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)

• Insights from our Valuer’s in terms of what they’re seeing in the market

• Global & UK Economic insights

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

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

• On the whole, lenders have put a stop on new lending into the sector, although there remain exceptions. We are aware of a number of small private banks, debt funds and PE-backed lenders that remain active. (See more detailed insight in the Valuer section below).

• From an investor perspective, those who are already well exposed to the hotel sector have little appetite to increase their exposure over the short term. However, they remain open to opportunistic plays.

• While the current Covid-19 crisis is unique compared to other downturns in terms of the scale and the immediate impact it’s having on operators, lenders and investors, there are some positive differences at this point. Compared to the Global Financial Crisis (GFC), the banks and borrowers are in better shape with lower gearing levels. Similarly, there remains significant equity in the market with a number of investors potentially deploying this on opportunistic plays. However, we do remain mindful of the potential length of the lockdown and the speed at which operational performance can bounce back, and it would not be unreasonable to expect some failures.

• There was some interesting international news from Austria last week. Their government announced that they would be easing its lockdown measures on 14th April, however, they announced that this would be dependent on its citizens abiding by social distancing rules. Initially, the relaxation would be restricted to small shops before extending to other retail with hotels restaurants and other services potentially opened in stages from mid-May. The government did stress that if there was a second wave of infections, they may be required to re-introduce restrictions.
  
  Austria went into lockdown on 16th March, a week before the UK, with its restrictions and guidance on social distancing in place ahead of this. This does not necessarily translate into a similar timeline for the UK, but it does provide some insight into how restrictions could be eased here. Yet, while some countries are looking to ease restrictions others have announced a continuation. In the UK, there are no immediate plans to ease the current restrictions, with France announcing a continuation of its lockdown for another month with a potential easing on 11th May dependent on the trajectory of coronavirus cases.

VALUER’S INSIGHTS

• There seems to be strong cooperation between lenders and borrowers at present. The focus for lending institutions is on dealing with existing customers and working through short-term debt serviceability issues on a case-by-case basis. As a result, some hotel lenders have indicated they will not consider new lending until at least Q4 2020.

• Some challenger banks and debt funds are still open for new opportunities, but the proof will be in the pudding and the terms offered are likely to be less favourable than at the start of the year.

• In the short term, where properties do come to market, buyer pools are likely to include cash buyers, parties with strong lender relationships or those with pricier debt than pre-Covid levels, which could have a knock-on effect on pricing.

• Despite the lockdown, formal Red Book Valuations can still be undertaken, to support new lending, refinancing and company accounts updates. With a lack of transactions to support benchmarking, it is vital Valuers thoughtfully consider market sentiment in a rational way.

GLOBAL & UK ECONOMIC INSIGHTS

• The impact of coronavirus on the global economy has prompted recent revisions to Oxford Economics baseline forecast, which now envisages a 2.8% contraction in global GDP for 2020 exceeding the annual contraction seen during the GFC. They also note that revisions to their baseline forecast since January have been unprecedented – with GDP forecasts downgraded by more than five percentage points in the past three months. Yet, they note that sizeable downside risks to their forecasts remain.

• In the case of the UK, Oxford Economics are forecasting GDP to fall by 10% in H1 2020 and 5.1% during the year, the biggest drops in almost a century. They suggest that it is still unclear whether policy responses will ensure that the fabric of the economy is preserved while activity goes into a hiatus.

• The key concern will be the ability and speed at which Global and Regional economies can recover in 2021 as this will have a read through for travel demand and in turn hotel performance. It could also be the case that a slower economic recovery will determine what segments of the hotel market are quicker to recover, suggesting that it could be economy and mid-tier hotels/commercial accommodation that will bounce back quicker.