How to fill the hotel development viability gap

The COVID-19 pandemic has accelerated changes in our town and city centres that were already present. Evolving consumer demand particularly in an areas like shopping has left some locations full of boarded-up shops and decaying infrastructure.

Retail and to a lesser extent offices are two sectors that are unlikely to bounce back to where they once were, meaning that hotel developments are becoming much more attractive to local authorities as a way of regenerating an area.

All this sounds like a win-win for brands, investors and councils, until, that is, you start to discuss the viability gap. A lot of projects might look and sound great in theory but once you start pricing them up, they quickly start to look less attractive. So what are the things that stakeholders need to consider when looking at developing a new hotel?

Ensure project diligence

This is arguably the most important thing to get right as it impacts everything that comes after. For big brands like Hilton, that get offered many different projects, picking the ones that work are crucial.

“I think we start with diligence around the sort of projects that we look at. I mean, there are so many things that fly around, that we could do. But it's just understanding where those projects are that are going to tick enough boxes, for all stakeholders to actually come forward and be delivered,” said Graham Dodd, managing director, development - UK & Ireland at Hilton.

It’s not just the brands that need to pay close attention to what’s going on – everyone involved in the process needs to be well advised. This is especially true of the local authorities who may generally have less experience when it comes to the hospitality component of any development.

For Andy Townsend CEO of Legacy Hotels & Resorts, the viability gaps is often down to poor communication right at the very beginning and down the line there’s a realisation that, for example, the F&B component is perhaps too extensive. This could be down to investment horizons, where developers are looking at the state of the market at the current time and councils are looking into the future at what they hope an area can become.

Townsend gave the example of the Pullman hotel in Liverpool where the brief had been very clear from the beginning, in that the hotel and the wider project was aimed at a European market rather than a domestic one.

Ways of making it work

In a mixed-use development the hotel component may not be the biggest revenue driver, but is there as tent-pole to attract other businesses as well as consumers. However, there are ways of making it work.

Dual-branded hotel projects have become much more popular in recent years as investors realise they offer multiple ways of attracting business and leisure travellers. This also gives more options for diversifying the income through food and beverage offerings, workspaces or even retail.

“When you're doing a large hotel scheme, look at dual branding it, with a full service and a limited-service hotel where a limited-service hotel has smaller rooms, you can make take advantage of the public areas in the full-service hotel, [and] you can diversify the income,” said Philip Lassman, vice president, head of development, Northern Europe, Accor Hotels.

It’s also important to remember that many of these developments are bigger than just the hotel and may include student accommodation, build-to-rent, restaurants or other leisure facilities. Some of which may have a more stable income stream and can help to subsidise the hospitality part.

“If you can cross fertilize or cross fund through other more profitable elements in a much wider master plan, then the authority can help to facilitate to make the less profitable elements, perhaps, perhaps the hotel work financially. So as a partner, they're critical. It's not just about the land that they bring to the equation and the investment that's required there, but also about planning, and about the wider regeneration purpose that they provide, the skill sets that they have that are critical and essential to deliver a master plan,” said Warwick Smither, development director at Genr8 Developments

Local authorities can be reluctant participants

For the most part councils wouldn’t want to be involved with financing major projects or even owning hotels outright but are being forced to do so because they are the only ones left with a long-term vested interest.

“Most local authorities just start off on a journey where they don't realize they're going to have to fund it,” said Townsend.

For years the UK government has done little to deal with regional disparities and the levelling up agenda brought in by previous prime minister Boris Johnson looks to have been jettisoned by his successor Liz Truss. Councils have therefore had to take matters into their own hands.

“I think that we have to start off on the premise that the councils don't do this because they want to do it. I think they are there because they have to, in some cases, set the standard, lead the way and actually help deliver some of these projects. I think the involvement of brands like ours, at a time when many major retail brands are all marching away from the high street […] I think is really important,” said Hilton’s Dodd.

Big brands can make a difference

In major cities the presence of another big-box brand might not make much of a difference but in smaller towns and cities they still have the potential to move the needle for locals and visitors.

Smither said that Gener8 had delivered a new Hilton Garden Inn hotel in Stoke-on-Trent and that this had already helped attract American companies looking to do business in the city.

“One of their prerequisites was that there was a quality hotel brand in the town centre. And it's helped underpin therefore, business generation in the wider context,” he said.

Stockton-on-Tees Borough Council took the decision to develop and ultimately own a Hampton by Hilton in the town, which opened in February 2019.

“I think the real selling point is about the broader economic benefits of a hotel in a specific geography and everything that brings, that's the thing that ultimately differentiates that investment,” said Iain Robinson, assistant director, Stockton-on-Tees Borough Council.

All those quoted in the article appeared on stage at the Annual Hotel Conference held in Manchester between October 3 and 4, in a session called: How to Fill the Hotel Development Viability Gap