The UK hospitality sector is facing some significant challenges and opportunities at the moment, due to a number of different factors.
How Reorganisation can help
Reorganisations can help in a number of ways, including facilitation of financing, asset protection and performance improvement.
Reorganisation for Financing
Quality real estate is still well regarded by sophisticated investors such as pension funds. UK real estate continues to trade at historically high levels compared to bond yields making property both attractive as an investment class and a viable option for investment diversification.
Quality UK properties are attractive as the market is liquid, sterling is weak and the legal consequences of property ownership well understood. These factors have increased the demand for UK real estate amongst those seeking annuity incomes or higher yields, including international investors.
Hotel occupancy rates, particularly in the big cities, continue to be strong and meet expectations. This gives investor confidence about acquisition of hotels as an asset class.
This presents an opportunity for those looking to grow their hotel business.
Financing requires a reorganisation to offer the lender security on real estate assets. If monies are to be raised by sale of a real estate asset then separation of that asset from the trading activity can be beneficial.
Reorganisation for Asset Protection
The Brexit vote and the fall of sterling has reduced the pool from which the sector traditionally recruits, whilst margins are being squeezed due to the higher cost of imported raw materials.
For restaurants this is exacerbated by the impact of the delivery operators as well as punitive business rates. This has resulted in a number of high profile restaurants faltering.
The current number of high profile restaurant failures would suggest that company reorganisation for asset protection may be a positive strategy.
Reorganisations for asset protection can involve separation of properties from the trade so that if there is a failure of the trade it does not necessarily mean the property is at risk. Group structures can help. Alternatively, more formal measures such as demergers can facilitate this planning.
Reorganisation to focus on performance
Management theory dictates that individuals should be incentivised on matters which they can control.
Property rich activities such as the hotel and leisure sector can lead to increasing share values due to property price increases rather than improvements in the underlying trade. It is therefore possible that management interests grow in value due to property prices rising rather than underlying trading improvements.
Reorganisations such as demergers can create structures which provide vehicles for management to focus and be incentivised based solely on trading performance. If properly structured these can also attract approved tax treatments such as the EMI share option reliefs.
In conclusion, the different strands of the hotel and leisure sector face different challenges and carefully structuring for particular situations can help manage risk and provide management reward opportunities.