The falling cost of capital in the wake of global interest rate cuts will give hospitality investors a broader range of financing options, according to Jorge Roa, managing director of investment banking real estate and hospitality in Spain for Alantra.
However, the thriving hotel industry is already at the top of the pile for loan applications, notes Roa, having been affected much less than other asset classes during the relative “credit crunch” of the past two years.
“Hospitality and the living sectors have been the preferred asset classes for lenders and investors over the last 24 months,” he says. “While high interest rates have impacted yields and negatively affected other commercial real estate asset types, hospitality has looked resilient due to strong fundamentals, allowing owners to outperform pre-Covid yields. It has been a very positive surprise for everyone.”
The ongoing success story creates further credit opportunities for the hospitality sector, he adds. “Outperforming hotels have allowed owners to pay their debts in advance and reduce leverage. In turn, banks see their exposure to hospitality go down and have an increased appetite to take on further lending in the space. That also means greater willingness to lend against new and innovative hospitality products.”
Private credit booming
UK digital bank, OakNorth has been increasingly lending into the hospitality space. The firm’s senior director of debt finance, Deepesh Thakrar says: “We have always found hospitality interesting and look for very strong management teams, many of whom are private equity backed.” In terms of hotel segments, he adds that OakNorth tends to prefer “the two ends of the market”, luxury and affordable, with ongoing “apprehension about the middle being squeezed out”. This has translated into loans for the likes of 5* country house hotel Beaverbrook in Surrey, or London-focused budget chain Z Hotels.
Earlier this year, OakNorth and HSBC partnered to provide a £232 million club loan to Splendid Hospitality Group, with a view to supporting future works such as adding 76 bedrooms to the 292-key Hilton London Bankside. The Splendid portfolio comprises some 24 hotels across the UK in the economy, midscale, upper midscale, boutique, and luxury segments. Says Thakrar: “The group, which boasts an incredible management team, had an existing facility with HSBC but we were invited to join the club.”
Thakrar believes an improved climate for dealmaking is just around the corner. “We have already seen an increase in available liquidity both for private equity funds and lenders and 2025 should see an increase in deal volumes compared to 2023 and 2024,” he affirms. “But lenders will only be backing teams where they are confident about management and the business case.”
Record volumes
The buoyant hospitality sector has already achieved record transaction volumes to date in 2024. European hotel deals exceeded €11.6 billion in the first half of 2024, the highest six-month volume since 2019, according to Cushman & Wakefield data. Overall, luxury hotels represented nearly half of H1 2024 volumes. C&W expects full-year transaction volumes to exceed €20 billion, driven by increasing liquidity and ongoing hotel outperformance.
While a “revenge travel” theme is clearly part of the tourism rebound, monetary policy has also had a part to play in hotels’ record occupancy figures in recent times. “It is clear that outsized fiscal support during the pandemic and in its immediate aftermath played a key role in sustaining consumer spending,” says Neil Shearing, group chief economist, Capital Economics. “This fiscal expansion manifested itself in several ways, including the ‘excess savings’ that were accumulated by households and which have helped support spending over the past three years.”
Still, recent rate cuts from a slate of central banks globally are being welcomed by many investors in hospitality real estate, particularly those who have refinancing events looming. The Federal Reserve’s decision earlier this month to reduce rates by 0.5 percent has brought the US institution in line with European central banks, with the European Central Bank (ECB) having already sliced rates twice and the Bank of England cutting rates once at its August meeting.
According to Moody’s data, European commercial real estate loans typically have maturities of three to five years, which implies that 20 percent to 30 percent of outstanding loans come up for refinancing each year. Roa thinks that as well as the latest cuts “improving liquidity, the Fed decision will have a positive impact on markets and benefit the Euro.”
Non-bank lenders
Non-bank lenders have proliferated in recent years, often offering borrowers a more flexible slate of options than traditional banks, in turn stymied by caution and persistent balance sheet distress. There is however hope that traditional banks may gain confidence as interest rates continue to fall.
Roa says that Alantra is already advising hospitality players on a mix of bank and non-bank lending, with the latter still offering useful non-conventional and often faster solutions, such as a hotel client recently avoiding insolvency thanks to a private loan.
However Thakrar finds that “larger banks and lenders remain quite apprehensive about lending against hospitality”, suggesting that changes won’t emerge overnight.
Whatever happens, the private credit space is unlikely to recede in the coming years, with new and growing players in the space increasingly deploying successful fundraising strategies. For example, private investment firm RoundShield announced the successful closure of RS Fund V earlier in September, exceeding its target by nearly $150 million as it secured some $1.01 billion in commitments. Marking the largest fund in the firm's 11-year history, the war-chest is focusing on European asset-backed private credit opportunities and capital solutions.
Driss Benkirane, founder and managing partner of RoundShield says: “We believe that European real assets private credit is a very attractive sub-category of private credit, especially within the highly fragmented mid-sized deal universe where we invest.
“Today’s opportunity set is particularly attractive due to the lack of liquidity in the European mid-market, real estate valuations that continue to adjust to the higher interest rate environment and shifts in real estate usage post-pandemic.”
RoundShield’s Fund V will primarily target real asset sectors within Western Europe, with preferred segments including hospitality, student housing, residential, social infrastructure and renewable energy.
Earlier this year, hotel investor and operator Kabannas acquired Hayweight House in Edinburgh thanks to RoundShield backing. Hayweight House – its fourth deal in nine months – is being converted into a new format hybrid hotel by Kabannas. With further funding from RoundShield, the Kabannas platform is targeting €100 million-plus in micro accommodation deals across Europe.
Another firm sizing up the European private credit space is global investment firm Sixth Street. According to a recent report by Reuters, the firm is embarking on the biggest European recruitment drive in its history to back a major push into private credit and real estate. If successful, the firm could follow the trajectory of its peers Ares Capital and Apollo Global Management, who have seen private credit strategies in real estate reap rewards.