Despite the uncertainty around the industry and wider economy there are still plenty of investors interested in Scottish hospitality businesses, writes Peter Seymour
APART from stating the obvious – that no one really knows where we are and what is happening – clients, buyers, stakeholders and even my wife all regularly ask me what the impact of the COVID-19 lockdown has been on the market so far.
Coronavirus has caught the industry, government and indeed the world completely unawares. Anyone who says that they were prepared for this (even Wimbledon!) is being disingenuous. Who would have thought when we heard about the outbreak in Wuhan in November last year that, within four months, the world would be on pause and tenterhooks with no clue what would happen next.
Since 2017, we have seen funding for hotel and leisure assets improve, with the majority of lenders supporting and lending against market value rather than the assumed closed value which had held the market back following the crash of 2008/2009. With increased funding, we saw more high value transactions complete and settle.
With this improved confidence in the market the Graham & Sibbald hotel and leisure team were expecting to achieve £10 million of asset sales and acquisitions in the sector in Q1 2020. Disappointingly, as a result of the government-enforced closure of all hospitality businesses, we managed to complete just over £4m in sales and acquisitions within the quarter, with the shortfall postponed until more certain times.
As a team, we had several deals under offer and due to complete in, or just after, March 2020. I am pleased and proud to say that none of them has collapsed or been renegotiated. The dates of entry have, of course, been postponed but that is to be expected given the uncertainty over when these businesses can reopen.
Buyers and new interest
We are still seeing interest in a wide variety of businesses and locations, from rural hotels and guesthouses/B&Bs through to national chains and UK brands requiring city centre Class 3 units.
Now, more than ever, ex-pats are returning to the UK and couples are hoping to relocate from down south – all looking for a change in lifestyle. The buyers tend to be couples using a redundancy payout to purchase their business. Unfortunately, buyers in this category were lacking between the 2008 to 2019 market, perhaps because of the number of employers who successfully retained staff through payment reductions/part-time working and other inventive solutions to avoid losing key personnel.
During previous downturns in the market, hotels, licensed properties and leisure businesses have been sold to owner/operators who are new to the trade. These types of buyers take a longer-term view on the return of their capital as they are buying a lifestyle rather than an income to add to an expanding group. Thus, the multipliers they paid were healthy and perhaps larger than what we are seeing at the moment. It is my opinion that the current pandemic will inspire buyers to seek a more rural/remote lifestyle. I am also in dialogue with several overseas purchasers – investors who are still looking at the UK as a safe haven and would consider hotels as a good place to “store wealth”.
We are also seeing real interest in the food and drink sector where we have a number of businesses available. I am in discussions with several small to medium-sized UK groups who are looking at the opportunities out in the market to grow their market share for the future. There have been requirements from UK brands looking to expand and snap up opportunities and we have a wide range of contacts within the branded restaurant/public house market who are all showing interest in sites across the whole of Scotland, with a focus in Edinburgh and Glasgow.
It is encouraging to hear that finance brokers and buyers are reporting that there is still funding out in the market. The majority of high street lenders are very much focused on supporting their existing client base with CIBLS loans/overdrafts and other debt to ensure that viable businesses survive. I understand from my contacts that, whilst decisions by the mainstream banks are taking longer and perhaps being deferred until some certainty on reopening dates is gained, many secondary and tertiary lenders are willing to offer funds to the market at this time.
Whilst the short-term future for hotels and leisure is very uncertain, I have seen enough evidence to say for sure that there will be a future for these assets beyond this virus. Perhaps initially, interest will be more UK-focused however, within a few years, international travel will return to Scotland. We have several world-beating assets that are unique to Scotland and that will not be altered by this pandemic – such as whisky, golf, heritage and scenery – which people will always want to experience.
Buying a business now may seem crazy, but I would make the following argument against that: If you buy now, or in the near future, it is very likely that the worst of the current situation will be over by the time that the legal and other due diligence checks are complete (approximately three to six months). You will then be the owner of a business that only has its mortgage debt to service, making you more profitable than current owners forced to borrow money to keep their businesses afloat.
Given that the loss in profits is going to be short term (and that hotels and other leisure assets sell on the basis of future profits), buying now will put you in a very strong position to benefit from the future profits that our industry will generate.
There will, of course, be risks to mitigate and hurdles to overcome, but hospitality businesses offer business owners better returns (20% to 55%) from the turnover they generate compared to many other businesses in the market. These margins will not be there during 2020, or maybe even 2021, but they will come back for those owners who are prepared to work hard, offer a good product and look after their guests.
Some sectors will have a ‘bumper’ 2021, in particular wedding venues or hotels with function rooms for weddings as there is a large backlog to clear. Indeed, my clients in this market talk with some surprise about the lack of cancellations, with the majority of couples moving their date into next year. Both The Telegraph and The Times stated recently that ‘staycations’ could lead to a significant bounce back for the hospitality trade. Until people feel safe, I believe that the 65m people in the UK will want to travel somewhere secluded, intimate and with stunning scenery to expand their minds, such as the North Coast 500.
So, what has the impact of Covid-19 been on the hotel and leisure market so far? The bullish answer is that it hasn’t scared off investors and, whilst deals may currently be on hold, there are absolutely still buyers out there.
Peter Seymour is head of hotel and leisure at Graham & Sibbald.