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Credibility key to land financing for Italy development

Column: industry Tag: hotel development,Italy,hotel projects Published: 2017-09-22 11:13 Source: Author:

Stress on Italian banks became notable when Banca Monte dei Paschi di Siena, the world’s oldest bank, was nationalized at the end of 2016. (Photo: Terence Baker)

REPORT FROM ITALY—Italy is lagging behind some of its Mediterranean neighbors in terms of hotel projects securing finance and getting off the ground, according to sources.

Sources said Italy’s lending uncertainty is affecting the hotel industry by compelling developers, owners and operators to be even more diligent in doing their homework and presenting ironclad business and financing plans.

The Italian banking system started experiencing some distress in 2016, and the most notable evidence was the nationalization of its third largest bank, Banca Monte dei Paschi di Siena, which also is widely acknowledged to be the world’s oldest surviving bank.

In February, a Bloomberg report suggested “almost 35% of all (Banca Monte dei Paschi di Siena’s) loans were deemed to be stressed,” according to June 2016 data from PwC.

Other Italian banks, including Veneto Banca and Banca Popolare di Vicenza, have also become stressed, according to Euromoney.

Debt is still available, sources said. It just takes time and a solid reputation. For assets to get the all-clear, the track record of developers, owners and operators must be sound.

The overriding mantra is slow and steady, but finance and assets are both available, said Antonello Dè Medici, area managing director for Venice at Marriott International and also national VP of industry lobby group Federturismo Confindustria.

“Italian banks are to date involved in difficult financial exposure with many local hotel owners that are struggling with the strategic repositioning and investments,” Dè Medici said. “For this reason, the mindset in the Italian banks is still very defensive and resistant to release cash based not on real estate value but business and branded value.”

Dè Medici said other key factors that need to be addressed in Italy include labor costs, national and local taxation and environmental policies.

“The macroeconomy is relatively unstable due to currency fluctuations and the Italian debt,” he said. “Nevertheless, the opportunities in tourism are among the best possible options to relaunch the country if the administrative constraints will allow entrepreneurs to take risks with clear parameters.”

Sources said investment remains affordable due to national and European policies to kick-start economies since the recession.

“Currently in Italy, it'’s cheaper to get debt because of the lower interest rates,” said Vittorio Scarpello, Italy franchise development manager at Choice Hotels International. “And, as one of our franchisees just told me the other day, it’s very easy if you have been a good payer until now (and) you have a good reputation with banks.”

Hylko Versteeg, associate VP of development for Southern Europe at InterContinental Hotels Group, agreed that across his area of responsibility from Spain to the Balkans, Italian assets can be slower to come to market. Italy is running one year behind Spain, Versteeg said.

That timeline could be longer for domestic brands and independent projects, sources said.

“There is no major issue per se, but there is a slower pace to getting assets to market,” Versteeg said. “Italy suffers also from having five or six key markets, and most everything else falls off the radar.”

Versteeg said alternative non-Italian sources of finance are entering the market, too, including funds.

More opportunities

“On one hand there are more opportunities, but they are coming to market with steep prices,” Versteeg said. Average daily rate and revenue per available room “are fantastic in those key markets, but many assets are trophy assets, not (return on investment) assets, and that is a slightly dangerous game.”

According to data from STR, the parent company of Hotel News Now, Italy’s three key performance indicators mostly have seen increases year to date, as of July 2017.

Across all of Italy, occupancy has risen 4.4% to 68.1% year to date. ADR is up 3.9% to €142.96 ($170.03) and RevPAR has increased 8.5% to €97.39 ($115.83).

Two of Italy’s biggest markets, Milan and Rome, have seen mostly positive performance. In Milan, occupancy has increased year to date through July by 9.1% to 71.2%, and despite a 0.9% ADR dip to €139.22 ($165.59), RevPAR is up 8.1% to €99.16 ($117.94). Rome’s occupancy so far in 2017 has risen 1.9% to 70%, ADR is up 0.9% to €150.11 ($178.54) and RevPAR has increased 2.9% to €105.15 ($125.06).

Bigger companies are better positioned to win over Italy’s banks when asking for capital, sources said.

“Large companies have more partnership opportunities with potential investors leveraging the brand’s portfolio and ensuring better distribution and return on investment (and) therefore more financial credibility when asking (for) debt,” Dè Medici said.

Global capital sources are starting to enter the fold, he said.

“Many international investment funds are looking at Italy as destination for hospitality projects considering the relative lower number of branded hotels and the magnitude of the natural and cultural resources to sustain key destinations,” Dè Medici said. “The risk is in the assumption that development analysts are running reliable projections if not supported by a solid management agreement or at least asset-management professionals and franchise deals to ensure the long-term expected returns on the initial cash devoted to acquisition and renovation.”

Certain types of development are more attractive to lenders than others.

“The market is more and more dynamic in terms of potential conversions, rather than new buildings,” Dè Medici said. “This allows international companies to design better scenarios over individual local firms. Use of best practices and management synergies with multiple properties in a destination are also key differentiators.”

He added the upper-tier chain scales still provide high barriers to entry in Italian markets.

“Single developers have to create unique selling propositions in the upper-upscale and luxury market at the expense of additional operating and distribution costs,” Dè Medici said.

But lending credibility still goes a long way, Scarpello said.

“I tend to say that a good reputation counts more than just having a certain scale,” he said.

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