With the office and retail sectors affected by structural change, the outperformance of the hotel sector and the opportunities it presents have come to the fore, as investors looking for higher returns are open to exploring alternative uses for buildings.
Hotel operators are always looking to expand. Given that higher construction costs and interest rates make development financing more challenging, hotel conversions have been key for expansion across most markets, especially in city centres. With office vacancy increasing as companies downsize their footprints and some office buildings become no longer fit for purpose, opportunities for other uses are on the rise.
Certain councils have also been changing the way they think about cities and business districts. For example, Oxford City Council published a City Centre Action Plan recommending increasing the city’s accommodation provision to boost the local economy and to encourage more overnight stays. In support, the local council approved the redevelopment of a former Odeon cinema into a 145-room aparthotel and a community hub.
Similarly, the City of London Corporation, which governs the Square Mile, announced earlier this year that it would be relaxing planning rules for uses such as hotels and galleries with the aim of creating a business and cultural destination offering complementary services. As part of the plan, it encourages conversions of secondary office buildings at risk of obsolescence to other uses.
The City was already seeing proposals for office redevelopments into hospitality schemes before the announcement. Last year, its Corporation approved plans for the development of a 311-room hotel at Boundary House, a former office building. Most recently, Whitbread acquired the freehold interest in New London House, an office building from the 1970s also comprising retail and a restaurant, for around £56.5 million, to be converted to one of its hotel brands, expanding the group’s presence in London.
Repurposing of offices and retail is also happening outside London. Department store chains, such as Debenhams and House of Fraser, have vacated many of the UK’s high streets, and the buildings have been finding new leases of life as hospitality developments.
The former Debenhams on Princes Street in Edinburgh was granted planning permission by the City of Edinburgh Council for a 210-room hotel, including a rooftop bar and terrace, restaurants, meeting and wellness spaces, with the site currently on the market for potential buyers.
Exeter Hospitality converted the former House of Fraser in Exeter into a 104-room Hotel Indigo, which opened earlier this year. The hotel is in the heart of the city, next to the cathedral. The company secured a £20 million development funding from Topland with a stabilisation period for the owners, extending their financing support.
Lastly, Ennismore is expected to open a new 175-room Mama Shelter hotel in Liverpool in 2025 at the former John Lewis site following a £25 million redevelopment.
Secondary office availability is expected to increase as the flight-to-quality trend in the office market continues, with occupiers targeting best-in-class buildings, while the demise of some major retailers has led to higher vacancies in retail. Repurposing these asset types into hospitality use can be successful, though consideration must be given to the design of the building and the location in question to ensure that the development may be viable. As councils look to revitalise city centres in the future, hospitality could be a major contributor to the improvement of many of the UK’s metropolitan areas.