Spain, which over the last ten years, has seen record investment in hotels through the acquisition of existing buildings, as well as the continued obsession with building new hotels.
However, as we are coming through this profound health crisis, the financial impact on hotel owners and chains is becoming clearer, from the initial optimism that a quick recovery after the endless restrictions is beginning to wane to the reality that heavily indebted owners and chains are having to contemplate their futures, whilst current investors are starting to look at ways of pulling out.
Warning signs in 2019
Tourism coming to Spain over the last 30 years has continued to rise, with only slight drops during economic downturns. In 2019 Spain reach 84 million tourists, a new record. To meet this demand, Spain has been building new hotels & resorts plus converting old buildings into new city centre hotels.
2019 Occupancy levels, in general, were hovering just below 80%, except for a few areas REVPAR growth was relatively small. The hotel chains were focused on expansion, with the main brands looking outside of Spain to grow their portfolio, whilst private owners and smaller brands increasing their presence within Spain. Just in Málaga alone in 2019, there were nearly 40 current or planned hotel projects.
Even though 2019 was a bumper year for tourism in Spain, some chains like Room Mate, according to recent reports, still made a loss of €10m with overall debts standing at over €100m, so they were not in a great position even before this crisis hit. This speaks to a wider issue within this industry.
Through our research and discussions with Hotel owners, there seems to be a tendency to rack up high levels of debt through investment in renovations and expansion. Costly internal processes, as well as a lack of cost optimization, is also not helping them increase their profit margins.
A wider point, though, is the number of new hotels coming online every year. With average occupancy levels in 2019 below 80% and relatively low growth in REVPAR demonstrates an oversupply of hotels currently, which contributes to Owners and management companies not being able to increase profit margins.
Change is Coming
Then the crisis hit, revenue was hit hard. Debt levels rocketed to unsustainable levels, mitigated to an extent by ERTES (Furloughs) and the ICO loans. Most analysts, ourselves included, forecast revenues to return to pre-2019 levels within the next 4-5 years, which will come too late for a lot of owners and chains.
We see this as Banks are communicating to businesses that no further lending will be available, and with very little help from the central and local governments, owners are facing an uncomfortable and unfortunate situation.
On the one hand, tourism will take time to rebound, whilst on the other an oversupply of hotels fighting for a lower amount of tourists as demand starts to return, which in turn will squeeze profit margins further.
Another headwind urban hotels are facing is the predicted decline in business & MICE travel, not just from the fact that businesses have adjusted successfully to virtual meetings but also the anticipated increase in costs in travel.
So, logically we are already seeing Investors cutting their losses, from ECS Capital’s reported intention to sell its 20 hotels in Portgual to Sandra Ortega’s intention to sell her stake in Room Mate. More importantly, Banks who are already forecasting a liquidity crisis, as recently discussed at the last ECB meeting through non-performing loans, will need to liquidate their assets.
This is only the start of the trend as Hotel Chains sell owned assets to raise liquidity. Some hotel companies are also set to go into administration with the most likely scenario of the sale of their assets. As more investors and businesses look to cut their losses, sale prices will only come down, with Investors waiting in the wings to take advantage.
With pressure coming in from all sides, we will undoubtedly see record levels of hotels purchases and transfer of assets. We will also see permanent record closures of hotels, especially leisure-focused ones.
Spanish hoteliers need to fix their underlying issues.
So once the population is vaccinated and tourism starts to slowly return, what now? Yes, there will be new players in the market, and more hotels than ever before will be in the hands of national and international investors, but if this crisis has taught the industry anything is that squeezed profit margins and high levels of debt do not protect you from a crisis.
- Focus on Profitability – Hotels will become more profitable through a reduction in staff and an increase in the use of technology. With new investment coming into hotels that will improve quality, the need to streamline processes and how they interact with the customers will become more automated. Also, with the anticipated reduction in hotel stock, occupancy and RevPAR levels will increase, further helping their profitability.
- Cash Reserves – instead of funding future refurbishments to maintain the quality of installations through loans, hoteliers will instead create a fund from existing earnings to accomplish this. This will also protect investors from any crisis that happen in the future.
- Leasing to management – Hotel chains will start to move away from leasing properties to offering management contracts so that they will be better positioned financially to weather any future economic storms through a risk reduction. This will also reduce the break-even point for many hotel chains from around 50% occupancy to below 30%.
Currently, as we have explained in previous articles, investors are sitting on their hands. However, over the next few years, we will see the biggest transfer of real estate assets in Spain’s history.
Most investment firms agree tourism will return to Spain, starting in 2022 assuming stock market has not seen significant correction and western economies bounce back post Covid. Yes, there are risks considered by international investment funds, such as the fundamental problems with the Euro and the possible requirement for Spain to be rescued by the EU, which will inevitably lead to a restructuring of the economy and austerity measures we saw in Greece. However, Spain is a destination that is a magnet for tourism that will endure for years to come.
We predict that fresh capital, technology and flexible business models will enable an opportunity to fix the historical problems of oversupply and weak management in certain sectors.
If there are any hotel real estate owners that are interested in selling or sale and leaseback, please contact John Kearney for a confidential consultation.