually cashflow, debt-service coverage ratio and interest coverage ratio.” Under the right circumstances, the bank will lend up 65 or 70 percent, she says, noting that another important ‘moving part’ is sustainability in all its guises. “The things we weren’t looking at three or four years ago are now very important,” she says. “We also want to be a supporter for our clients turning brown assets into green, and not only finance greenfield investments, where obviously the carbon footprint is much lower than in older, existing buildings from the fifties or sixties.”
The bank is ready to give clients a nudge in the right direction, she notes, where there are risks of assets remaining stranded. “If the investor has a brown building, and they don’t want to put in additional capex to turn it green, we are happy to support and provide some special products which can support this transition.”
Financial instruments
The evolution of lending is also unlocking a different set of financing tools, notes Patrick Grant, partner at AlphaReal, which has been increasingly exploring ground rents, that convert a landlord’s interest in an asset into something closer to a financial instrument. Grant explains: “They have been extensively used in the UK for many years and are just moving into Europe. We have got a European fund where we're rolling this out and it's viewed in some ways as either an alternative to, or complimentary with, traditional debt.”
He describes how insurance companies are increasingly entering the capital stack, usually replacing pension funds, and how new debt structures are “taking away the need for more expensive mezzanine financing to create a better blended cost of capital”.
The outcome means a richer panorama of lenders. “Some 90 percent of our capital used to come from pension funds and about 10 percent from insurers. That's entirely switched over the last two years. And one of the real positive benefits of that is that actually what we're providing now to make it work for insurers, under their regulatory world, is a lot closer to debt.”
Broader lending environment
Notes Morita on the broader lending environment: “We've seen more capital come into the private debt fund or alternative lender space. And I think from that part of the market you've had people forcefully become more creative, accept partial accrual deals, and accept a lack of covenants or a holiday on covenants.”
He says that the resulting “competitiveness” has “helped improve lending terms”, which in itself is countering what has been described as “the big debt shortfall”. He concludes: “As hospitality outperforms, there’s certainly a lot of capital out there vying for the middle of the capital stack.”