While hotel investment may seem more attractive than other asset classes, the means to finance it are crucial. The balance between equity and debt has varied significantly over the last few decades. The question now is whether central banks will reverse their stance, which directs interest rates based on their perception of economic situations.
In response to widespread inflation, triggered by an excess of liquidity released by central banks, their reaction over the last 18 months has been to gradually raise interest rates to temper the movement, risking a new recession phase.
This increase has not been without consequences on the landscape of hotel investment, making capital access more expensive, reducing return rates, and forcing stakeholders to demand higher quality in investment proposals. The trade-off between risk-free investments, which become more attractive in a rising rate phase, and the potential yields on assets to be acquired or developed has fueled many strategic meetings and impacted volumes. The failure of several major US banking institutions last year has not helped reassure investors.
The rise of the cost of financing has affected the pace of hotel development
The weakness in debt leverage has significantly hampered transactions. Lending banks, closely monitored by financial market regulators, have become more cautious. Convincing them of the risk quality and project bearers was essential. The weak debt leverage has greatly restrained transactions, although partially compensated by insurance companies or investment funds ready to seize opportunities.
Financial engineering has been leveraged with more complex and hybrid structures, combining debt takeovers, mezzanine debt in addition to senior debt. Moreover, pressure was placed on asset holders in the process of divestiture to "make the bride more attractive": reduce operational costs, boost revenues, and lower divestiture values. All these conditions also contributed to reducing the number of deals signed, especially as asset holders could not easily accept losses when valuations had soared in recent years.
Owners in "distress" have been more visible in global markets but without reaching peaks. Of the $86 billion in distressed real estate assets identified at the end of 2023, only $15 billion concerned hotel assets. Given the positive assessment of...
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