IN THIS UPDATE:

• Hotel real estate insights (compiled from our Covid-19 tracker that monitors developments and views from across the lending and investment space)

• UK Q1 2020 transaction volumes

• Brokers insights from across Europe

• STR European insights including forecasts for 2020 and 2021 RevPAR performance

^{(Any views expressed below are only valid for a short period of time)}

HOTEL REAL ESTATE INSIGHTS (compiled from the Savills Covid-19 tracker)

• No real change in how operators are looking to conserve cash flow. From a property perspective, they continue to seek rent concessions/deferments/holidays from landlords, with a number of landlords open to this. According to press reports, Travelodge did not pay their quarterly rent with StayCity seeking a rent freeze. LandSec reported that across its hotel and leisure assets, they received 23% of their March quarter rent (five days post-quarter date). Interestingly, they received 41% of rent on their retail portfolio.

• From a lending perspective, the major lenders seem to be flexible with loan expiries and facility covenants. Reflects their confidence in the longer-term health of their customers. However, appetite for new debt remains limited.

• We’re starting to hear some concerns from operators around future staff availability once the market starts to recover. The concerns are that European staff placed on furlough/made redundant have left the UK or will leave the UK once travel restrictions are lifted meaning the ability and speed to which hotels can restaff may be an issue. If this issue does materialise it could generate some capacity challenges – in turn, extending the recovery to pre-Covid levels. Over the medium term, it could accelerate efficiencies in the sector, including a greater use of automation where appropriate.

Q1 2020 UK TRANSACTION VOLUMES (INDICATIVE FIGURES)

London and Regional UK

• Transaction volumes in London totalled £1.15bn in Q1. This was largely in line with the £1.26bn traded in Q1 2019 albeit reflected an 8.8% decline.

• The Ritz acquisition accounts for a sizeable share of this activity. However, the fact that this deal completed in the final week of March while the UK was in lockdown and hotels were closed/closing highlights the continued appeal of trophy assets. This suggests that we could see a flight to quality once the market starts to recover, as seen in the aftermath of the GFC.

• Regional volumes totalled £115.2m, significantly down (-79.9%) on Q1 2019. This brings the total UK figure for Q1 to £1.27bn.

BROKERS INSIGHTS (SELECT VIEWS FROM AROUND EUROPE)

UK/London

• Sentiment seems to be split. Strong levels of interest in development sites, even those without planning consent, as developers look to be taking a longer-term view on the recovery of the sector. For example, Savills received unconditional bids on a London site in the final week of March, with four being above the guide price.

• Smaller private deals are also still going through, but it’s the larger corporate M&A deals that have really slowed. This is partially down to trading uncertainty, but predominantly due to the lack of debt in the market or, where it is available, because the banks have pushed out their margins.

Ireland/Dublin

• The temporary closure of most Irish hotels and lockdown of non-essential services has delayed many Irish hotel transactions. Hotel transactions totalled €0.7bn in 2019 (five-year average of €0.8bn). Prior to the Covid crisis Savills expected a similar level for 2020, but volumes will now be lower, unless there are unexpected distressed sales.

• In terms of the development pipeline covering March 2020 to the end of 2022, Savills has reduced its forecast supply of new hotel bedrooms in Dublin by 32%, to just over 4,000 rooms, with over half of those expected in 2021. They expect hoteliers, developers and investors will complete most projects that have commenced construction, although the delivery and opening dates will slip. There is a greater risk of delay and repurposing for those sites that are yet to commence, or are in the very early phase of development.

• With a reduced development forecast for Dublin hotels, Savills believe new hotel development in Cork, Galway, Limerick and regional Ireland will be more difficult to deliver in the coming years.

Germany & Austria (DACH region)

• Some well capitalised institutional buyers and pension funds remain active investigating interesting opportunities. However, greater emphasis, and analysis, is being placed on the quality of the operator and their business plan strategy.

• There are some reports that investors have reduced bids by between 15 to 25 basis points on core assets in prime German locations. However, this remains restricted to individual assets rather than being the norm across the market. Appetite for assets in B and C locations seeing a greater degree of softening compared to core assets in German A cities. Indicates the start of a shift to quality.

• Development pipeline is expected to slow going forward as a result of construction delays due to staff shortages or issues with the supply of materials.

Spain

Operators

• All the hotels in the country are closed by law, some of them turned into hospitals mainly in Madrid and Barcelona, which are the most affected cities.

• Most of the hotel operators are focused on i) temporary layoffs (ERTE), some of them including HQ, ii) Renegotiation (deferred or holiday payments, etc.) of rents or mortgages and iii) designing commercial strategies (cancellations and pick up). Regarding this, some TTOO are trying to attract desperate operators/owners with aggressive marketing campaigns for this summer (launching offers in mid-June) and winter.

Banks/debt

• Lenders have hit the pause button or have stalled most new transactions. They are focused on extension of existing loans and working capital liquidity to help companies with cash flow problems. Government is also injecting liquidity through banks to support troubled companies (ICO loans).

• At this point, there is no evidence of debt cost adjustment, however, and based on informal conversations with banks, updated appraisals (Tasaciones ECO) are ca. – 10/20% value, directly affecting LTV levels.

• Debt funds are approaching us to identify potential opportunities for high yield financing (bridge loans, mezz, etc.).

Capital markets

• Investor appetite is still alive; however, there is a deal delay scenario in the market, advancing slowly (developments or non-operating assets) or stand by until the health crisis has been overcome. Similar to that seen in other real estate segments.

• Distressed and VA investors very active, anticipating a bad summer season, looking for potential opportunities at discounted prices.

STR EUROPEAN INSIGHTS

China ‘green shoots’ of recovery

• China’s hotel occupancy currently at c.30% as of 28th March but did jump 10 percentage points in two weeks.

• Domestic leisure demand looks to be recovering quicker as are mid-tier and economy hotels.

• 88% of hotels in STR’s sample are now open.

• Did see some interesting initiatives by operators to secure some income during the lockdown. For example, some operators were able to lease kitchen facilities to F&B delivery operators.

Outlook (as of March 2020)

• They remain relatively optimistic of a strong bounce in 2021 performance supported by a strong bounce in economic growth aided by fiscal support. However, they concede that household wealth will be impacted, which is likely to feed through to tourism demand.

• Short-haul source markets are expected to be the quickest to rebound in 2021.

• Domestic leisure demand expected to come back even quicker, in line with what is being seen in China. Points to a longer recovery for those markets driven by international leisure demand, particularly where longer haul source markets account for a larger share of demand. As a result, Germany could see a faster recovery due to the fact that domestic demand accounts for a larger share of total demand (c.88% of tourism spend is domestic).

• European 2020 RevPAR is forecast to decline 37% driven largely by occupancy with ADR down 14%; 2021 forecast to see a 41% bounce in RevPAR again driven by occupancy. However, RevPAR is not expected to return to pre-Covid (2019) levels until 2022.

• This compares to 51% forecast decline in RevPAR for the US in 2020, -32% for Asia (excl. China) and -28% for China.

• For London, Edinburgh, Heathrow, Frankfurt, Berlin and Paris (luxury) they’re forecasting RevPAR declines of between 30–40% in 2020. Declines of 40-50% forecast for Milan, Rome, Dublin, Amsterdam, Madrid, Vienna, Brussels and Munich.

• Regional UK forecast to see lower levels of decline (driven by domestic demand) and was the only European market flagged as expected to see RevPAR declines of 20–30%.

• STR provided an outlook for P&L recovery; post the GFC it took European RevPAR seven years to recover to pre-GFC levels with GOPPAR taking an additional two years. Assuming RevPAR returns to pre-Covid levels in 2022 it may take until 2024 for GOPPAR to fully recover.

• Profitability in Germany took much quicker to recover post-GFC, with only one year of GOPPAR decline (2009).