During the pandemic and its aftermath, there were very few lenders willing to finance hotels.
Today things couldn’t be more different. An abundance of different types of finance includes traditional bank loans, debt funds, institutional investors, and private equity.
Aareal Bank is one of few lenders that stayed active during Covid, providing finance to 250 hotels without any write-offs. It also lent €380m to Archer Hotel Capital in June 2020 to refinance near-term maturities and fund liquidity for seven European hotels in five countries.
How does a bank like Aareal cope with the additional competition today?
Veronica Eckhoff, vice president, Aareal Bank, said: “There's a lot of liquidity out there for best-in-class stabilised assets, and there's a lot of new players who are willing to finance hotels. I think we are very client relationship-driven so that's a strength. While we're not always the cheapest, we're always there for our clients, in good and bad times. We're also active in 24 countries.”
Stephanie Muller, director, CBRE, added: “We're in a very good place now, because we can give our clients a lot of optionality across the risk spectrum. A lot more banks are willing to lend to hotels. They're comfortable with hotels, and you also have a very deep pool of debt funds willing to lend to hotels, which means they can also price more competitively. So if you put something on the market, you will get quite a lot of choice across the leverage spectrum.”
Non-bank lenders, especially private equity debt funds are now competing, giving hotel owners more options. Muller at CBRE said: “Sometimes the client will take a little bit more loan to value exposure with PE capital. And sometimes the bank is just a little bit cheaper and they go with the bank.”
In December 2024, KKR and The Baupost Group purchased a portfolio of 33 Marriott -branded hotels in the UK including the London Marriott Hotel County Hall and the London Marriott Hotel Regents Park.
Gwen Martignoni, vice president of Amante Capital, the operating partner for the joint venture, remembers: “We had about 30 lenders lined up at our door. Good sponsorship definitely helps attract financing.”
In the end, a £600 million loan for the purchase was secured from a consortium including Société Générale, BAML and Deutsche Bank.
What are today’s key lending metrics?
Giving a borrower’s point of view, Martignoni said; “We still see LTV covenants, but we're seeing a lot more interest rate coverage ratios and debt yields as covenants. We've also seen more cash traps as a way forward to give the banks the comfort that they need.”
A cash trap is a mechanism where, if the hotel’s performance falls below an agreed threshold, any extra cash it generates must be held in a blocked account (the ‘trap’) rather than paid out to the owner. That way, the lender knows there’s a reserve of funds available to cover debt payments if things go wrong.
Giving a lender’s perspective, Eckhoff said: “We like covenants at Aareal Bank, both hard and soft. Over the past 10 years, when interest rates were low, yield on debt was the prime parameter that we looked at. But since 2022 interest rates have increased, so we've gone back to looking at DSCR (debt service coverage ratio). And of course, LTV continues to play a role.”
Branded versus unbranded
Is it easier for branded hotels to secure finance? Muller at CBRE commented: “I think the brand gives a stamp of approval that another party has produced their own numbers. Brands can help a lender put the opportunity through the credit committee by saying: ‘Look here’s a robust distribution system and another view on the numbers as well.’”
Eckhoff at Aareal Bank added: “Brands can add a lot to an asset. However, we also finance independent hotels. For example, we financed the Pulitzer Hotel in Amsterdam, which used to be a Luxury Collection by Starwood Hotels and Resorts. We refinanced its €17m capex program, and now it's an independent hotel with the Lore Group, and it works very well.”
Green funding goes mainstream
ESG and green loans are now major considerations for lenders and borrowers. Aareal Bank started offering green loans in 20219. Today, its green loan book totals €7.6b and more than a one third of the hotels that it finances meet the criteria.
To qualify, hotels must be EU Taxonomy compliant, consume less than 140 kWh per square meter, or hold a top-scoring green certificate like LEED (gold) or BREEM (very good).
Eckhoff said: “There's a lot of greenwashing out there. Our green loan framework is checked by an independent external party called Sustainalytics.”
Muller added: “As a borrower, the more [environmental] boxes you tick with your assets, the more attractive you are to lenders, and the more lenders you attract, the better the terms.”
Martignoni said: “We acquired a hotel in Kensington, London, last year, and without even realising it, we qualified for a green loan. So, I definitely think it's where the future is going, and it's where debt and equity can really work together.”
All quotes taken from the IHIF EMEA 2025 panel ‘New direction: Where is the lending market headed next?’ The panel was moderated by Andreas Löcher, department-head, Investment Management Operational, Germany.