Leumi UK, the London-based subsidiary of Israel’s Bank Leumi, has provided over £135 million (€155 million) in finance in the UK’s covid-hit hotel industry since the pandemic began. In its most recent hotel deal, the boutique bank is helping to bring one of Birmingham’s most iconic buildings back to life.
Last month, the bank provided a £27 million loan to global private investment firm Starwood Capital to refinance the development costs for the Grand Hotel, Birmingham’s only five-star hotel.
The five-year facility will help finance both the opening and stabilisation costs of the hotel, which was acquired in 2017 by funds managed and controlled by Starwood. The Grade II-listed, 185-room hotel is set to reopen in May with cocktail bar Madeleine and a New York-style brasserie, Isaac’s.
According to Louise Gillon, head of hotel finance at Leumi UK, the asset ticked all the boxes for the bank, including a strong sponsor and a central location in Birmingham’s business district.
“The Birmingham hospitality market needed something like this since this is the only five-star hotel in the city,” she told Real Estate Capital. “We are currently looking at financing assets that can compete well with their competitors when the market reopens. So, assets that have a high level of capex spent on them are likely to perform well when that happens: a newly refurbished five-star hotel was a fantastic opportunity for us to finance.”
Covid-19 has caused temporary disruption to the hotel market, but Leumi UK remains confident in the long-term demand for high-quality accommodation in city centre locations. According to Gillon, these properties benefit from several demand drivers. “We have always financed major city centre location assets, mainly in London, on the basis that they tend to enjoy a mix of corporate and leisure demand. We find them more resilient to downturns and they remain our lending focus.”
Overall, Gillon said the bank is focused on hotels that have some key features that make them stand out from the crowd, which they see as being in a stronger position to attract the little demand there may be. “Therefore, we are likely to avoid dated hotels, which lack capex, or perhaps need some repositioning, unless the project is specifically about doing that capex.”
Open but selective
Gillon said the UK-based bank remains confident the hospitality industry will rebound but that it might take three to four years for a return to 2019’s income levels. Against this backdrop, the lender has become more selective and conservative in its lending.
“We have become more conservative in order to maximise on the opportunities we see now,” she said. “Historically, we would have provided around 65 percent loan-to-value but now we are willing to offer around 55 percent.”
She added that historic cashflows are even more important than LTV ratios when financing a hotel asset. “The stability of that historic cashflow will determine where we can get,” Gillon said. “Since we do not know yet when things will get back to normal, we have to structure loan deals assuming there is going to remain some level of disruption.”
The fact that they have been financing closed businesses has, according to the sector specialist, heavily determined loan pricing. “Our pricing is attached to our risk, which is attached to income stability,” Gillon said.
“In order to provide borrowers with flexibility, we have worked with pricing ratchets, where the margin is reflective of the underlying trading performance of the hotel on a lookback basis,” She added. “In that way, we are not penalising the customers for sourcing loan facilities now in a high-risk environment, rather working with them, with pricing evolving over the loan period and the risk profile of such period. Ultimately, when loan conditions normalise, we are offering normalised pricing.”
Gillon said alternative debt providers are most actively providing finance to the UK hotel sector, with most bank lenders having pulled back. This, she added, has led to higher pricing. “There seems to be some opportunistic pricing out there with around 5 percent margins in a lot of instances.
“What we want to do is to ultimately retain the good business we booked during this period. We are not looking to be opportunistic.”