"If a sale is considered the best route, the price achieved can be considerably increased if the asset is stabilised prior to the sale"
- Paul Johnson - LRG
Hospitality was the sector most affected by the pandemic and many businesses were forced to take out loans to continue. In many cases, consistently rising interest rates have compounded that debt and rising energy and food prices haven’t helped in paying it off.
PWC’s Hotels Forecast 2022 – 2023 precited that real terms growth is likely to fall by -0.6% to -9.4% for all UK regions except London (where growth is predicted at 12.0% to 17.9%), with changes in occupancy growth based on a mild economic scenario estimated at +2.1% for all UK regions and +8.1% for London.
The reasons given for slow / no growth are continued volatility of trading conditions and rising operational costs. Inflation, energy costs and rising interest rates remain major factors which are impairing the industry’s recovery according to the report, in addition to staffing shortages and supply chain disruption.
Consumer confidence also continues to be hit by the cost of living crisis but current forecasts predict inflation to fall back to 3.6% by the end of 2023, which could start to ease some of that pressure.
Consequently, many hotel and catering businesses are being repurposed or restructured. Faced with a rapidly changing landscape and a variety of potential scenarios, some of which may be unfamiliar, business owners with substantial property assets must consider the variety of options carefully to gain maximum return.
Our Corporate Sales division works across a range of brands within Leaders Romans Group – from maintenance and planning consultancy to agency and auctions - in addition to external partners, to advise on options for property - options which take into account timeframes, adversity to risk and flexibility. No hotel operator with an underperforming business should assume that a sale is the only, or indeed the best option, as there may be many preferable alternatives.
Strategic review
A review of the options should always start with a viability study which then informs the most appropriate strategy. On a very basic level, this would typically involve ascertaining current market values, proposed disposal options and understanding the demographics of the best target market and future investment values/yields.
A strategic review and valuation will look at the true value of the property asset and determine whether any sale should be structured as a portfolio investment, or would be more successful if marketed as individual assets. Many larger hotels will have the potential to be broken down into separate businesses – for example, sporting facilities or a health spa may be sold separately, retaining the central services of the hotel as a business in its own right.
External factors and changing propensity to risk as the situation evolves will invariably impact these decisions and, specifically in changeable economic circumstances, may change – so reviews as strategically important as these are best revisited on an ongoing basis.
Equity release through property/property sale
If a sale is considered the best route, the price achieved can be considerably increased if the asset is stabilised prior to the sale.
This might involve securing business rates rebates on unoccupied commercial property or overseeing maintenance and repair obligations, licensing and regulatory requirements. All of this helps achieve the best financial outcome at the lowest risk, also providing more support to the owner and any others impacted – tenants, suppliers and any investors.
Determining the best marketing price for a sale is dependent on stabilising these factors. It is also impacted by the owner’s priorities in terms of timing: some will opt for a quick sale as an opportunity to move on, whereas others will decide to hold out for the best price or a potential uptake in demand.
An understanding of the vagaries of the market is crucial, and so we would always recommend that when any property valuation is done by an RICS-qualified valuer. The experience and access to data provide the best overview of the market, local comparables and the direction in which values are moving.
Understandably a concern about putting a property on the market is that the chain may break and all progress will be lost. So bear in mind that there are companies which provide a guaranteed sale. Although full market value is not necessarily achieved, many of these companies may offer an additional payment if they can achieve a sale within a defined time or price bracket.
Capitalising on property/land value
Depending on timing and resources, there is considerable value in investing to increase the value of a property asset. For example, if land forms part of the overall asset (in the case of a hotel with substantial grounds), this might involve seeking planning consent for additional buildings.
Planning consent can increase the asset’s value considerably but can be time-consuming, especially if an allocation in the local authority’s Local Plan is required before a planning application is made.
Another planning route is change of use. Post-COVID, residential values now outstrip commercial values and so to change a building’s use from commercial to residential may result in a much more favourable price being achieved. Alternatively, it might return the asset to a more viable position and provide a new income stream for the existing owner.
Change of use can now be achieved through permitted development rights (PDR) and amendments to planning legislation were introduced during Covid specifically to help struggling businesses. In September 2020, Class E was created to assimilate a number of previously separate planning use classes (shops, financial and professional services, food and drink; office space; clinics, health centres, creches, day nurseries, and day centres; gyms and most indoor recreations, and research and development or light industrial town centre use) into ‘E for everything’.
This enables those individual uses to be changed, providing they remain within Class E, without the need for a full planning application. Then, in 2021 further legislation enabled any use within the new Class E to be changed to residential use, again without the need for a planning application (providing certain conditions are met). So essentially a restaurant or hotel can be changed into a home with a relatively straightforward planning process.
Leasehold arrangements
Whether the use of the building changes or remains, there may be tenants in place. A property consultancy can negotiate new leases and tenancy agreements as necessary, protecting the interests of both parties and ensuring minimal disruption. It is important to note that existing leases can impact substantially on viability, and so a review of leases is a necessity. The same applies to any outstanding rent or other debts.
Maintenance issues and options
Again, owners’ inclinations and options for restoring value through maintenance work will vary depending on the circumstances. If a property is in a state of disrepair we may advise that our maintenance company is instructed to carry out the necessary work to increase the value.
Sometimes this is not an option due to timing or resources and a quick sale of a dilapidated property is necessary. In this case, we may instruct our auctions branch, First For Auctions to achieve a quick sale. With First For Auctions typically achieving a significant rise in the guide price, this is a fast and often profitable route.
Conclusion
Selling a business or a property asset can be difficult for anyone, and so it is important to get the right advice, from a company well-placed to advise on the wide range of options. Because our team consists of professionals from a range of backgrounds within property, we understand the various options and routes available in different circumstances and have experience in similar situations.
From achieving fast sales at auction to benefiting from change of use and substantially upgrading assets, our experience can create considerable efficiencies and make the difference between success and failure.
