Spanish banks will sell nice and cheap Hotels. Is it for real or a wishful thought?

Paying attention to everything that has been published in the press for the last few weeks, considering it as a dogma, without a needed analysis of the handled amounts, some times quoted apart from the whole text, somebody may think that, in each and every case, the selling price reduction in Real Estate Assets (including some Hotels) controlled by Spanish financial institutions, due to an excessive valuation, is going to reach half of its theoretical current market price, when that reduction (always understood as a weighted average) takes as comparable base the existing selling prices at the peak of the Real Estate bubble.

In the case of Hotels, we find a compound reality, because property and business are as inseparable as complementary. From a valuation point of view, we acknowledge a certain trend towards initial asking prices which we may consider as reasonable for a Hotel Investor, followed by some owners in the last few weeks, that was out of sight just a few months ago.

Within the following months, some investors are convinced that good Hotel Assets controlled by financial institutions will be in the market, priced way below which may be already considered as reasonable, from the viewpoint of a Hotel operation professional, a fact that I am afraid has more of a wish than a real scenario, although there may be some specific and isolated case in which the binomial may take place, in most opportunities one of the two variables may fail.

As a brief approach to this matter, if the Hotel Business is cared by a financial institution, in a great number of occasions, will probably be due to one of the following reasons: was acquired at a low price, as part of a Sale and Lease Back long-term operation, has seized it when it was already closed, or is involved into a long and complex administration or Chapter 11 procedure, that will end in most cases in a foreseeable company liquidation.

For the first scenario, although it was bought at a low price, the adjusted obtained return on the investment is always calculated on the transaction value, therefore we may believe, even be sure, that is far from the figures a financial investor may be looking for.

Considering the second scenario, we are not speaking of good Hotel Assets provided they are not in operation and we also may have to add the huge cost that implies a complete building refurbishment, in terms of money, time and resources.

In the third scenario, if the Hotel owner has gone into administration or Chapter 11, a possible contract of sale transaction handled in the most suitable conditions will be highly unlikely. Besides that, it seems quite logical to think that if the owner will not be able to pay its debts during the whole process, we can imagine the Hotel premises will be suffering some damages, so we should not be surprised to be involved in some major repair in order to meet all quality standards set by the Hotel chain that will be in charge of its operation.

Apart from the three previous options, we may consider those adjudged Hotels which have remained open. If they have looked for some professionals to manage the Hotels, they may have recovered operational profit levels and been commercialized to regain presence in their segment, becoming good Hotel Businesses but, when the time comes to join the market will the owners really ask a low price for them?

(Post published on 10.Jul.2012, blog upgrade date is shown)

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