Why government hotel contracts present a challenge to owners and valuers

The influence of UK government contracts is greatly distorting the hotel market, presenting a challenge to owners and valuers, according to a group of industry experts.  

So-called ‘exclusive use’ agreements that now see hotels used to house asylum seekers and were previously used for Covid-19 related requirements such as isolation, are having a particular impact in secondary markets. The views were shared by senior leaders from across the sector at the recent Annual Hotel Conference (AHC) Advisory Board meeting in York.

One attendee described them as a “great short-term shot in the arm” but that the problem now was how to deal with the exit. For example is the hotel covered by a property improvement plan? Many of the assets will require money spent on them to update, especially if they are branded.

The second challenge is on the valuation front. As many of these hotels are in small towns and cities with only a few hotels, taking them out of the market has warped the local situation with nearby properties likely benefiting from displaced guests.

“You've got a big chunk of rooms that are still to all intents and purposes off the market. But actually, it might displace business into other hotels that are seeing a better performance as a result, but at some point, that asylum business may disappear. What does that suddenly do to that underlying market?” one attendee said.

Brand standard pushback

Another area that generated a lot of interest was over brand standards. During the Covid-19 pandemics brands relaxed their approach with franchisees but since life has largely gone back to normal there has been renewed debate about the amount of monitoring that is necessary. There is also the tension over things that could make a difference environmentally such as housecleaning frequency and heating use with the perceived impact this might have on guest satisfaction.

"You've got the loyalty programme, which is excellent and brand contribution traditionally, [which] was pretty strong. But you lose your individuality,” one attendee said.

Another said: “It'll be interesting to see whether any of the big players do start to taking a flexible view […] But it is a bit of a blunt instrument at the moment, particularly when the market is in such a sort of state of flux, in terms of what gets bought and the ability to provide that calibre of offer.”