A global pandemic has made life very difficult for hotel valuers. How do you put a number on a property that might have been closed for long periods with limited comparatives to help you make a judgement? We speak to those in the know and take a look at how they are making assessments.
Valuing property has always been as much of an art an it is a science and the Covid-19 pandemic has shown just how difficult it can be to pull a number together.
Comparables are crucial, so what happens when the market effectively shuts down? That was the situation for significant parts of 2020 and 2021 throughout Europe with governments bringing in lockdowns of varying severity and length.
Revenue per available room or RevPAR, a key hotel industry metric, declined by 70% after March 2020 in Europe, according to HVS. Not only were hotels closed but market for transactions stalled as well.
“The spread of the pandemic put a virtual halt to transactional activity, which achieved less than €10 billion in Europe in 2020, or around a third of the amount reached in 2019,” HVS said in its 2021 European Hotel Valuation Index report.
It’s worth thinking back to 2020 and remembering what the situation was. There were limited prospects for vaccines with an unknown timeframe and we didn’t know much about the virus itself and there were mixed messages about how it spread. This made it much trickier to come up with a valuation as nobody knew when markets would recover.
“Valuations in 2020 were always subject to relevant caveats such as market uncertainty clause in reports and calculations were backed by multiple sensitivity analysis to understand potential changes if situation varied. In our case, the IRR or discount rate in cash flows played a major role, as we decided to factor part of the uncertainty and market risk within this financial parameter,” Blanca Martín Alonso, director of hotel advisory at CBRE Hotels Iberia, told Hospitality Insights.
The situation has improved with vaccines arriving on the scene in late 2020 with an extensive rollout at the start of 2021. Health authorities and governments also now have more knowledge of the virus. Many leisure properties in tourist destinations enjoyed bumper periods when they were allowed to open.
“During 2021 the situation has improved and facilitated our job due to several factors: investment has gained a lot of traction and at least in the Spanish market we have assisted to several notable deals, thus comparable evidence has been present again, especially for core assets and leased properties. At the end, comparable evidence is always the key for any valuation. Huge liquidity levels and, for the moment, low interest rates have also helped to confirm yield levels in these valuations of prime properties,” Martín said.
Comparing to 2019
Given everything that has happened over the last two years it can be difficult to recall exactly what the market was like back in the pre-pandemic days of 2019. That year the total European hotel transaction volume reached €27.1 billion, the highest annual level ever recorded, according to HVS.
“2019 is often a good benchmark, but we recognize that this was a peak year for many valuations. If cash flow is back to 2019 levels, we need to account for the additional risk of the long-term effects of the pandemic,” Philip Bacon, global practice leader, valuations at Horwath HTL said.
Bacon said one of the surprising things so far was that capitalization (cap) rates had not shifted much.
“Cap rates should normally be expected to go up in this uncertain market, but because of shortage of offer on the market and the fact that investors see hotels as one of the more stable asset classes, the real effect is that rates stay at pre covid levels,” he said.
Because there are fewer transaction, Bacon said he was having to make changes to the process.
“In many markets there are few truly comparable sales to use as benchmarks and we are relying more heavily than usual on income capitalisation in our reconciliations of value,” he said.
Martín too is having to broaden her toolset. “As always comparable evidence is the key and in difficult market circumstances such as now we expand our benchmark to other destinations if evidence is not enough in the specific destination,” she said.
This means looking at similar European cities, for example.
Buyers and sellers
One of the biggest storylines in hotel investment during the pandemic has been the mismatch in pricing between buyers and sellers. Unlike in previous crises debts were not called in immediately and there was plenty of support on offer from government. Not many owners were forced to sell and buyers looking for steep discounts were often left disappointed.
“There is still a mismatch in several sales process, especially for secondary assets with sellers still expecting higher numbers and lower discounts but the gap is diminishing as the need to sale has become more real in those cases. On the contrary, we are seeing super high prices in trophy assets,” Martín said.
Despite the challenge in getting transactions over the line, there is still a strong appetite from investors for hotels.
“A low interest rate environment has boosted investment within the hotel sector, with investors queuing for some assets,” Bacon said.
“Some leisure-based properties have had record years in 2021 and this has affected their attitude to price, but investor interest remains high in this sector which in turn is putting pressure on values.
“In the end, the anticipated flow of distressed assets has not appeared and this has allowed sellers to maintain their price expectations, assuming that they have not been obliged to sell due to external pressures from banks etc.”
There are some indications that things are set to change in 2022 with the end of much government support and lenders perhaps keener to call in their debts. And even with the Omicron variant still causing mass infections in Europe, there’s a sense that things are heading towards normality.