MANCHESTER, England — Navigating rising construction, financing and supply-chain costs top the agenda for hotel developers in the United Kingdom, but the current market has plenty of opportunity for hoteliers, said speakers at the recent Annual Hospitality Conference.
U.K. hoteliers are up for the challenge, according to developers speaking on a panel titled “United Kingdom hospitality development: Trends, challenges and opportunities.”
Since the ending of the pandemic, costs have increased significantly.
“Ten years ago, it would cost £70,000 ($91,332) a key. Recently, we went tendering for a hotel, and it came back at £250,000 ($326,185) a key, and that's a clean-cut site. If you are seeing sites that have got heritage involved, then it’s up to £400,000 ($521,896) a key, which makes it absolutely unviable,” said Zain Kajani, director of hotel investor JMK Group.
He said financing costs have shown a similar trajectory, but there is competition among lenders, which benefits hoteliers seeking financing.
“Ten years ago, you had High Street banks lending at maybe 50% [loan to cost], but now you can get alternative financing coming in around 70%, 80% LTC, which is really nice. Yes, it's a lot harder to develop now, but I think you've got a bit more support from different lenders, which makes it easier. But senior debt is becoming more difficult,” he said.
Kajani said he had not yet seen stabilized inflation rates coming into the hotel-cost equation.
Development is becoming more challenging, he said. "But, hey, who doesn't want a challenge?” he asked.
Niall Kelly, head of business development, Europe, Middle East and Africa for third-party management company Aimbridge EMEA, said he is not seeing much development in the U.K.
“Most of the deals we’re seeing now are actually more driven out of existing assets that need to either find a new path in life or they've kind of reached the end of a certain life, and they’ve been repositioned or retaken over,” he said.
The process takes a long time nowadays, he said. Deals become "slow and sticky."
He said he has never seen an environment in which so much due diligence and attention is paid to everything.
“You take that on. You roll with the punches,” Kelly said.
Conversion conversations
Adela Cristea, vice president of development, U.K., Ireland and Nordics for Radisson Hotel Group, said it is no surprise that conversions are currently so popular.
“During COVID, we realized that we needed a soft brand, a conversion brand, rather than stretching our core, and very quickly, we affiliated about 90 hotels in the space of four years,” she said.
She said she has seen development companies that also might have a construction company and family offices that might have some land, entities that have been thinking about opening hotels for a long time that due to current circumstances now cannot add up the sums.
All they are doing is planning, she added.
She said Radisson has in the last couple of years discovered and expanded in the niche of stadium and events destinations.
“What I love most about these projects is that owners have been thinking about such projects for the last 10, 20, 30 years, and no crisis will change their mind. They will be doing it anyway, versus the office that doesn’t work today, so let me do a hotel instead.
“We do have people asking for conversions from office to hotel. We’ve seen quite a few, but how many hotels can you put in the City of London?” Cristea said.
She added that stadium developers know they need a hotel, and if meetings and events, F&B and some other activities and attractions can be added, a property makes a lot of sense.
“They need a hotel to make the venue a year-round destination,” she added.
Timothy Walton, senior vice president, Western Europe, international hotel development for Marriott International, said he has no doubt as to the direction of travel — conversions of offices or independent hotels.
“We recently opened a Courtyard by Marriott hotel here in the U.K., and when I looked back at the files, the time it took between submission, the first letter of interest, and the opening was a shade under 12 years. Now that is unusual. … This year in the U.K., we’ve signed about a dozen transactions, and not one of those is a rebuild,” he said.
He added there has also been some adaptive reuse and more interest in extended stay.
“Those [models] bring challenges of their own. I think this cycle is slightly different for us and tough to compare with previous cycles because I think over the course of the last few years, we’ve made an increased foray into franchising.
“Marriott was conspicuously absent from the mid-market until relatively recently, and we’ve made a further push into this kind of conversion space, and that’s kind of skewed the picture. Exclusively this year, what we’ve done to date in the U.K. has been conversions and adaptive reuse,” Walton added.
Such models and deals have attracted a great deal of competition, said moderator Ed Fitch, head of hospitality United Kingdom and Ireland, at business consultancy Cushman & Wakefield.
“Why would you not turn your attention to buying at less than replacement costs, rather than taking on development risk?” he asked.
JMK’s Kajani said it comes down to the equation between price per key and return on investment, with many secondary and tertiary cities in the country simply not providing the necessary mathematics.
“We’re not a fund. We’re a family, so we prefer to develop our assets and put a bit more heart and soul into it, and also, from a cash flow perspective, it’s much more easier to develop a hotel when you’re spreading your equity.
“It is very scenario-driven,” he said.
Brand bonus
Marriott’s Walton said brand is an important consideration for lenders in what he sees as an easier debt environment.
“Not all brands are created equally, and so I think the lending community is sophisticated enough to look beyond the brand and look at what the company can deliver in terms of business to the [destination]. Clearly, the sponsor is absolutely critical. I think that the debt market is easing for known borrowers, with a number of credentials that I think need to be met, only one of which is brand. Brand is only part of the story,” he said.
Aimbridge works with 85 hotel brands, Kelly said.
“We can bring a lot of information to the table in comparison, and we team up with many of these people here on different projects and are really happy to. While the brands are our partners, it is the P&L and the operations that are our sole focus.
“It is very clear where we stand in the pecking order and what our focus is,” Kelly said.
Cristea said another recent change is that local authorities have become more sophisticated and easier to work with.
“They have the best sites in town. They want to regenerate their areas. They may get different interest rates. … I love to work with them,” she said.
“[Local authorities] also have backup options, and they will make [the project] happen, while [Radisson is] trying to be more creative, to be flexible. … We’re happy not to give owners the same large book of land standards (and) value-engineer if we can,” Cristea added.
Flexibility also has increased in terms of contract models.
Franchising is on the rise throughout Europe.
“We like to tailor a proposal and a brand to owners, rather than just giving the same sets of numbers to everybody,” she said.
Walton said competition is inevitable when there are up to 10 hotel firms with 20 or 30 brands, or more, in the mix.
“We’re all chasing the same pieces of real estate. It has put enormous pressure on commercial terms, so there’s downward pressure on length of terms, downward pressure on fees, and there’s upward pressure on key money,” he said.
“You get what you pay for, and a large part of my team’s time is spent trying to convey to our ownership and franchise community and our potential owners and franchisees just what it is that they’re getting with the Marriott product. But there’s no doubt that we’re having to be more nimble. … We’re all having to be a lot more flexible than perhaps we were even five or six years ago,” he added.
Kajani said brands still bring much to owners, but with brands still pushing for long-term agreements, it has to be the right partners.
“Costs, key money, it does make a difference. You’re not going to be getting key money from every brand, so sometimes you have got to take the long-term view. So then that becomes the part that’s got to be important, the booking engines, the flexibility of franchise terms, the bits that resonate with your shareholders and lenders as well, to make sure they’re happy because at the end of the day whilst you’re doing a development for yourself, there’s a lot of people within the pot,” he added.
Kelly said the increase in sophistication can make things easier, but also tougher.
“That allows people to then start pricing exactly what they’re trying to build. And there’s more and more data, and this is where you will get a different margin. This is where we get a different flow through,” he said.