Are you interested in hotel investments and financing strategies? Heribert Gangl, Director Hotels & Tourism, Erste Group Bank AG, shares his expertise and insights on the challenges in the industry, especially in the post-COVID era. Heribert emphasizes the importance of understanding different perspectives and being pragmatic in certain situations to address challenges such as inflation, labor shortages, and the need for sustainability.

Heribert also discusses the impact of interest rate changes on financing strategies for investors and borrowers. Previously, financing at almost no cost was assumed, but now investors need to carefully consider their financing terms and how much they want to secure and lock in rates for security and safety.

Moreover, Heribert notes the emergence of low-service concepts and the increased attractiveness of leisure and tourism in the industry. He also emphasizes the importance of the quality of the sponsor and the real estate in project financing, their focus on existing performing hotels with a track record and experience, and their selective approach to development projects.

Finally, Heribert shares his excitement for the upcoming IDEEA Hospitality Investment Conference in Prague, where he will be one of the speakers. The conference will be a great opportunity to learn more about hotel investments and financing, and to connect with industry experts and professionals. Are you ready to navigate the challenges of hotel financing in the post-COVID era? Join the conversation and stay tuned for more insights and ideas!

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Transcript

Marina Franolic (00:00:22) - Hello everyone. Today we're gathering here at the For the IDEAA podcast. IDEAA Investment Conference will be held in Prague on the 18th to the 20th of September 2023. You're all welcome to join, to register and to hear our great sessions. Today we will be hearing from Mr. Herbert Gangl. He's a director of hotels and Tourism within the group. Herbert, welcome to the podcast.

Heribert Gangl (00:00:54) - Thank you very much, Marina, for having me. Yeah.

Marina Franolic (00:00:57) - It's a great pleasure. A pleasure. Because Heribert is also going to be one of our speakers and it's always interesting to hear what Erste Bank thinks of the hospitality market and how they are prepared and supporting it. I must just mention that we are currently at IGF conference in Berlin, so you might get a little noise outside, but maybe this is also special because there's lots of attendees here.

Marina Franolic (00:01:26) - Everyone is talking about industry and it seems that everyone is quite positive. But let's go back to Herbert and the questions we have prepared a little bit. So he had a bit in one of your I'll search a little bit on your LinkedIn profile. So within one of your LinkedIn posts for months ago, you wrote There are many big challenges ahead. So what did you mean by that? What are those challenges? What are do you know something that we don't?

Heribert Gangl (00:01:58) - Um, first of all, thank you. And I'm very much looking forward to joining your conference in September. Um, well, I don't think there is anything I know, that you don't know, but I'm just looking here. The market in general, it has been very good. Good year. It was a good year last year for Citigroup. And we've also this year has been a good start. But I think if you look overall at the industry in the market, there's a few challenges which also obviously translate into opportunities.

Heribert Gangl (00:02:30) - Um, but yeah, one thing, definitely the inflation environment which has affected not only the eurozone but also see in the various countries, um, quite strongly affecting purchasing power, consumer spending. It's, it's the labor situation and general shortage of labor and it's also affecting various industries, not only our hotel industry, but this is obviously very service intensive. It's the macroeconomic situation in some of the countries and markets. It's a situation, you know, the war in Ukraine, which is very close to our region especially, so all these things. And then we have a big challenge ahead of us. I think our entire generation is the whole green Yeah. And sustainability issue, which is now, I think, becoming a lot. It is critical that we get moving as in the industry and as a society in general on this, on this matter. So that's what I was kind of covering, referring with my post here.

Marina Franolic (00:03:35) - Okay. I thought that maybe, you know, some secrets, but even if you do, apparently you're not going to share them with us, at least not today.

Marina Franolic (00:03:42) - So tell me your background. Is hotel investments and hotel consulting? Did being part of the financing side bring some new perspective as you are now approaching projects from the other side of the table? At one point you were from the investment, so you're looking for funding now you are actually giving funding. Um.

Heribert Gangl (00:04:03) - I think it's been it's very, very helpful in general, when you share different perspectives or you understand different positions, no matter what your current role is, that's always very helpful. So now in a meeting, with clients and borrowers and having discussions, it's very helpful for me to have been on their side and understand what they're looking for, what their interests are, and being able to also consider that now when, you know, structuring new finance or discussing with them, understanding the challenges the borrowers might have. So this in this regard. Yeah, it's I think I've kind of I started on hotel operations, then I moved into consulting then on the asset and investment management on the financing side.

Marina Franolic (00:05:42) - Uh, do you see any, and if yes what exactly the difference in projects that are looking for financing pre and post-Covid.

Heribert Gangl (00:05:52) - Um I think the industry is very fast changing the hotel industry and challenge you have seen is a consequence of corona or during Corona that some of the products have changed as well.

Heribert Gangl (00:06:05) - So that's what we see as well on the financing side or what products are looking for financing, I think there's been a, um, an emerging trend of low service concept with limited serviced apartments have proven very popular and resilient. So we have some more of those kind of concepts. Certainly the leisure segment and tourism has, um, gained also in attractiveness for, for a wider group of investors now through city hotels have always been considered more reliable with more stable cash flows. I think now with Corona it was very unseen of yeah, that suddenly, no matter how diversified your portfolio was in terms of city hotels, all the markets were affected worldwide. So this I think changed the perspective of most market participants. And that has also translated into some new concepts, new products which have evolved and which we are seeing now. But I think the fundamentals of the industry are still in place.

Marina Franolic (00:07:13) - And is there any specific product that you tend to prefer to fund now of to finance or there? So you said there's the low-service products that are coming on the market, lifestyle, hotels, luxury properties, leisure.

Marina Franolic (00:07:33) - And I know it really depends on location because everyone in real estate, everyone says location, location, location. But is there any type even let's put it the question this way within the leisure destinations or within the city destinations, is there a specific type of hotel that you kind of see that they have the best possibility to succeed?

Heribert Gangl (00:07:58) - I think we've even before we always like good projects. You know, it's a combination. I mean, we see attractive opportunities across the markets we are active in. And it's not so much a question of city and leisure destination, it just needs to the whole setup needs to work. And so it needs to be the right sponsor. Yeah. With the right vision, the right strategy, also sufficient equity. Obviously, it needs to be the right product at the right place location. Yes, but it needs to also the entire contract structure and setup need to work with the operator, with the owner. If there's a.

Marina Franolic (00:08:38) - Do you insist on operators?

Heribert Gangl (00:08:41) - Um, we mean we don't necessarily need branding.

Heribert Gangl (00:08:44) - Yeah, a lot of large brands, but the operating concept is important. But we are very flexible in terms of yeah, we are not so much stuck or fixed on just fixed leases, for example, like some of other lenders. So in fact most of our portfolio is managed hotels or owned-operated hotels. So we have the whole mix, but we always look at the cash flows and what's sustainable, what can be achieved, you know? So I think this is also important.

Marina Franolic (00:09:11) - Um, but I guess also on the background of the customer.

Heribert Gangl (00:09:15) - Absolutely. It's the quality of the asset, it's the quality of the operator and it's the concept of branding. But of course, also the quality of the sponsor is very much important for us. At the end of when we do a project financing, it's the real estate and in which we finance that's that's our main collateral as well. But the quality of the sponsor is important is key. Yeah, Yeah.

Marina Franolic (00:09:39) - Uh, what are the trends in financing and how have they changed from five, three years ago? Are there any changes or what is the interest rates now?

Heribert Gangl (00:09:49) - Yeah, I guess, yeah.

Heribert Gangl (00:09:50) - From the interest rate changes, this has had an impact. I mean a few until one and a half years ago. Uh, can most in. Assuming financing at almost no cost. So hedging or fixed interest, we're not really a discussion we had or of interest. Now that has changed quite, quite a lot. And so this is one of the effects. Obviously, now the investors and borrowers need to think very carefully about the financing strategy in terms and how to do want to secure and lock in some of the of the rates to have more security and safety on that on that aspect. But I mean, general trends are thinking that the financing terms were becoming shorter, a little bit more moving towards the short end, and flexible. I think now that's that has changed again. Yeah.

Marina Franolic (00:10:44) - What do you mean when you say flexible.

Heribert Gangl (00:10:46) - In terms of general? Terms, I think there was always the hope to do short-term financing and to get even better financing terms of four years time because the market was developing or performing.

Heribert Gangl (00:10:59) - So well. So in terms of operating performance, but also it was assumed financing costs will remain as low as they were.

Marina Franolic (00:11:07) - We've heard this morning here at IGF by Ian Golding. He said that he expect by Q4 this year that the interest rates will remain stable and then they will slowly, slowly start going down. So do you think this is the case? Can you even share that with us? Or this is still to be seen on how the market will respond within the upcoming six months?

Heribert Gangl (00:11:37) - I mean, I think I mean, our research department has the view at the moment that we probably seeing the peak now maybe 1 or 2 more small interest hikes in the eurozone. I can speak of the eurozone only, but it really depends on the underlying inflation rate which is more. Um, you know, it's very persistent, more persistent than we were maybe expecting a few months ago or so. This will determine the further path, but we'll see what the ECB will decide. But it's really I think the inflation is key, obviously, and how this is going to involve.

Marina Franolic (00:12:16) - Now you have green financing available for hotels. What are the main requirements?

Heribert Gangl (00:12:24) - I mean, green financing. What I can say is we have seen more for in the bond market and corporate financing. There have been green finance products and green bonds, um, around for some time now on, on really on an investment or real estate financing level. There is some offerings that like to call green finance or products, but in reality I'd say this is more a marketing initiative at the moment, really. Green finance is difficult. How do you define green finance at the moment? One thing is clear. I mean, it's um, with the Green Initiative and the Green Deal and there's a lot of regulatory pressure on all lenders in the EU to increase the share of green investments in green finance in their portfolio. And it's the same for us. And we are this, this topic gets a lot of attention and gains importance dramatically. And in our credit decision process, it's almost the first has become the first question now so it's it's kind of a minimum it's becoming a minimum requirement to have at least a concept, a strategy that the sponsor thinks about it if the asset is not doesn't qualify as green investment.

Marina Franolic (00:13:40) - So if I would have a property or a project that I want to fund, would I would you give me better interest rates if I would have a plan to have a Leed platinum or that I would build it in a very sustainable way? Would that give me some benefits?

Heribert Gangl (00:14:03) - Yes, absolutely. I think, I mean, just one, one remark. I mean, the certificate building certificate doesn't necessarily mean the building is a green investment or a green building. So but I think this is something we would be a separate discussion. Yes. But in general, I mean, at the moment, yes, it the market, I think, is in a place where you get maybe a small incentive for a green product, but it's minor for real estate project financing. I think this will change in becoming you won't be able to have financing or a much you will have a risk premium on nongreen financing or non and maybe even no financing at all for certain types of assets.

Heribert Gangl (00:14:47) - And I think that's very moving too. But we are not there yet. But it's definitely when we do the overall consideration having um, an asset which qualifies for some kind of green aspect, it's definitely supporting and helpful in the overall decision. If the other factors are.

Marina Franolic (00:15:05) - Do you think that long term you will also talk to your existing clients and tell them, Listen, if we want to work on, you'll have to do something about your building. You need to implement some kind of green strategies, some kind of investments, because long term, that asset will have lower value. Just because it's not green, it's not sustainable.

Heribert Gangl (00:15:29) - That's something we are already considering now. So usually when we do a new financing, one of the requirements is it will be called a technical object trading. So it's a technical assessment of the building which are technical department performs. So that's our current approach. I think most lenders are doing it like this at the moment.

Heribert Gangl (00:15:49) - And if this assessment shows that there are certain requirements, CapEx requirements related to sustainability and is key and green, then we are already reflecting that in the facility agreement and making this a mandatory requirement to reserve or to a certain investment in the financing period.

Marina Franolic (00:16:14) - And then one last question. Is there any type of project at the moment that you would completely not consider financing at all?

Heribert Gangl (00:16:22) - Uh, well, I think project. Which don't meet the criteria, as I mentioned before. So, I mean, if, you know, poor sponsor, poor asset quality, underinvested, underperforming without a concept and or a clear strategy and we are in general more conservative, very selective on development projects. So our focus is clearly on existing projects or existing performing hotels with a track record and experience, the market participants, sponsors and operators lower risk.

Marina Franolic (00:16:54) - Is that what you mean? Kind of. I mean, at least development? It depends on where. But usually, developments take a longer period and are at a little bit higher risk.

Marina Franolic (00:17:04) - So yeah.

Heribert Gangl (00:17:05) - I mean, this is generally I mean, development risk, this is not necessarily the issue, but it's more because it's also reflected in the margin. And we can deal with the riski we have to have monitoring and supervision and technical expertise. So it that's not necessary that we shy away from this risk, but it's more related to the market situation. Okay.

Marina Franolic (00:17:27) - So currently the situation. Okay. Okay. That makes sense. Okay. Is there anything special that you're looking for to get from IDEAA in September except sharing your your knowledge of the market?

Heribert Gangl (00:17:42) - Well, I'm in general, I'm always looking forward to, you know, different views, different opinions from different market participants and discussing current trends, developments in market environment. So I'm very much looking forward to that interesting discussion. Also focusing on, on, on on the region as well. So it's important those kind of events are, I think, very important for the industry.

Marina Franolic (00:18:04) - I didn't ask you at the beginning, so what are the markets within the CE? So you're based in Austria, in Vienna.

Heribert Gangl (00:18:14) - Our core markets are really the markets where we have local subsidiaries and so neighboring countries Czechoslovakia, Hungary, Croatia, Serbia. So the Balkan region is of great importance for us. And then also extended markets are Poland and selectively Germany besides our home market, Austria. So these are this is the region we are very much focusing on and we have been there for most of these markets. We have market-leading positions. We've been there for 25 years. We really believe in the in markets and see still see very close and close potential. Okay.

Marina Franolic (00:18:51) - Well, we're looking forward to having you in Prague in September. Thank you so much for this interview. And yeah, see you soon.

Heribert Gangl (00:18:59) - Thank you very much, Marina. Looking forward to seeing you there as well.