Oracle Hospitality is the exclusive Technology Partner of the HI Investor Council
How is the hotel investment sector set for 2024? What trends should we paying attention to and which should we be ignoring? We recently gathered together a select group of investors to discuss the ins and outs in our Q1 Investor Council meeting. Below are a selection of the key nuggets from that discussion.
1. Underwriting gets back to normal
We’re now four years on since the start of the Covid-19 pandemic. Obviously hotels felt the impact from lockdowns immediately but in terms of investing the unpredictable nature of the period made underwriting incredibly challenging. The good news is that although there are still plenty of moving parts to the macro economy, underwriting has gone back to normal. Now, it's a case of understanding you can underwrite based on costs going up or down in the future, which is a normal part of the economic life of any operational sector.
2. Supply restrictions in the UK can help demand
The supply pipeline in a lot of UK markets remains gummed up, which can be a good or bad thing depending on how you want to look at it. On the demand side of things it likely means rates should be fairly healthy over the next five or so years, even if the numbers themselves don’t necessarily keep the same pace as they have been doing.
3. Interest rates and inflation vs geopolitics
How much does geopolitics impact hotel investment? Well, of course it depends on the locations you are operating in and your key source markets. There is still war in the Middle East and in Ukraine and there are key elections in the US and elsewhere. But what will be the effect on hospitality?
- Assets in key gateway cities, perceived as being far away from conflict will continue to be prized. Think London, Paris, Madrid, Lisbon.
- The key things is the impact on interest rates and inflation and what that will do to the cost of capital.
- In the US we could see investors holding back ahead of a contentious election with increased activity in 2025.
4. Structuring deals is key
With dealmaking still on the scarce side and the bid-ask spread still sizeable, buyers are having to get creative when it comes to financing acquisitions. This could mean refereed equity or seller financing. As one investor remarked: “You don’t have a fight over value, you have a fight about the waterfall.” In some cases the market remains stuck with deals stuck because the financials just don’t stack up. It might be the case, however, that some potential buyers will look back on this period with regret in a year’s time, simply because they couldn’t come up with the right solution to get a deal over the line.
5. Private credit muddies the water
Towards the end of 2022 it started getting trickier to raise money as interest rates and inflation really started to bite. Those difficulties continued throughout most of 2023 creating a capital distribution gap. Subsequently lot of investors, in order to get LPs to come into their funds and get to their final close started talking about distressed credit. At the end of the day, there was still an issue of getting enough capital into those funds and it was quite difficult when everyone went real long, to then reverse course, and talk in equity game.
6. Labour still a challenge
A high inflation environment has meant increased wages and hotel investors and operators have had to get used to the P&L having a different shape to it post 2020. During the lockdown, many individuals left the industry, leading to challenges for companies in attracting and retaining staff, with employees now having the upper hand. In November the UK government announced a 9.8 per cent rise in the national living wage, starting in April 2024. The mandatory rate of hourly pay will increase from £10.42 to £11.44 per hour.
One investor said that their staffing costs had increased by £800,000 a year. “You just have to work even harder, top line, to cover the ills, in the cost structure and the p&l,” they said.
The flip side of inflation is that it has meant increased revenue so that businesses can cover these increased costs from labour and utilities. But as that inflation falls away, and nominal growth kind of slows down that minimum wage could really sting people.