The borrower view: Financing hotels during covid-19

Shiva Hotels' managing director on financing hospitality during covid-19

Privately owned Shiva Hotels was founded in 2001 by former Lehman Brothers trader Rishi Sachdev. The UK company manages five hotels under the Hilton brand. It also has a development pipeline of five luxury central London hotels, two of which had been due to open when covid-19 struck.

In July, Shiva sourced £230 million (€255 million) of development finance from lenders Cale Street Investments and Crosstree Real Estate Partners for its scheme in the Marylebone area of the UK capital. Real Estate Capital spoke to its managing director to discuss the impact of the pandemic.

How has covid-19 affected your business?

Rishi Sachdev
Rishi Sachdev

Our five hotels are closed to the public, although one stayed open to accommodate healthcare workers. There has been a lot of focus on the UK government’s 4 July lockdown easing, but the hospitality industry is reliant on corporate as well as domestic and international leisure demand, which will take time to return. So, hotel operators will need to manage the impact of this on income for the next couple of years.

I am more confident about the recovery of luxury hotels, particularly in prime locations. Demand from individual, high-end leisure travellers should rebound quicker than corporate demand. Also, investors seek wealth preservation and real income growth in times of crisis.

How are you managing your lender relationships?

Communication is key. The extraordinary challenges presented by covid-19 necessitate a collective strategy. We are looking at different ways to cover interest payments to compensate for a near-term shortfall in income. In general, realignment of interest payments seems to have been the preferred response from financial institutions, which seems both sensible and pragmatic.

How has the crisis affected the availability of hotel debt?

There are fewer active lenders, and their willingness to lend is more restricted. From the conversations I have had, high street banks are focusing on their existing clients and facilitating government-backed loans. Alternative lenders, especially debt funds, understand the sector and are more open to providing finance, but more selectively and with a greater focus on assets’ location and borrower quality.

How have debt terms been affected?

Lenders are generally more cautious and are taking less overall exposure to the sector. Terms are obviously dependent on the individual deal. However, there are still lenders willing to finance hotels, including mezzanine and preferred equity providers. In some cases, they are charging higher margins, while in others, their cost of funds appears similar to pre-covid levels. Overall, though, they are more conservative, including on leverage.

Is development finance scarce?

In some cases, lenders are more comfortable funding development than financing existing operational assets. Our current schemes will not complete until 2023, so although there are challenges to financing construction, some lenders see them as more manageable than the short-term challenge to operational assets. Development facilities are being structured with contingency for disruptions to timeframes.

How will covid change how you develop and operate hotels?

Pre-vaccine, we are putting measures in place to protect our guests and teams, including more intense room cleaning, temperature checks, enhanced front-of-house management and personal protective equipment where appropriate. Longer-term, for our development projects, we are actively engaged with advisors that specialise in viral control and are looking at factors including air circulation and use of materials that facilitate enhanced cleanliness. Until there is a vaccine, hotels cannot run at high occupancy and, for as long as the virus remains a threat, we need to think carefully about the level of occupancy.