By Paul Johnson, Head of Corporate Sales at Leaders Romans Group (LRG) (www.lrg.co.uk)
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.
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, due to continued volatility of trading conditions and rising operational costs.
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, it is important that business owners with substantial property assets consider the variety of options carefully to gain maximum return.
Our Corporate Sales division advises on options for property disposal – and options to avoid it where possible. This takes into account timeframes, adversity to risk and flexibility.
Review the options
A viability study is the first step. This involves ascertaining current market values, proposed disposal options and understanding the demographics of best target market and future investment values/yields.
A valuation will determine whether any sale should be structured as a portfolio investment, or marketed as individual assets. Many larger hotels will have the potential to be sold as separate businesses – for example, 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 on these decisions and, economic circumstances may change – so reviews are best revisited regularly.
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, or overseeing maintenance and repair obligations, licensing and regulatory requirements.
Determining the best marketing price 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 market is crucial, and so we would always recommend that when any property valuation is by an RICS qualified valuer.
Understandably a concern about selling 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 offer an additional payment if they are able to sell 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 hotel. For example, if a hotel has substantial grounds, this might involve seeking planning consent for additional buildings.
Another planning route is change of use. Change 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. Amendments to planning legislation were introduced during Covid specifically to help struggling businesses. 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). This enables those individual uses to be changed, providing they remain within Class E, without the need for a full planning application. In 2021 legislation enabled a Class E building to be changed to residential use, again without the need of a planning application (providing certain conditions are met). So a restaurant or hotel can be changed into a home with a relatively straightforward planning process.
Finally, 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.
Selling a business or a property asset can be difficult for anyone, and so its important to get the right advice, from the strategic overview, to the detail of the sale.