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SANG, London (06.23)


Philip was invited to attend the latest SANG event (Serviced Apartment Networking Group) at the swanky new offices of Gerald Eve in Fitzrovia. Here below his take-away nuggets.


  • The industry is split between champagne swilling operators and sparkling water sipping real estate folk. Operators want to expand but build costs are too high. Many hotels now worth less than their current replacement value.
  • There is a very limited pipeline of new developments in the UK at present and deals are even rarer. There has been talk of redundant office buildings being better used as hotels, however, values need to drop further before they become truly viable to redevelop into either hotel or aparthotel.
  • Is the current level of ADR a new market norm? Panel found it difficult to conclude as so many factors involved. Currently most banks are referring to 2019 KPIs as a baseline and applying more normal levels of inflation thereon. ADR could fall before interest rates fall, although new behaviour trends do indicate people today love to stay in hotels more than the older generations which is driving ADR growth. Therefore, maybe current ADR levels are sustainable (like air fares).
  • Uncertainties around future ADR growth and operating cost inflation make valuations very tricky at the moment (forecasting a P&L not easy). Even if happy with forecast, what yield to apply – so few recent transactions provides limited benchmarking for reliable assumptions. With regard to aparthotels specifically, their income is more certain than is the case in traditional hotels and should therefore warrant a lower yield (valuers to take note).
  • With cost of debt now around 10%, debt is making deals difficult to compute. Stability in the transaction and development sectors will only return when gilts, debt and construction costs come back down – which could be some 18-24 months away. Prices of assets need to drop for more deals to happen.
  • The refinancing market is very hot at the moment, as borrowers hunt for the best deals. Keeping bankers busy and there are many options out there.
  • Large scale bank enforcements are unlikely in the short term. However, as higher interest rates are going to be a long-term issue, perhaps more foreclosures will occur in the longer term. Most queries re when will distress occur are from PE houses. For the moment owners cannot be encouraged to sell at lower prices. Thus most likely purchasers are longer term investor types (some deals are happening but process is slow). PE houses therefore more actively involved in refinancing and active in debt market (PE funds finding deals tough as no longer getting double digit IRR with debt rates so high).
  • Due to lack of any certainty at the moment regarding the next 12 months, it is unlikely that bank lending will become more flexible.
  • Current high ADRs and occupancy levels mean trading is good, but operating cost inflation (such as 5% salary increases this year so far) is eating into top line gains, with many operations surviving for now. Finding staff is still an issue, especially across jurisdictions and with multiple openings close together. In UK, unlike as promised by government, Brits have not replaced Europeans following Brexit.
  • Leisure demand remains strong, Corporate demand has been slow to recover (Teams and Zoom mentioned), but Corporate beginning to show more serious signs of life. Tech companies will pay any price, but professional services much more cost conscious. US market is returning (not price sensitive, so good for business) and tend to stay longer than UK/Europe clients. No clear signs that China is returning (good market as stay a very long time), due to C19 in China, UK one of the few countries requiring C19 tests and UK visa process complex.
  • Construction costs have spiralled and cost assumptions in any investment model can be tricky to pin down. Negotiating construction contracts is increasingly more complex and a case of negotiating package by package. Some inflation drivers in the sector are easing and the sector may start to see some benefit by end of 2023.
  • Regarding ESG issues: (i) green loans not ideal for development projects, more applicable to mature assets; (ii) aparthotels are better ESG products than traditional hotels which could lead to green bond financing for some groups; (iii) the ‘S’ part of ESG is the trickiest to get right.
  • Hotel sector is still very poor at adopting new technology and yet technological innovation is required to help with payroll pressures and to ease the customer journey from end-to-end.


Great session and well done to the SANG team. Regarding the ADR new normal issue, I suspect these may be sustainable (after all, hoteliers constantly advise one should maintain pricing even in the face of weaker demand), but on the other hand I believe occupancy’s new normal could be lower than pre-C19 (reference higher air fares, but lower capacity levels). Watch this space and let’s see what happens in 12 months’ time.

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