THDP designs Pigeon Post Bar and Eatery at Hilton Cologne
Hospitality experts THDP have revealed their design for the new Pigeon Post Bar & Eatery at Hilton Cologne, referencing the building’s long history as a post office.
Nobody is pretending that the UK hotel development pipeline will start to flow again like it did before March 2020. But there are plenty of encouraging signs the hotel building business will bounce back. One year after the pandemic began, Mix offers six reasons to be hopeful.
The UK hotel property sector ought to be a hopeless case. Developers ought to be having meltdowns, investors ought to be running for the hills, and operators – well, your heart goes out to them. After a year in which England has been in full national lockdown for 195 out of the first 365 days of pandemic – that’s 53% of the year – what is there to cheer about? And, with international travel at a standstill, and unlikely to resume anytime soon, the hospitality sector does not look like a property market top bet. Yet, there is hope. And this is not just whistling to keep the spirits up.
Reasons to be cheerful range from operational to money market. At one end of the scale sits the (accurate) observation that some sectors and locations of the UK hotel sector were heading to over-supply before March 2020, and so the pandemic-induced slowdown in new development has done everyone a favour. At the other end, there are global investors who think that the bottom of the market is the perfect time to buy or build, and that is what they intend to do.
Here are six good reasons property developers and property investors still have faith in the hotel sector.
Not a joke, but a serious claim that the over 50s, all of whom should have had both doses of COVID vaccine by June, are expected to lead demand for domestic hotel space. They have the money, they have the time, and they have no reason not to go travelling. Data from CBRE suggests domestic travel demand will be the main stay until revenues recover in, or after, 2024. Hoteliers seem to agree, with Whitbread’s Premier Inn brand taking the opportunity to beef-up its staycation-friendly destination list.
Premier Inn is expected to open its fifth Manchester site in the university district after a deal with Vita Group/Bruntwood for their Circle Square scheme. They are, meanwhile, scouring the Northern Quarter, Piccadilly and the neighbourhood of the new Oak View/Co-op Live stadium in East Manchester for further potential hotels. Elsewhere, Whitbread will open five new Premier Inn hotels in summer holiday hotspots: the new £11 million 121-bed Torquay hotel is already rising out of its foundations.
The pre-pandemic hotel building boom was driven by an unprecedented surge of global equity into what felt like (and was, at the time) a potential high-return sector. The flow of cash was eye watering: as much as £135 billion in 2019, after a decade in which volumes more or less doubled.
And yes, investment fell off a cliff when investors realised the pandemic would undermine the value of their newly built assets. Yet investment did not stop. Data from the City of London Business School shows that investors simply tightened their criteria and focused on the strongest propositions. Interest rates on senior debt rose appreciably, and lenders concentrated on their sweet spot, which meant deals large enough to make a good return, but not large enough to provoke sleepless nights. This means between £50m and £100m.
Investors also narrowed their focus to locations like London, reckoning the capital will always be a focus for visitors. So, whilst UK hotel investment volumes fell by 70% in 2020, in London they fell relatively less steeply (down 49%). This was largely thanks to the £750m sale of The Ritz, but the point remains valid: investors think London is a safe(ish) bet.
However, the pandemic has created a difficult-to-read market dynamic. Ian Elliott, Principal in Avison Young’s Hotel Valuation and Investment team, explains: ‘Thanks to government intervention, and forbearance from bank lenders, we haven’t seen anything like the distress sales we saw after the 2008/9 great financial crisis. Of course, some hotels will fail, and some must be sold, but we haven’t seen the 30-40% discount in pricing that some buyers were hoping for.’
The result is a curious kind of tension. Buyers want to wait a little, hoping that, before long, sellers will drop their price. Sellers reckon it is worth hanging on a bit longer, hoping the market picks up and rescues their hotel business. The consequence is that the volume of sales is extremely low, so judging the real level of pricing is hard. And that, too, deters deal making: who wants to sign up today to discover they paid over the odds tomorrow? There is, however, one clear consequence of this confusion – and this is reason to be cheerful number three.
There are two drivers behind a potential boom in large-scale refurbishment. First, because customers and guests have the whip hand in a recovering sector and can afford to be choosy about where they stay.
‘Post-pandemic, people may travel less but they will stay in hotels more, if that makes sense,’ says Richard Candey, Head of Investor & Developer Services at Cushman & Wakefield.
Richard envisages fewer but more intensive visits, with users expecting more from their hotels. ‘This will mean more fun, attractive spaces, more lifestyle brands and less emphasis on homogenous boring brands, even for business visitors,’ he says.
The result will be a wave of upgrades, rethinks and refurbishments. Meanwhile, investors will be making complex calculations of their own, and this provides the second source of energy behind refurbishment.
Whilst hotel prices haven’t fallen as fast as some vendors would like, they certainly have fallen (10%-20% seems to be the agreed minimum). In some overcrowded locations and some styles of accommodation, the fall is sharper still. Potential buyers look at these sites and attempt to calculate the residual value – in other words, what that site would be worth if it were not a hotel.
‘The question for some investors is, can I buy and refurbish an existing hotel more cheaply than I could build a new one?’ asks Avison Young’s Ian Elliott. ‘And if your purchase cost in some locations is just 60-70% of the development cost, then why not buy and refurbish?’
This calculation will be particularly appealing in country house or suburban hotels, where the grounds, outbuildings and newly treasured rural location might mean the alternative (residual) value is a lot higher than that of the original hotel. ‘A tired hotel on the outskirts of a town may have a lot of residual value, more than people saw before the pandemic,’ Ian suggests.
The motive is clear: many existing hotels will be looking shabby by 2024, thanks to poor cash flow and a couple of years of underinvestment. One route for new entrants into a crowded market is to have a new, cool offer ready to make – which means starting to build now.
This kind of logic motivates Capital & Centric, developers of a central Manchester hotel to be operated by the Fattal Group. The Leonardo Hotel Piccadilly East will provide 275 rooms in a 110,000 sq ft building.
Adam Higgins, Co-founder at Capital & Centric, explains: ‘We actually finalised the deal with the Fattal Group for our Leonardo Hotel Piccadilly East during lockdown. Some might say it took guts given what was happening but really it just showed the confidence on both sides that the UK market, and Manchester especially, would recover. Sure, in the short-term, hotels have been hit hard, but you have to take a longer-term view.
‘I think people will be looking for new experiences and will want to stay somewhere cool.’
The striking building design (by Stephenson Studio) and interiors by NoChintz are designed to make the trip to Manchester well worth it. The hotel will be ready for visitors in Spring 2022, by which time Adam expects the domestic and overseas tourism market to be back to where it was pre-COVID.
The pandemic has made aparthotels seem like a brilliant idea, and developers with an eye on the sector will be putting more effort into aparthotels or hybrid and double-decker buildings containing both standard and aparthotel operators. Marriott’s first UK dual-brand hotel opened in Slough in February, providing Moxy and Residence Inn accommodation.
Developed and owned by Slough Borough Council, specialist hotel management company, Cycas Hospitality, operates both hotels and the development was built via a joint venture between the council and Morgan Sindall Investments Ltd. This development was backed by Slough Council and may not have seen the light of day without them. The government’s £4.8 billion Levelling Up Fund could offer more councils the chance to do likewise.
Occupying the lower four floors, the lifestyle driven Moxy Slough offers 152 guest rooms, including 28 twin and eight accessible rooms. With 92 suites, Residence Inn by Marriott Slough, for longer-staying guests, is the first branded extended-stay property in Slough.
This is not normally a source of comfort, particularly if you or your clients aren’t particularly fit. But understood properly, this could be a significant spur to new development and refurbishment.
Cushman & Wakefield’s Richard Candey says: ‘Survival of the fittest is not a bad thing. Operators have to sharpen up their offer. If it means that some hotels feel the pinch of competition, that’s good.
‘Over the last year we’ve seen the greater proportion of live hotel projects either enter a holding pattern or find themselves challenged to the extent that the proposal collapses. But then this was also true pre-COVID. In London, for instance, we regularly tracked plans for about 25,000-30,000 hotel beds, yet only around 3,000 a year got built. The pandemic has increased the pressure these schemes feel, and that is not a bad thing because the weaker speculative schemes will not happen, and the strong ones will be a more certain focus of operator and investor interest.’
In other words, a clear out of ‘no-hoper’ hotel schemes may be a disappointment for their promoters, but it saves everyone else a lot of time and trouble.
Inspiration for your next read
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