According the UK Hotels Forecast 2019 from PWC the rise in demand from leisure and business travellers has been good news for the hotel industry in recent years. So how to capitalise and when to invest?
Chartered accountant Chris Langrick, who specialises in advising the independent hotel sector, gives his thoughts on how to fund a capital project.
The investment picture in general is pretty buoyant for the sector so big capital projects are seriously well funded. Global property adviser Knight Frank cites a 50% increase in international interest in the last 12 months with overseas buyers responsible for £4.9bn invested into the UK hotel market – both London and the regions enjoying an equal share of the spoils.
So plenty of overseas financial muscle but what about an independent or group of independents wanting to get a capital project off the ground?
Depending on the level of investment required, there are several routes to go. These include using trading cash flow and profits, a loan from the bank or other lender and equity investment.
Maximising cash for reinvestment
Hotels are simple businesses, but with many moving parts. With strong controls across all areas, a hotel should be able to generate a healthy profit for reinvestment into the business. However, this is on the basis that the initial debt leverage on acquisition was appropriate and that the original deal was not over stretched.
Relevant management information, detailed financial projections and key performance indicators (KPIs) should allow this to happen. There are certain KPIS that are well talked about in the hotel industry and there is a lot of available data and resources to allow a hotel to benchmark itself, such as occupancy rates, average room rate, food margins, beverage margins, payroll margins – the list goes on.
If a property is not hitting these then there is a lost opportunity to maximise cash for reinvestment. This becomes a catch 22 scenario. If you cannot keep reinvesting into a property, rooms and common areas will become tired and the ability to maximise room rate will diminish as will profits and potential cash generated.
So an ongoing strategic funding plan, supported from trading cash flow and profits is an ideal scenario.
If the property has sufficient equity and there is not over reliance on bank lending, banks are keen to lend for capital investment if the business can show a clear ability to repay this debt and leverage criteria work for the lender.
Owners of a B&B and self-catering business in Whittlesey near Peterborough did just that, increasing the size of their holiday lets, after securing six-figure funding from Natwest. As reported in Boutique Hotelier Pete and Anita Boardman from Highfields Holidays, have used a £440k funding package from NatWest to purchase and refurbish an existing on-site bungalow into three-bedroom B&B accommodation.
For a portfolio of hotels or larger properties, equity investment could be an option, but this is often the most expensive way of raising finance. Hallmark opted for a buy and build strategy, backed by Palatine Private Equity and Bridgepoint Development Capital which was successfully executed a few years ago, delivering healthy returns for investors and establishing the Hallmark brand as a strong four-star hotel group employing 600 staff.