Extended stay or early check-out? Hotel finance in lockdown and beyond


Covid-19 has had a great impact on all areas of our lives, however the hospitality, retail and leisure sector is arguably one of the most affected. Following on from a webinar hosted by Howard Kennedy last month, where a panel of experts from Santander, Michels & Taylor and Savills discussed how the hotel finance industry is holding up during the current crisis, here I set out what has been done during the pandemic to help hotels, and what the future is looking like for the industry.

Current Situation for the Industry

The main focus for banks such as Santander during the Covid-19 pandemic has been supporting their existing customers, by ensuring borrowers retain a manageable cash flow to keep their businesses running, as opposed to meeting financial covenants required under their loan facilities. Santander have done this with a phased approach, the first of which provided capital repayment holidays to borrowers to help maintain their cash flows and provide some comfort that payments will not be demanded for a few months. The second phase has focused on providing working capital support to borrowers in line with the Government's Covid-19 schemes quickly and efficiently. This has allowed borrower hotel customers to manage their cash burn throughout the lockdown while they have been closed. Santander's next phase will focus on the approach, support and initiatives required to assist hotels financially when they begin reopening.

The financial impact of Covid-19 has not only been felt by hotel businesses themselves, but also by the hotel real estate market. Although the property market has been significantly affected by Covid-19, some activity in the hotel real estate market remains.  Valuations have continued to be an important service line, despite the difficulties associated with ascertaining the extent to which Covid-19 has damaged market value. What is clear however, is that it is a fast moving situation, with the economy's recovery model thought to be changing from being 'V-shaped' to 'U-shaped'. The main concern for valuation therefore, is how long the bottom of that 'U' will be. 

Future for the Industry

The greatest challenge for the hotel industry will ultimately be returning to 'normal' and re-opening hotels in line with the Government guidelines. A new type of hotel will emerge from the lockdown and initially, will likely operate on a room basis only.  As part of the initial re-opening measures, restaurants, bars and meeting spaces would likely not open, face to face check ins will also be limited, and housekeeping will likely become an on request service. As such, there will be a difficult balance to be struck by hoteliers between operating legally and safely, operating in a way that is comfortable and desirable enough for guests to consider staying and operating profitably.

The process of reopening will also give rise to financial costs which did not exist before lockdown started. The social distancing and increased hygiene standards required as well as the level of publicity and marketing required to re-build guest confidence, will all have an impact on the bottom line. As such, it might not necessarily be appropriate for a hotel to re-open as soon as the lockdown is lifted, but each hotel's operations be assessed on a case by case basis.  There is enormous granularity across the hotels sector, no two hotels are the same (even if in a similar location or operating under the same brand) and the merits of each hotel re-opening will need to be assessed on an individual basis.    

It will also be important to manage lender relationships, and  early engagement and communication with lenders so that they can understand each hotel's financial circumstances and operational needs will be key. There will not be a 'one-size fits all' solution for hotels to reopen and recover, and what might be the right approach for one business might not be for another. It is also important for hotel businesses to recognise that there will not be a quick fix to return to normality, and the best way for lenders to support borrowers will be to look at solutions over the longer term, to ensure financial strength and longevity.

We are not seeing distressed hotel assets on the market yet, and instead there is various off-market activity going on behind the scenes. Although this is a difficult time for businesses, it is proving to be a good opportunity for hotel owners to quietly review their portfolio and offload assets which they would rather not nurse over the coming months and years, in order to allow them to better support those hotel assets which they regard as stronger. 

Despite some of the concerns highlighted above,  it is important to remember that the hotel is a very popular product. Individuals' desire to travel and interact face to face will still exist, and the hotel sector is crucial to this. Although there is no guarantee of when we will return to 'normal', there is confidence that it will return. This, combined with the support from financial institutions such as Santander who endeavour to be part of the solution rather than, as perhaps seen in the last recession, as part of the problem, gives the hotel sector hope and confidence for the longer term future, even if the immediate future is unclear.

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