The UK hotel financing market is in a comparatively strong position. We have seen a notable pick up in the market over the last few months and, while borrowers still need to contend with higher interest rates than in the pre-Covid era of cheap debt, there is now a broad range of debt options available, with lenders actively seeking good hotel credits. Acquisition financings are increasing, which is encouraging, as well as conversion of existing buildings to hotels in city centres, rather than relying on refinancings. However, ground-up development is still struggling for reasons which have been well documented such as elevated materials costs and availability of labour. Lenders are focusing on the type of assets, with city centre hotels in the key locations largely favoured over country house hotels, secondary cities and the relationship with and track record of the owners and operators also being key.
There is now a spectrum of debt providers active in the UK hotel market, each with different risk appetites and product offerings, although this has to date been strongest with the traditional and challenger banks, rather than debt funds and insurers. Lenders are looking at bigger ticket sizes and with the number of providers in the market for hotel financing increasing, pricing is becoming more attractive for borrowers (although again for the right assets and sponsors).
With regard to hedging, given the further global shocks this year, available pricing has been volatile, with borrowers looking for flexibility as to how to hedge and when to put the hedging in place as timing it wrong could have a substantial impact on the all in cost. Having seen the market move decisively from caps to swaps in the last couple of years, the market is more mixed and most borrowers are engaging with advisors to obtain the best terms from counterparties.
In a similar vein (and in the same way as we have been seeing for other asset classes over recent years), debt brokers have become more and more prevalent in the market, which given the number of available lenders now looking at hotels, gives borrowers access to the widest range of options.
