The potential obsolescence of certain hotel assets has been a popular topic of discussion industrywide in recent times, and no hotel asset class has been more discussed in this vein than the traditional, full-service midscale hotel.
At Hospitality Investor’s Q1 Investor Council meeting, investors discussed how rising capital costs, changing consumer demand and rising operating costs have accelerated the rate of obsolescence for some hotel assets, particularly in the mid-market. But are there any solutions which will ensure investors continue to see a healthy return?
Hospitality Investor explores various alternatives uses, which could help transform and revitalise these potentially non-performing assets and ensure they remain profitable investments for years to come.
Exploring the options
Simon Atha, associate director at planning consultancy Boyer says that the options include a refocusing into a flexi aparthotel model, an extended stay hotel product or conversion to either residential or student accommodation.
“From a planning perspective, there’s merit in looking at conversion in terms of utilising the existing building because it brings what is potentially a redundant brownfield site into a more active use,” he says.
However, he notes there are many considerations to be made including the location, condition and the physical characteristics of the building.
Refocusing the hotel product
Atha says the path of least resistance is taking these potentially underperforming full-service hotels and adopting them into flexi aparthotels.
“An aparthotel will keep it in the hotel use class. It will be retained in a hospitality use and that is something councils are often keen to see because they place a great deal of value on hotels bringing tourists to an area because of the economic benefits.”
However, location is a big consideration when it comes to changing a hotel in this way.
“If it’s in a prime tourist area or a more rural area, then the council probably won’t be very supportive. But there are opportunities for different types of flexible uses in different parts of the building that a council many get behind because they would prefer to see the hotel retained with more flexible uses than the hotel being lost altogether.”
Jermaine Browne, co-founder of ARK Coliving and alternative living real estate company re:shape says there’s an argument for the repositioning of hotels which gain their income from daily rates and transient stays into long stay serviced accommodation.
“Typically, hotels work on the notion of an average daily rate (ADR). But when a distressed hotel is repositioned into more of an extended stay product where people can stay for months, for example co-living, it effectively changes the profile of people in the building and that results in lower OPEX costs and a greater security of income for investors.”
Browne explains that by having an income profile that goes from a daily rate – which results in a lot of vacancies – to a monthly rate, operators benefit from reduced staffing, marketing and servicing costs in particular because there isn’t a need to provide daily room cleaning, services, or continuously sell beds, compared to traditional hotels. From a consumer perspective, he adds that longer stay products offer an accessible and ready-made temporary housing solution, at a time when there is a chronic undersupply of UK homes.
Atha notes that when considering extended stay products, a planning challenge exists in relation to crossing the threshold from serviced accommodation into a what could be classified as a permanent residential dwelling.
“It’s very location specific. There are opportunities and it could work well in some locations but in others it will be more challenging. It’s all about the degree of independence of living; if you’re creating a more studio-type situation, then councils can potentially be a bit more cautious and may resist the permanence that could bring. Hotel owners, operators and investors need to be speaking with planning consultants early on because it can be local authority specific.
Richard Dawes, director - EMEA hotel capital markets at Savills notes longer stay products presents an opportunity for more types of investors to get into the hotel sector.
“Ultimately, we see it as quite a liquid environment. It's a pocket of liquidity for investors who are traditionally more residential-led, who want to get into hospitality but are perhaps less experienced in the hotel sector. Long-stay hotel products are a bridge to understanding the hotel sector more as it straddles both residential and hotel environment.”
Dawes says he believes greater capital will be spent in this segment than has been spent in the past.
“I see a growing trend towards this segment because it’s capturing the imagination of both institutional and private money. We’re seeing a huge push into this space from both hotel groups looking into long stay as well as new entities across the UK and Europe.”
Student accommodation
When considering the conversion of traditional, full-service midscale hotels to purpose-built student accommodation (PBSA), Atha says conversion in a city centre site or an urban area will be more acceptable than in rural areas.
While he says some towns and cities impose policies that restrict new student accommodation because they see the market as saturated, others are more supportive and this bodes well because a lot of hotel stock could be suitable for PBSA. However, he notes it is very important to consider the impact of student accommodation on the existing area.
“There are challenges with PBSA in relation to student management and you have to convince the council that you can manage that accommodation in a way that won’t impact on the existing community.”
Alex Luria, associate at architectural firm Jestico + Whiles adds it may be easier to secure permission for conversion to PBSA if stakeholders can convince the local authority that there’s demand and development isn’t speculative.
“If there’s a nomination agreement with a university or higher education institution, you can demonstrate demand and show there’s a high guarantee of letting for that space.”
He adds: “We’re hearing from our clients that there’s a huge demand and massive under provision of student accommodation. Maybe that’s because a lot of the accommodation being built at the moment is very expensive and isn’t providing to the entirety of the market.”
Luria notes that when changing use from hotel to living whether that be residential or PBSA, there may be the requirement to provide affordable housing in some form and he warns this may be difficult to provide in one hotel building.
“Logistically, a traditional hotel has one entrance which takes you to all the rooms. But if you suddenly are required to provide two different ways of entering a building and two different silos - one for affordable and one for private - that can become complicated.”
He also says spatial requirements can be a challenge when it comes to conversion.
Positively however, he says both these problems can be addressed, noting that converting an existing building into student accommodation, with a wide range of rooms may be complicated but could be possible with retrofitting.
He explains: “In student residential, there are broadly three types of rooms provided; cluster rooms which are smaller, have shared amenities and are cheaper and therefore more affordable, standard rooms which are larger and have their own kitchenettes and upper range premium rooms which are essentially the size of a normal hotel room.”
He also suggests that in order to increase return on investment, higher end premium rooms could be offered.
“If you’re converting, you may as well go for these higher-end premium rooms marketed at the international student market. But for these, it’s important to not just demonstrate ease of use and proximity to amenities but to also fulfil the expectation of getting better facilities.”
However, he advises that in order to effectively provide a range of rooms from affordable to super premium in the same building, there’s the need to add separate entrances and separate ways of accessing rooms. He suggests a solution of having shared lifts with controlled access to different floors.
Conversion to residential
Turning to conversion of these midscale hotels to residential, George Adams, associate director in the operational capital markets team at Colliers says it has to be examined on a case-by-case basis.
“If it’s a 15-minute walk to the bus or train, then residential may be a great change of use. Hotels which are slightly further out could be converted into high-end boutique apartments and this could maximise the value of your asset a little more.”
Atha notes that a big consideration when exploring conversion to both residential and student accommodation is the energy efficiency of the existing building.
“The big issue we also see with older sites across the market is the costs of conversion and upgrading to meet modern energy efficiency standards and to achieve a good EPC rating.”
However, Adams says what when considering build costs, refurbishment and retrofit projects cost a lot less to accomplish than building from scratch.
“We’re in a very inflationary environment and the value-add play we’re seeing at the moment is people being very interested in repurposing underperforming assets to try and maximise their value. It’s at the top of people’s agendas.”
Adams says while fluctuating construction costs and planning present challenges when exploring the conversion of unperforming hotel assets into other uses, it is an area which is attracting a lot of attention.
Moving forward, he stresses the importance of engaging in early discussions with councils and planning authorities to see what the possibilities are.
“The earlier you understand what you can achieve, what is viable and what the limits are, the better as that shapes your whole outlook and return profile,” he says.