London’s five-star hotel sector will emerge as a “winner” as real estate markets recover from the covid pandemic, according to alternative investment firm HIG Capital, which this month provided £76 million ($100m; €90 million) of mezzanine debt against a portfolio of luxury assets in the UK capital.
The Miami-headquartered investment company provided the loan to Shiva Hotels, a privately owned hotel developer and operator founded in 2001 by former Lehman Brothers trader Rishi Sachdev.
The loan part-finances a portfolio of prime hotel assets including The Guardsman in Westminster, Middle Eight in Covent Garden – which both opened for business in 2021 – and a hotel development underway at Holborn Viaduct.
Chris Zlatarev, principal at HIG Europe Realty, said the firm worked with Shiva and the hotels’ existing senior lenders to structure the mezzanine loan to allow the sponsor to focus on implementing its business plan.
“It is a corporate mezzanine financing with propco-level security,” Zlatarev told Real Estate Capital Europe. “The propcos have no recourse to senior debt with Bank Leumi and ICG. The overall debt loan-to-value is in the 70 percent range,” he added.
Leumi UK, the UK arm of Israel’s Bank Leumi, is the existing senior lender to The Guardsman and Middle Eight. In March 2020, Leumi UK announced it had provided a £62 million loan to finance the Middle Eight development. London-based alternative lender ICG Real Estate is understood to be the senior lender on the Holborn Viaduct development.
The senior debt is non-recourse at the asset level. HIG worked with the senior lenders to realign the senior debt with the mezzanine loan term and structure.
Despite the pandemic’s severe impact of the London hotel market, Riccardo Dallolio, managing director and head of HIG Europe Realty in London, told Real Estate Capital Europe that the financing deal represented a good opportunity: “We believe this is a prime hotel portfolio in central London with hotels built to a very high standard with significant cash equity invested by the sponsor, and our loan takes into consideration the impact of the pandemic on the performance and the values of the assets.”
“The structure and financial covenants of the senior and the mezzanine financing were designed to allow a full recovery from the pandemic and for the company to achieve its business plan and growth objectives,” Dallolio added.
Zlatarev said the historic resilience of London’s high-end hotel sector was a reason for HIG’s confidence in the deal. “The hotels are positioned in the London luxury hotel segment, targeting leisure and discretionary business travel, which historically has experienced strong recovery following a crisis.
“The prime luxury London hotel revenue per available room (RevPAR) has grown at a compound annual growth rate of around 4 percent since 2001 – around 2 percent above inflation – and has experienced one of the quickest recoveries after prior economic downturns.”
Zlatarev added that, in the five years following the great financial crisis of 2007-08, RevPAR in the luxury London segment increased by around 30 percent.