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Asia’s hotels owners look for financing solutions amid coronavirus uncertainty

Owners are looking for near-term financing solutions to bridge cash flow shortages

June 01, 2020

Faced with unprecedented challenges from the COVID-19 pandemic, hotels owners across Asia are turning to creative financing solutions to ride out near-term turbulence.

Sweeping restrictions have seen an unprecedented period of historically low occupancy rates, closed borders and severe limitations on air travel as countries around the world attempt to contain the ongoing COVID19 pandemic. The impact has posed an enormous challenge for the global hospitality industry, forcing many owners to look at an array of short-term financing options, says Adam Bury, Executive Vice President of JLL’s Hotels & Hospitality Group.

“We are seeing increased demand for debt financing. As the hotel industry is typically the fastest to react to demand shocks, and also the quickest to recover, certain owners are looking for near-term solutions to bridge cash flow until travel, hotel demand and revenues return.”

The impact of COVID-19 continues to hurt the hospitality industry across Asia, with many hotels and investors witnessing an unparalleled cash crunch as significantly constrained revenues struggle to offset fixed costs.

In Asia, only a select few destinations and properties are achieving meaningful demand often by providing quarantine facilities or accommodation to support other government initiatives. But at these levels, most hotels are struggling to break even, much less cover their debt service obligations with owners left to fill the gaps.

“Generally speaking, owners that are the most concerned are those in resort destinations such as Thailand, Vietnam, Indonesia and the Maldives. These markets are most reliant on international guests – a segment which many are assuming will be the slowest to recover post-COVID,” says Bury.

Less reliance on traditional lending

The increased demand for hotel lending comes at a time when similar requests are being made from numerous sectors feeling the impact of the pandemic, causing traditional lenders to be increasingly cautious of heightened exposure to more volatile sectors.

This has seen many traditional lending channels curtail their exposure to the hospitality sector or make significant changes to their conditions, says Bury.

“With the banking sector cautious of amplifying an already difficult situation, there has been a willingness amongst lenders to consider forbearance or restructuring of loans, including the provision of short-term grace periods.”

“However, in the current environment, traditional lenders may be less likely to materially increase their funding on these non-performing loans to cover longer-term shortfalls. Whilst it may be too soon to determine the eventual recovery period for the hotel industry, short-term grace periods may simply not be enough to help many owners navigate the current situation and additional capital will likely be needed to fill the gap,” he says.

In April, investment manager PAG Real Estate closed its US$2.75 billion Secured Capital Real Estate Partners (SCREP) VII fund which will target distressed debt investments and opportunistic property in markets across Asia Pacific. Late last year, PAG and Korean Inmark Asset Management purchased the luxury Grand Hyatt Seoul, hotel from a Hyatt affiliate.

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“Like all investment firms we are watching the current coronavirus outbreak with concern…we remain confident that Asia and Japan in particular represent attractive long-term opportunities,” said Paul Toppino, managing partner of PAG Real Estate and group president of PAG, of the final close.

Demand remains

Despite the expected pullback in lending and the record US$12.7 billion of hotel investment in Asia Pacific during 2019, demand for quality assets in the region remains high particularly from debt funds and non-traditional lenders, who have the flexibility to look beyond the interim cash flow disruption and make decisions on resilient asset values and other collateral, says Corey Hambata, from JLL’s Hotels & Hospitality group in Asia Pacific.

“Given the substantial funding requirements in the hotel sector, we have seen a pivot in investor activity towards the lending space, including from private equity groups and family offices. While traditionally more expensive, these capital providers are able to act quickly and flexibly in order to fill the void with typically-shorter term solutions to provide a bridge until a time when the loan can be replaced with more permanent financing or the asset can be divested at more reasonable pricing,” he says.

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Where short-term fixes can’t be achieved, it is likely that the second half of 2020 will mostly see distressed assets come to market.

“Post-COVID, we will likely see the limiting of future new supply and firming up of balance sheets of those who are able to survive the downturn, ultimately resulting in stronger fundamentals for the industry going forward,” says Bury.