Liquidity needed: financing the European hotel market

ditulis oleh : Jomblo Terhormat 04 Juli 2013
In his recent book Finance and the Good Society, Professor Robert Shiller calls on the financial services industry to return to its role as steward of society's assets. After a period of irrational exuberance across the entire hotel market, this sounds like a prescient message. But is it really happening?

Over the past few years, governments all over Europe have tried to stimulate bank funding by boosting the supply of money in a process it calls quantitative easing (QE). It's a tried-and-tested trick of monetary policy, but this time round it has worked poorly. Growth across Europe is stagnant and banks, even with the help of QE, remain in the position that Shiller, a professor of finance at Yale, so rightly feared: unwilling or simply unable to serve the productive economy.

This is, for many reasons, a great shame. By most sensible metrics, the European hotel market is outperforming the rest of the economy. Many of Europe's major capital gateway cities are performing unexpectedly well.

At the start of the crisis, hotel groups were forced to slash room rates in a desperate attempt to maintain consumer demand, but by 2011, figures showed that European revenues per available room (RevPAR) had grown at a much better rate than the wider economy.

The key to this success seems to lie in the way people relate to travel. Businesses may have tightened their belts, but they still perceive a need to travel, to meet their customers and familiarise themselves with foreign markets. And the same is true
for leisure travellers, if not for slightly different reasons. A recent study by PwC found that consumers are very keen to protect their holiday time and cut back elsewhere.
Mixed blessings

The mood hasn't always been this optimistic. For a long time, many of the industry's key players failed to appreciate just how cyclical the hotel market could be. In the decade before the crash, the industry resisted a number of political and macroeconomic events. But not this time round. Like most industries, the hotel sector has seen a clear dip in trading over the past four years, as well as a recovery that is not entirely uniform.
"When you look at the provincial sector, it still has some way to go," says Tim Helliwell, head of hotel finance at Barclays Bank. "If you adjust current performance to inflation, you can see that these businesses are in a far tougher place than gateway hotels."

As a domestic, GDP-led sector, it's not hard to see why the provincial market is lagging behind. Problems in the eurozone, and a return to recession in the UK and other independent European markets can hardly help going forward. But long-term prospects still remain good for the hospitality sector and the major gateway cities continue to perform well.

With that assessment in mind, it seems unfortunate that credit markets are so tough. In recent years, debt finance has dried across the sector in a way that has seriously dragged down the wider investment market.

"UK and European banks remain cautious about lending to the hotel sector," PwC's UK hospitality and leisure leader Robert Milburn states, "and, as a result, there is relatively little new lending. Most of their attention is on refinancing the loan portfolios they've already got."

Mark Wynne Smith, global CEO at Jones Lang LaSalle, agrees with that assessment. "It's very tough securing bank finance for developments and existing hotels," he says. "I think most banks have an allocation for hotels that is a lot smaller than it used to be."

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