A recent financing deal in London suggests owners of super-prime hotels can still count on lenders’ support, despite the severe strain Europe’s hospitality sector is under due to the impact of covid-19.
Constellation Hotels, owned by Qatar Holding, agreed a £340 million (€390.4 million) 10-year refinancing facility, arranged by US bank Citigroup on 23 March – the day the UK went into lockdown – against two five-star London hotels, the Connaught and the Berkeley.
Along with Claridge’s, the hotels are operated by Maybourne Hotel Group. In 2015, Constellation bought a 64 percent stake in Maybourne from the latter company’s billionaire owners David and Frederick Barclay and Irish financier Derek Quinlan. It purchased the remaining stake from Irish developer Paddy McKillen a month later.
Russell Gould, Citi’s co-head of CRE finance, EMEA, told Real Estate Capital: “It is a testament to the exceptional quality of the hotels and to the strength of the management team and sponsorship, that, despite the challenging environment, Constellation Hotels has been able to secure long-term financing from a broad spectrum of supportive lenders.”
The consortium of lenders is understood to include Germany’s pbb Deutsche Pfandbriefbank, a UK investment manager and a UK-based debt fund. The transaction locked in fixed term finance to replace existing debt, which was around 18-months from maturity. Unlike in the US market, where 10-year fixed-rate hotel loans are relatively common, such a structure is rarely seen in the European market.
Gould added: “The London hotel market has already proven itself to be highly resilient after previous crises. Despite the disruption and uncertainty caused by the covid-19 pandemic, we are still seeing continuing yet understandably cautious appetite from investors, both on the debt and equity side.”
Market commentators argued that, although conditions in the wider hotel market are challenging, many investors and lenders will regard the highest-end luxury hotel assets as a relatively safe haven for capital.
Rob Stapleton, director in the hotels team at real estate consultancy Savills, said: “The Connaught and the Berkeley hotels rank among the best known luxury hotels in London, if not the world, and during these times of uncertainty we tend to see an enhanced focus on irreplaceable assets in ultra-prime locations.
“When you consider the quality of the sponsor, and the specific hotels, it is no surprise that the lender has a high degree of confidence in supporting this refinancing.”
In the investment market, just days before the Constellation Hotels financing deal was closed, one of the UK capital’s other super prime hotels was subject to an acquisition deal.
The Ritz was bought by a private Qatari investor for an undisclosed amount, reported to be around £700 million. The deal was announced on 27 March, the day the hotel shut its doors for the first time in 113 years on the back of the covid-19 lockdown.
“The sale of the Ritz highlights the continued appetite for trophy assets,” said Stapleton. “As we have seen in the aftermath of other market shocks, we again expect to see a flight to quality with assets such as the Ritz likely to be increasingly attractive to investors seeking capital preservation in ultra-prime locations in one of the world’s most resilient markets.”
The Ritz acquisition accounts for a sizeable share of transaction volumes in the first quarter of the year. Savills reported that hotel transaction volumes in London totalled £1.15 billion in Q1, which was largely in line with the £1.26 billion traded in the first quarter of 2019.
European hotel outlook
Colin Morgan, real estate finance partner at law firm Macfarlanes, which advised Constellation Hotels on its recent deal, said: “We could see other deals like Constellation’s, providing that those lenders who remain active in the sector are prepared to see beyond the next six or nine months and recognise that the hotel sector will return to normality.
“It will largely depend on how flexible these lenders can be in the early months of the loan – for example, how long will any financial covenant ‘holidays’ last, especially interest cover.
“Also, how recent is the latest valuation of the hotels? Lenders certainly won’t be able to obtain a new valuation in the current environment. A further question will be whether the sponsor has the financial strength to fund any covenant cures that may by needed in the short to medium term as the market stabilises.”
Although investor confidence clearly remains in London’s London luxury hotel sector, some predict a relatively positive outlook for the capital’s wider hotel market, dependent on when the lockdown is lifted.
Research by Knight Frank found that there could be a surge in UK hotel investment volumes in the final months of 2020. The real estate consultancy added there was the prospect of London’s hotel market making a complete recovery by the end of next year, provided that covid-19 restrictions are lifted by the end of June 2020.
Fellow consultancy CBRE identified London as one of the top 10 European cities that are “well positioned” for hotel performance recovery.
The research, published on 16 April, ranked the 27 main cities in Europe, based on how exposed they were to the demand in key travel segments, including domestic, international, corporate, leisure and international meetings. The markets that are forecast for a more rapid recovery are those with a lower reliance on international travel demand, that have material exposure to leisure demand and that are home to fewer international events.
Although London beat the likes of Paris, Madrid, Barcelona and Lisbon, it fell behind fellow UK cities Edinburgh, Glasgow, Manchester and Belfast.
Joe Stather, associate director for hotels at CBRE, said: “We anticipate that markets across Europe which have previously benefited from strong domestic leisure demand are well positioned to lead the recovering cycle.”