Industry Insight: Have banks helped us by restricting funding?

Five years on from the start of the global financial crisis, the development of new hotels in the UK is still considerably below its 2008 peak. Robert Barnard, head of hotel consultancy at business advisory and accountancy firm BDO LLP, examines the impact of this restricted development pipeline and looks at what might happen next.

The 2008 global financial crisis was a watershed moment for the UK hotel sector. Operators that had previously been given unrestricted access to cheap development capital suddenly found that the tap had been turned off. We entered a new world where only borrowers with strong banking relationships and proven track records could obtain development finance for new hotel projects.

The results were predictable: our research suggests that development of new rooms fell from a peak of 29,400 in 2008 to just 15,700 in 2010. The pipeline has since returned to pre-crisis levels in London – no doubt helped by the Olympic Games and the city’s status as one of the world’s leading hotel destinations – but new development in the regions remains subdued, at barely half the level seen five years ago. The figures would be considerably worse if not for the rise of the budget hotel sector, with its no frills/low cost model that has so appealed to frugal consumers and businesses (not to mention financiers) during these austere times.

The lack of new development outside of London has not been bad news for everyone. Regional operators have found that the limited new supply has bolstered revenues at a time when the all-important MICE market continues to flatline. Indeed, our research found that hotels in the regions have consistently posted modest year-on-year growth in rooms yield since 2010 on the back of stable occupancy and a gradual uptick in room rate. This trend has continued during the first few months of 2013, with rooms yield at hotels outside of the capital currently up 1.4% against the same period last year. To put this performance into context, London hotels have experienced a 4.7% drop in rooms yield during the same time.

And, more generally, it appears that there may be some light at the end of this very long tunnel for the sector as a whole: we’re starting to see banks beginning to look once again at lending to hotels in a meaningful way.

So are we about to turn the clock back a decade and witness another construction boom? It’s unlikely. Banks may be starting to loosen the purse strings, but they’re being much more cautious than they were 10 years ago. For example, much of the lending in the previous boom was assessed on loan to value criteria, with ratios of 90% or even 100% not uncommon. Today, prudent bankers are scrutinising loan to construction cost ratios, with limits of around 50-60% likely to be imposed and strictly adhered to.

The game may be the same, but the rules have definitely changed.

Robert Barnard is head of hotel consultancy at BDO LLP and has over 35 years of experience in the hotel sector. Robert can be reached on [email protected] and 0207 065 0292.