How to prepare for a formal valuation if it’s time to refinance your hotel in 2024

Over the past decade, debt finance was easily accessible for the majority of UK hoteliers and investors, due to historically low interest rates. Since 2022 however, various macroeconomic factors have led to significantly higher inflation and interest rate hikes, which has seen refinancing garner increased attention.

For many hotel investors, holding debt in this new reality is likely to be materially different from that at the inception or last refinancing of most loans. With covenants on value and affordability under pressure, loans agreed at a historically low interest rate are now proving to be more expensive and challenging to refinance. Subsequent loan repayments are also likely to be materially higher, reducing like-for-like returns for owners.

With an estimated £43 billion of hotel debt in the UK set to reach maturity by 2025, many hotel investors will be required to refinance this year. Almost certainly a valuation will be required to assess a lender’s potential security.

Read on for some key considerations when getting a formal valuation for loan security purposes in the current market.

Review your current situation

If your debt is coming up for refinance, then a careful review of the situation is prudent. The primary question here is, how is your existing debt structured, at what cost and when does it expire.  In most cases, the cost of new debt will, at present, be higher than existing and thus sticking with your existing facility until expiry may well be prudent if you anticipate interest rates to fall in the medium term.

Get your accounts in order

Make sure your financial trading accounts are in order, speak to a finance broker and consider the wider options of adding to security or paying down debt early, if funds allow. 

Of key relevance is the financial trading performance of the business, and a valuer/ finance broker/funder will wish to review accounts and management information to analyse historic track record and assess trading potential.  Additional documentation relating to tenure – any leases, management or franchise agreements should ideally be provided to the valuer prior to any site visit.  Providing detailed and up to date due diligence at the earliest opportunity can save time and allow queries to be dealt with promptly. 

Ensure that you identify any one-off costs in historic accounts, or other items specific to your operation of the business, as these can often be adjusted or ‘added back’ to EBITDA, could positively impact value and evidence more robust affordability of proposed new debt structure.  These might include ‘internal’ rent payments, Director’s remuneration, or one-off capital expenditures.

What happens when its valuation time?

A formal RICS ‘Red Book’ valuation is usually required, and will typically be instructed by the lender, although you may have a choice in which firm is employed. A valuation takes the form of detailed report undertaken by a Chartered Surveyor specialising in hospitality premises.

The valuer will arrange to visit the property and would expect a tour and a chance to discuss operations with an appropriate person. They may need to take photos and measurements and would typically request to see back of house and domestic accommodation.

Valuation Metrics

Operational hotel values are typically calculated by a multiple of Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA). EBITDA is not directly impacted by rising interest rates on debt due to the exclusion of interest at this level of the P&L. All else equal, many hotel operators have been able to capitalise on both demand and inflation to increase their average daily rate. With utility costs normalising and widespread business rates reductions in the hospitality sector, EBITDA in many hotels has moved positively in the last 12 months. This can offset or outweigh downward pressure on multipliers leading to a positive valuation outcome.

Capital requirements – Refinancing certain loans may require a capital input from the owner to ensure affordability covenant compliance and/or maintain loan to value parameters – potentially triggering a sale or a requirement for further mezzanine debt at higher margins.

Medium Term Outlook

The medium term expectation is for interest rates to fall, reducing refinancing pressures, and leading to cautious optimism around hotel values. Most banks and finance providers have shown a willingness to support operators through these external challenges, with the result of less distress in the market than might otherwise have been expected.  Anecdotally, this level of forbearance from some funders appears to be on the wane, evidenced by restructure negotiations from incumbent banks including capital injection, additional security, refinance to a new lender or enforced sale of the security held.  Overall sector confidence remains positive and sector resilience has been evidenced by strong structural demand for hospitality assets compared to other asset classes such as offices and retail.  Finally, we note many funds and investors (new and existing) are well capitalised with an appetite to deploy funds into the sector.

  

How can we help?

Christie & Co’s team of hotel experts can provide tailored advice. We undertake hundreds of hospitality valuations for loan security purposes each year and are uniquely close to the market.

Our consultancy team can undertake asset or market reviews, feasibility studies, or an operator search and selection process if you would rather be hands-off.

Our brokerage team will help you find value opportunities in the present market, if expansion is your goal.

Christie Finance can help owners and investors shine a light on the best value lenders for specific properties in what can sometimes be an opaque debt market.