In the hospitality industry, development and growth are strong once again. Russell Kett of HVS discusses how developers are confidently seek equity.

Positive industry development

All the pointers are up.  Everybody’s excited.  Investors are excited.  The banks are here in droves.  There are people here with developments to try and get people interested in and they’re even getting a good hearing.  The operators are buoyant. In my business, we are really based around two types of deals.  One is that we have a business which actively sells hotels.  And the other side of our business is the advisory side, whether we’re doing some valuations of hotels, we’re dong feasibility studies for new hotels, strategic advice and so forth.  So on our agency side we’ve been hugely busy selling peoples’ assets and that side of our business which is called HVS Hodges Ward Elliott. We’re obviously known as valuers and we value hundreds of hotels every year, even out of the London office alone.  But what’s perhaps been more surprising in the past 12 months is how many people have come to us with feasibility studies that need to be done.  So that’s encouraging in the sense that the new development market is picking up fast.  And they are hiring us on the basis that they feel confident that they’re going to get funding, they’ve either got equity behind them or they’re confident of getting it. Some people are using our work to help them to find the debt and they’re confident of getting the debt before they’re even hiring us. So I think that’s an encouraging sign of the industry that that side of the business is on a more upward trend.  We’re also getting more involved in helping companies determine their strategy for the future, how they should be growing and maybe how their brand should be developing and so forth.  And again that’s encouraging, people are putting behind the sort of batten down the hatches, get our costs down, you know, keep surviving at all costs to saying, well now let’s look to the future, let’s look to how we can grow, how we can expand and so forth.

If you are interested in industry development and business growth, why not browse more TV show on The Hospitality Channel.

Joseph McInerney: "We’ve had a shift because in 2007 we had a credit crunch started.  And in 2008, after the Lehmann Brothers change, there was, you know, nobody had any money.  And the economy was in tough shape.  And nobody could get financing.  And the federal government decided to change some of the banking laws and everything else.  So very few people for big boxes were getting … big hotels were getting finance.  But of course there weren’t many of them needed in the United States at that time.  So what we’re seeing is smaller 100 rooms, you know, maybe 200 rooms, boutique hotels, more of a lifestyle, like an Indigo that IHG has or a Loft that Starwood has or some of the other lifestyle brands and other chains.  And we’re starting to see them come in, are really geared towards that, you know, 20 to 35 market."

Patrick Sanville: “First of all, in business market is a deal finance now, you know. There’s sufficient cash flow to cover the debt.  Is the equity that is required to make the deal finance available?  Is there a story to deliver?  Is there an upside?  Even if there’s no upside, is the yield sufficient to cover the debt payments?  These are the kind of things that we will be looking at.  Of course, you know, we have to think first, the banks, the kind of deal that can be achieved, because they’re all looking for gateway cities, branded … the good buildings, branded hotels.  Everyone is looking for the same type of advance and of a certain size that can, you know, support all the due diligent cost.  The banks are lending, if the deal is good the banks are lending.  The issue is that there aren’t so many good deals around.  The picture is not so rosy.  But there’s always a silver lining.  I think that, you know, of course it’s going to take time to do the leverage.  But there’s always niches and there’s a play, in downmarket, probably even more so.  But there will be some … some decent asset to be picked up.  And there is plenty of money around.  So there will be deals to be done.  We’re in that period of recovery and rebuilding the economies.”

Steve Pateman: "Sky have a great way of communicating with me about films. They know I like films.  They know I like sports.  So they connect with me in the areas of sport and films.  They sort of create a sort of connection with me in my own time and my own space.  They’re not forcing me to do something at a time that suits them.  They’re giving it to me at a time that I can choose, and it’s information I’m interested in.  And that’s why I go away and read it and then kind of watch the films and so on and so forth.  And within Santander we’re going to try to do the same, to use the data we have about people to connect with them in their time at their convenience in a way that’s useful to them.  So for example if we provided a mortgage for someone then actually we should be able to provide their house insurance without having to ask them how many bedrooms it’s got and who’s living there, because on the basis we’ve provided the mortgage we should actually know whose living there and how many bedrooms it’s got.  But we don’t, we ask them the same information again.  And I think that’s a way of turning a customer off and actually not using the data you have intelligently.  So I think you can use a huge amount from some of the new guys, some of the retailers I see and I’ve talked about, you can learn a huge amount from somebody like Sky, who are much more innovative in that space.  And you can use the data that you have on customers to find a way to connect with them that’s relevant to your business."

Steve Pateman: "We’ve been involved with the British Hospitality Association now for the last couple of years.  Since we started building our corporate, commercial and business bank in the UK, which is only three or four years old in itself because we didn’t use to have that business at all.  It’s very important that you kind of connect with the key industries in the UK.  And the UK is a service economy.  You just have to look at the, you know, when the service industry isn’t performing well the GDP isn’t performing well.  And the hospitality is a fundamental part of the service industry in the UK.  And we’ve got lots of hotels, we’ve got lots of restaurants, we’ve got lots of leisure facilities in the UK.  And actually being in touch with that part of the UK currently is very important for any bank that wants to grow in the UK.  And we want to grow in the UK.  So we’ve grown our lending to small businesses by 20% per annum over the course of the last three or four years.  We intend to kind of maintain that trajectory, and being in touch with these types of businesses is a good way of achieving that." 

Steve Pateman: "When I was growing up in banking and that’s been many years, I was a relationship manager who looked after hotel businesses and retail businesses and leisure businesses.  So it’s a sector that I have a lot of affection for because I’ve kind of grown up working for other people in it.  I’ve seen a huge amount of change in the last 20 or 30 years as I’ve worked in that sector.  I think for the leisure industry, a little like all industries, you know, everything changes, the consumers’ demands and expectations change.  And it’s the same in the leisure industry.  I think all businesses these days are much more focused on meeting customers’ needs, understanding customers’ needs and building a proposition that encourages people to come back and shop with you and buy with you again.  It’s exactly the same in banking as I would imagine it’s in restaurants and hotels.  You’ve got to be much more in touch with the customer experience because the customer has choice.  And the customer will want to eat and go to places that they feel an empathy with and they feel a trust in and a warmth in.  And it’s the same for banking, it’s same for retail.  And it’s definitely the same for leisure.  So I think the challenges for businesses are to build a proposition that will bring their customers in and will keep their customers and to be very, very clear about creating the best possible customer experience because that’s probably what will make the difference.  You could have a fantastic hotel room that looks great, but if the service is poor they won’t come back.”

Mark Wynne Smith: "The single biggest factor is to be a good executor.  And by that I mean people who have done the right things at the right time.  Again you look at our industry it was … we go back to 15 years ago, it was a cottage industry, I can’t remember how many people turned up there but it was a couple of hundred, and obviously what has happened is that as more assets have gone out into the public domain, as groups have adopted far more aggressive growth prospects, the whole market has expanded.  New participants have come in and again on occasions they didn’t do anything wrong, it was just they did the right thing at the wrong time.  And clearly over-leverage, all of these types of aspects has meant that the market has contracted  quite a lot, in terms of the number of active participants.  So if you are the type of company who has shown that you can perform in what the last couple of years, when you go to the table with the bank and you are negotiating over a loan, I think that sense of comfort that these guys do know what they’re talking about is what gets you ahead of the list.  One of the interesting things,  which is developing though is around the liking for banks to lend to their current customers because this is actually reaching the end of the line now because we have the point of single borrower concentration.  So at some point they have to start lending to new guys because they can’t lend anything more to their current guys."

Mark Wynne Smith: "As opposed to the previous three years, I can actually see something coming out of those meetings as opposed to an endless discussion about possibilities.  Most of those are around transactions, again some of which we started quite some time ago, others which we have very recently started.  But I guess the tone here today is amongst a small group of people, a lot more positive.  The reason why I say amongst a small number of people, because I think again the liquidity across the whole market this year is not going to be much different from what it was last year.  There is a lot of hope that it will be a better year but my reasoning for saying that is that there isn’t a lot more bank debt around, and this I’m afraid is the one governing factor, on our liquidity as it stands today.  So I think the overall takeaway is that the attitude is really around the fact that life is not going to change therefore as business is to happen you must deal with the circumstances that exist today as opposed to hoping for better times which I think aint going to come, certainly in the short-term for sure."

Kingsley Seevaratnam: "The banks today are more focused on relationship lending as against looking for new players to lend to.  So one of the advantages we’ve had is that, we’ve built up a relationship with banks for anybody who’s really looking at new borrowing.  And entering the space for the first time I would say it’s going to be a lot tougher.  That combined with the fact that I think lending is again, the focus on lending is moving away from loan to value to EBITDA multiples.  So that again is changing.  So it’s almost like from one extreme to another.  In the old days when money was available they were lending 80% to 90%.  Now you’re lucky if you get 50% of LPB in terms of deals.  So my advice to people, well just hang in there, we sincerely hope the market is going to change.  And beyond that, if you have a relationship that you already built up with the bank then  you can sort of get by.  But if you don’t, then good luck, it’s going to be tough."