Funding is essential to health of hospitality

Banks had their fingers burned by the hospitality industry during the credit crunch, but it’s time to start lending again, writes Jamie Savage of DM Hall

Funding is crucial for providing the level of hospitality required in places like the Isle of Skye, said Jamie Savage.
Funding is crucial for providing the level of hospitality required in places like the Isle of Skye, said Jamie Savage.
Jamie Savage
Jamie Savage

IT is a problem countries around the world would give their eye teeth to have, but Scotland is bulging at the seams with tourists who are keen to open their wallets and immerse themselves in the ‘land of mountain and flood’.

The problem facing tourist chiefs and politicians is whether the country’s tourist infrastructure is up to coping with the crowds.

There is evidence that visitor numbers are becoming overwhelming.

Leisure operators on the Isle of Skye, for instance – a destination which features frequently in movie and TV productions – have pleaded that it is “full up”. There is talk Of bussing tourists into the most popular spots and restricting other access.

So how can the licensed property sector step up to the plate and create the kind of visitor experience which will keep crowds coming back?

One potential answer could be a willingness among primary lenders to revisit their attitude to risk in the sector, recognise that trading conditions for operators are more favourable than they have been for decades and to provide the essential funding for a functioning market.

However, in considering funding imperatives, it is necessary to cast our minds back to the root of the problem, the cataclysm of the credit crunch which shook financial institutions to their foundations ten years ago.

The leisure sector, particularly in the scenic west of Scotland, was not unique in being affected but it was in the forefront of the drop-off of discretionary spending, which in turn devastated property values.

Many distressed hotels, inns and B&Bs started to crowd the market, often as a result of creditor action, and banks were hit badly, losing substantial, irrecoverable sums.

Their attitude to risk since has been understandably on the averse side.

As a consequence, the market has stagnated and the door has opened to challenger banks and emerging lenders whose rates are significantly above market.

But that was then, and this is now.

There is no doubt demand for tourist services is back in a big way. Official figures indicate that international tourism spend is up 35% from 2016 to 2017 alone.

Occupancy rates of 100% during the peak months of the year are not uncommon.

Apart from Scotland’s natural attractions, the surge has been driven by the “safe haven” factor in a world beset by terrorism; an increase in staycations as a result of Brexit; and, not least, by the Road Equivalent Tariff effect.

This Scottish Government initiative has slashed ferry fares – to the delight of foreign visitors and domestic holidaymakers alike.

Holyrood is also pushing hard into the global food and drink sector, with ambitions to double turnover by 2030 and establish Scotland as a foodie destination brand.

To help this succeed, the leisure sector will need to up its game and its capacity to facilitate growth.

Many businesses in the west of Scotland are small, often lifestyle-choice establishments. These can typically have a limited lifespan, depending on how long owners have the enthusiasm and the incentive to run them.

If they are at the stage of wanting to move on or upscale and lending is not available to support buyers, such owners can become dispirited and, consequently, their product becomes tired and struggles to keep pace with the new environment.

It is reasonable to empathise with the predicament in which lenders find themselves. They have had their fingers burned and are now exhibiting understandable restraint in their lending.

A lesson learned should be that lenders provide not only funding for the right property asset but also do their due diligence on the borrower in the expectation that he or she can demonstrate skills and capability to operate the business effectively.

By doing so, the aversion lenders once demonstrated might be dissipated.

But, as the coaches, cars and campervans continue to file up the A82 to points north and west, it is worth asking if a corner has been turned and strong sentiment, demand and expenditure dictate a rethink on risk attitudes.

If the funding taps were turned on again, it would have an immediate effect on addressing the balance of supply and demand within the marketplace. And the return of a functioning market would have a knock-on effect on the level of transactions and, ultimately, values.

It is wonderful news that so many tourists wish to visit Scotland. Lenders could turn the phenomenon into a long-term, sustainable industry with a few considered and clear-sighted tweaks to their policies.

• Jamie Savage is a senior surveyor in the Glasgow office of DM Hall.