Aareal’s Graef-Parker: We prefer financing hotels with a diverse target market

Following the German bank’s financing of a London hotel for L+R, its managing director of special property finance says it currently favours hotels capable of attracting a broad mix of guests.

Aareal Bank, the German lender solely focused on commercial real estate, announced on 24 March that it had provided a five-year loan to the privately-owned company L+R Hotels.

The loan, which the bank said was in the “upper double-digit million” pounds range, is secured by The Mayfair Townhouse hotel in London, a five-star luxury property with 172 rooms. Formerly known as the Green Park Hotel and the Hilton Green Park, the hotel will be operated under L+R’s Iconic Luxury Hotels brand, which comprises eight hotels and resorts located in Europe and the US.

At the end of 2020, the hotelier completed a refurbishment and repositioning of The Mayfair Townhouse, which caters to business and leisure guests.

Despite the ongoing uncertainty over when and how the hospitality industry will recover, the quality of the sponsor and its long-term expertise in the sector were key reasons behind the bank providing the loan, said Bettina Graef-Parker, managing director for special property finance at Aareal.

“The asset is operated by a hotel professional, rather than by a franchise, which is the right business model for its features,” she told Real Estate Capital. “It is a newly renovated, medium-sized property, located in the heart of Mayfair. Its features greatly position the asset to benefit once the pandemic is over.”

Graef-Parker: ‘As a financier, you need to look for hotels with a broad demand mix’

Graef-Parker believes the hotel industry is going to experience what she calls a “revenge travel” trend, fuelled by people’s determination to travel after an extended period of restrictions. “People have been saving money so ‘revenge spending’ is going to happen. The other day, I went to an optician and just because I was so excited to be in a shop, I bought two pairs of sunglasses I did not even need. I just needed to spend some money,” she said. “I think people feel like that about travelling, so I believe the hotel industry is going to experience that trend. Leisure travel might return first but business travel will also come back.”

Aareal has a hotel loan book of around €8.5 billion. Graef-Parker said the German bank remains confident the hospitality industry will rebound but that it might take from three to four years for a return to 2019’s income levels. She added that hotels focused on attracting a diverse mix of customers are the best lending opportunities in today’s market.

“As a financier, you need to look for hotels with a broad demand mix,” Graef-Parker said. She added that hotels focused on a single business segment should be avoided now. “Uncertainty still lies ahead so we want to be prepared for whatever might come by having a diverse split of everything,” she said. “Covid has changed many things suddenly. For example, none of us would have predicted leisure travel to be the strongest segment as it is now. In previous downturns, this would have been the most vulnerable.”

She added that choice of sponsor is more crucial than ever. “We work with investment clients with long-term experience, that can build from the reserves they have gathered over the last couple of years,” Graef-Parker said. “Hotels are often considered a property type to invest in when other asset classes don’t offer good returns, but we prefer to work with clients that do not only have those opportunistic views. We have a long-term commitment to the sector that we want our sponsors to share.”

Hotel financing terms have been impacted by the pandemic, with loan-to-values generally reduced to 50 to 55 percent on average and margins up by 150 to 200 basis points from pre-covid levels, according to a market source.

In addition to underwriting loans to the sector on conservative terms, Aareal is also looking at including reserve accounts in some of its financing deals aimed at covering operating income and loan interest costs. “We ask the client to provide reserves because we need to ensure there are enough reserves for operating expenses and debt service in the system,” Graef-Parker said.

Aareal targets hotel loans of at least €30 million-€40 million and has experience of financing hotel portfolios located across several countries. The ability to write loans across multiple jurisdictions is, according to Graef-Parker, a competitive advantage. “Multi-jurisdictional transactions tend to attract a smaller pool of lenders, which can benefit us. If there is a financing opportunity involving a portfolio with assets in the UK, Germany, Italy, Spain and France, many debt providers would be out.”

Although the bank has a mandate to continue financing hotel properties, she added there are few financing opportunities. “At the moment, the offer is limited because not many hotel owners are selling unless they are in distress. In two years, however, I expect transaction levels to significantly resume.”