Excerpt from CoStar

Hoteliers Fear Inability To Refinance on Sensible Terms As Cost of Debt Skyrockets

United Kingdom hotel loan agreements are undergoing summer stress testing as debt maturities peak.

Ask United Kingdom hoteliers what they believe is the main barrier to development, and the likely answer is the availability of debt.

Debt finance had been readily available over the past decade and a half as interest rates barely rose above zero, but that landscape changed noticeably in 2022. For the past year and a half, interest rates have increased by 50 or so basis points a month in the U.K. as the country’s central bank has sought to slow down or reverse inflation.

The shift has led to fears among hotel owners that they would not be able to sensibly refinance properties with debt set to mature, as the costs of debt increase along with lenders’ increased reticence to risk.

Some economists believe hoteliers and other borrowers need to realize that higher interest rates are here to stay and a cost of business.

There is not a shortage of available debt, but what debt there is comes at additional expense.

On a webinar hosted by business advisory HVS London, Chris Sheppardson, managing director of magazine EP Business in Hospitality, said debt in the U.K. has become both a political and economic concern.

“Debt now … is becoming a global issue. It [globally] totals $42.9 trillion, about twice what it was last year. The world has a major debt challenge, and companies will need to face this challenge. The biggest barrier is the availability of debt finance,” he said.

Hoteliers suggest they don't expect the debt crunch to ease until the second half of 2024, Sheppardson said.

According to the U.S. Committee for a Responsible Federal Budget, U.S. debt will also total $42.9 trillion by 2032, or 116% of U.S. gross domestic product.

Tim Barbrook, head of debt advisory at HVS Hodges Ward Elliott, said economic stimulus will be the way out, but it is not a surprise that every decade or so the real estate landscape experiences a correction, either a shock such as COVID-19 or a macroeconomic event.

The increase in interest rates this time around comes hard on the back of the pandemic, but Barbrook said the two things are connected.

“There has been huge government intervention. In the U.K., the stimulus package equaled £6,000 ($7,741) per person. Printing money causes inflation, and the Bank of England used the only real lever it has, raising interest rates 13 times to the current 5% level,” he said.

Sheppardson cited estimates that £43 billion of hotel debt in the U.K. is set to mature.

“Bankers are actively offloading their commercial real estate exposure, thinking it is better to sell at a loss than to keep bad debts on their books,” Barbrook said.

James Salford, partner in real estate and hotel finance at legal firm Bird & Bird, said the interest-rate scenario has four major ramifications for the hotel industry:

  • The fall in asset values will result in challenges to loan-to-value ratios.
  • Interest cover ratios will be challenged and breached.
  • Many existing deals are now outside of lending mandates.
  • Kicking the can down the road, any “extend and pretend” strategy, is not a long-term option.

Salford said credit and investment committees have genuine concerns as to whether interest rates have peaked, with some economists predicting the peak might be 6%, one percent higher than it is now.

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