Trying to ascertain what a hotel in Europe is worth at the moment is not a very exact science.

The current thinking in regard to the hotel industry’s three major metrics is revenue per available room will remain depressed until widespread travel begins again and occupancy will recover faster than average daily rate.

New hotel supply will slow down, with projects delayed or canceled, and, while restrictions apply, hotel operations will be suspended to minimize losses in earnings before interest, taxes, depreciation and amortization.

Thus, hotel valuations will decline until EBITDA hits rock bottom.

The silver lining is that hoteliers are starting to sense the opportunities that will bring higher returns once more.

Speaking at a May 23 webinar hosted by business advisory HVS London, panelists said this is the case even if the fundamentals of hotel performance — product, people, location — have not changed due to the pandemic.

Bob Silk, relationship director at Barclays Bank, said most hotels are highly indebted and value in a normal world is derived from trading performance, which points to cash flow.

With cash flow in short supply, value cannot be accurately portrayed. Sellers, if there are any, are quoting values and therefore prices that are distant from buyers' expectations.

“Financial distress is widespread, but in our sector there is little distressed selling against a wall of capital from frustrated buyers,” Silk said, adding buyers are following the maxim that one should never let a good recession go to waste.

“What is a hotel worth today? It is hard to say, as there are very few comparisons to compare anything with,” he added.

Russell Kett, chairman of HVS London, said traditional methods of valuation all have holes in them due to the effects of COVID-19.

“Early in my career, [one method] was the rule of 1,000, which is average room rate times 1,000, which would give a rough equivalent of what the value of that hotel was on a per-room basis. That is simplistic but surprisingly close," Kett said. “Another method was the ‘can of Coke’ method. Whatever the cost of a can of coke in any hotel times 100,000."

The pandemic has altered or flipped a lot of this thinking, said Jane Pendlebury, CEO of Hospitality Professionals Association.

Hotels outside of urban locations have had a sharp rise in valuation, Silk said.

“A seaside hotel now may have been a very good location indeed to invest in,” he said.

He added valuing hotels in London has become even more difficult.

“We have no idea, as there have been zero transactions. Hotels there generally are owned by high-net-worth, overseas owners, but there has undoubtedly been a reduction in value. … Segments also will affect valuations,” Silk said, adding that meetings, incentives, conventions and exposition business is the most constrained segment.

In comparison with the Global Financial Crisis, values for regional United Kingdom hotels during the pandemic have fallen approximately 15% to 20%, but Silk said the picture in London still is unclear. During the GFC, values in the regions fell approximately 40%, while those in London were stable, he added.

Kett said "European hotel values have declined mainly between 5% and 15%, so not all is gloom and doom."

"The transaction volume in 2020 declined 70%, but it was still higher than that of 2009,” he said. “Many lenders will wait to see values rise before recognizing distress."

But Kett said he recognizes values will go down due to the wide bid-ask gap.

“You have pressures that serve to reduce values, but some might push it up — such as improved operating models, funds ready to pounce and capital able to invest,” he said.

Panelists said other factors with potential to drive values up include vaccination rollouts, the easing of borders, a return to offices and of air travel, corporate demand and herd immunity.

Independent hotels, without the support of a brand, face additional challenges in driving values.

Luxury independent hotels, for instance, “often lack the machine of a brand, and they do not always have the corporate experience to help them operate rigors,” Kett said.

Silk added the presence of a brand is not the panacea for all ills.

“[Branding] is an expensive arrangement, and a brand does not always mean [the hotel] will be operated well,” he said.

Kett said hotels open in secondary and tertiary markets are holding up well, trading at smaller discounts to 2019 prices.

Silk said that over the course of the pandemic, lenders have not panicked, but instead have granted debtors time and space, and even funding.

He added much debt pricing now is probably unacceptable to those seeking funding, with banks preferring to focus on the ability of management to generate sufficient cash flow across the cycle.

Kett said the traditional mathematics of repaying debt still stands.

“Income capitalization, a single multiple, is quick, commonly used and understood but is based only on one year’s net income. It does not replace increases and decreases in net income and is not always reliable," Kett said. “Future multiples take account of some future cash flow and are useful where assets are currently underperforming, but it needs skill and knowledge and still is based on one year’s net income and still does not reflect future fluctuations in net income."

Another method is to combine income capitalization and discounted cash flow, a projection of future earnings over a period of time, which he said is thorough and reflects rises and falls in net income.

That's all well and good, but currently there is precious little or no cash flow, Kett said.

“Demand has proved resilient to previous shocks, with RevPAR recovery averaging six years, and that is about right for the current situation,” Kett said.

Silk said banks’ relationships with developers have always been tricky, even before COVID-19, as things always go wrong, timelines are extended and costs mount.

“Borrowers need deep pockets, so changes are mostly funded by equity," Silk said. "The other element is how an asset will perform in the future, and it is easier to predict how a hotel will trade in four or five years’ time, given trends, than how it will trade in the next year or two, and that is certainly the case today.”

Kett said the industry should expect the wider supply pipeline to shrink.

“There is a lot of redundant property out there, and not just in the hotel sector,” he said.

Silk said banks seek redress of debt at differing points.

“Generally, I would say it is when you reach a point of literally no return, [the asset] has become so indebted that with all the best will in the world it will never be able to recover," he said. “Liquidity has run out, and the key to avoiding that is not to stick your head in the sand. Have dialogue well ahead of that eventuality, frequent, quality discussion."