How can local authorities best support hotel development? It’s a question that flows naturally from two recently published articles in a series by Hospitality Investor. The first revealed that just one development involving a hotel had received support from the last round of the Levelling Up Fund, showing the lack of central government support for the sector.
The second explored just quite how important hotels are to local economies and demonstrated just how essential they are when it comes to everything from job creation and protection to attracting new businesses to an area. So, if central government isn’t going to help, what can local government do support growth and inward investment?
According to Kate Nicholls, chief executive of industry body UKHospitality, most councils understand that having the right hospitality offer in place is beneficial when it comes to economic development and will intervene in the market if they think it will yield tangible results. “I’ll give you what was a real live example, where Warner Brothers were looking at whether they bring additional film studio capacity to the Watford area,” she says.
“Do they do the next Tom Cruise film in Watford? There wasn't enough good quality accommodation and that put them off. So, build the five-star hotels or the four-star hotels and that has a knock-on effect. It also goes right down to the budget end as well.”
It isn’t just about attracting A-list celebrities and all that goes with major motion pictures, however. “Undoubtedly, people who are building factories, who are looking at investing in these new investment zones need to have good quality accommodation and hospitality alongside it to do it,” Nicholls adds.
“It’s the same when the government decided to put its economic campus in Darlington. The civil servants who are travelling backwards and forwards have an expectation of a certain type, level and quality of accommodation.”
Bespoke strategy
The point is that councils have to know what the specific need is and then come up with a bespoke strategy to meet that need. Tom Cunningham, UK regional director, hotel capital markets, at Savills says that sometimes councils can be a little overly optimistic on that front. “You can't just build a hotel in a town and expect everyone to go to it - it’s not a case of if you build it, they will come” he says.
“The fundamentals of that town or city have to be there to support a hotel. I think sometimes some planners say ‘we want to see a hotel there’. We've done a couple of pieces of work for local towns that would love a branded hotel and I'm sure they would, but the feasibility doesn't support it.”
Nevertheless, according to Marc Finney, head of hotels and resorts consulting at Colliers, councils have been getting increasingly proactive in recent years. “What we have seen over the last five years and possibly even as far back as 10 years is councils recognising that they've got an issue with the quality and level of accommodation that’s on offer,” he says. “There are lots of towns in this in the UK, even quite big towns of up to 100,000 people that haven't seen any new hotels for the last 10 years.”
A lot of the time, that may not have less to do with the potential of a location than the fact that hotels can operate with something of a herd mentality. “What tends to happen is that developers, hotel owners and hotel operators tend to have a list of places they'd like to be,” says Finney. “Let's say you're a foreign company and you're arriving in the UK. You want to be in places like London and Edinburgh. They all have the same list because they use the same criteria.”
However, even alternative areas that can make a compelling case may struggle to attract investment in the current market without some form of support. There are several factors to consider here, but the most commonly cited is construction costs, which have ballooned enormously since the pandemic just like pretty much everything else. Higher financing costs aren’t helping wither.
“The problem we've got at the moment in terms of new development is that construction costs have risen enormously, by 20-30%,” says Finney. “The cost of finance has just gone up enormously too [since interest rates started rising to combat inflation]. It’s squeezing opportunities.”
Thinking long term
For all these reasons and more, local authorities are realising that they need to act in the long-term interest of their economies. What we have seen is a number of councils across the country that have said ‘okay, we've got to do something about this’,” says Finney. “That involvement can take a lot of different forms. We've seen councils that have actually gone ahead and invested in the hotel themselves with a view to getting the hotel that they want up and built.”
He adds: “Then, presumably in a couple of years' time they'll send it once they've got what they want and recover their money that way. That is something that we're seeing happen at the moment. There is a hotel under construction in Sheffield and it's about to happen in Huddersfield.”
Intervention doesn’t have to be so dramatic. Elsewhere, councils have agreed to lend the money required to get a hotel out of the ground and operating, taking an informed risk that they will recover their money with added interest but less interest than a traditional investor might require. “We've seen cases where councils have said ‘okay, we've got this developer who wants to build a hotel but the high street banks are not lending the money’,” says Finney.
“The big debt funds will lend him the money, but it's far too expensive. So, the council decides to step in as lender and take a secure position on the asset, lending sensibly as a bank is meant to do but isn’t doing because in the current situation they're not going to do it in the face of a dysfunctional market. In Peterborough, there's a new four-star hotel about to open that was supported by a council loan.”
Other options are available. In Edinburgh, for instance the council realised that they had an undersupply of quality hotels close to the city’s main conference centre and that it was losing conferences to other locations as a result. It decided that it would find a suitable site, offer to underwrite the lease and hand it to the conference centre to manage.
“That way, the developer has effectively got the council’s covenant on a on a lease and in that way they're rolling the project forward,” says Finney. So that's a very good example of a very practical way in which councils can help themselves.”
So, while there are doubtless some councils that are naive in their expectations and others that simply do not see it as their role to intervene in the market, many are also increasingly sophisticated and know the value that the right hospitality offer brings to their areas.