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Preparing for the New Normal: Reimagining Hotel Financing Options

While many governments all the around the world have set out to provide financial stimuli to their respective economies as a whole and to some of the worst-hit sectors in particular, – travel and tourism industry being one of the major contenders – it is now quite obvious that such a source of financing is not sustainable in the long term. And, unfortunately, the long term is what travel world will most probably need to recover to the pre-covid levels.

According to McKinsey & Company, tourism accounted for 10% of global GDP in 2019, which places its worth at almost $9 trillion, making the industry nearly three times larger than agriculture. At such a scale, it is no more an exclusively private sector problem, as governments are looking at the total of about 120 million jobs potentially lost (followed by an understandable public dissatisfaction), until the industry performance rebounds to that of the last year no earlier than in 2024, according to the latest, revised estimates. Thankfully, there are relatively creative financing ways both public and private players could turn to in the face of unprecedented crisis.

One of them is the somewhat innovative revenue-pooling structure. The major idea of this approach is to make good use of the existent supply and minimize the associated variable costs. Under this scheme, a number of competing hotels in the specific area decides to keep only a few properties open and pool the associated revenues and losses. This way, instead of operating at 20 – 40% occupancy each, the remaining hotels enjoy a higher number of guests, while the closed properties save up on variable costs and could use the shared profits to improve the infrastructure and, thus, boost the overall attractiveness of the destination.

Of course, such an approach is not a panacea and would not fit all the businesses. SMEs and independent brands are perhaps the best candidates for finding this model attractive, but location matters too – as long as there is a common asset shared by all the properties (like a beach, for example), the incentives should be in place to enter into this revenue-sharing scheme.

Another potentially helpful financing model is government-backed joint equity funds. The major purpose of this vehicle would be to mitigate the investors’ risks by letting them secure an equity stake in multiple businesses simultaneously and streamlining the due diligence process with the help of state-designed standardized valuation strategies. Such model could potentially give access to a wealth of private capital in case investors feel confident in the government’s prolonged and consistent participation as a guarantee of the fund’s effectiveness. State itself could also become one of the investors and thus arrive to a more efficient model than plain government subsidies.

Given that the hospitality supply is very likely to outstrip the demand in the few coming years, clever capacity planning coupled with innovative approaches to business capital financing, supported by both private and state players, should enter the realm of day-to-day operations. How exactly this would happen is yet to be determined, however, travel sector has successfully reestablished itself after multiple crises – and covid-19 should not become an exception.

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