Capital spending on UK hotels reached around £1.5bn in 2014, leading to substantial construction work. With branded chains continuing to grow, what do contractors need to know to win work with the sector’s biggest clients?
“You can always rely on a Premier Inn,” sighs Lenny Henry in the hotel chain’s ubiquitous TV ads. For the construction sector at least, there has proved to be some truth in the slogan.
Over recent years the rapid expansion of Premier Inn and other branded budget hotels like Travelodge has provided a fairly dependable source of work for UK contractors regardless of the state of the economy.
Meanwhile as investor confidence has recovered following the global downturn, the more luxurious end of the market has also seen increased development activity. AMA research estimates that in 2014, capital spending in the UK hotels sector totalled around £1.5bn.
Most development activity has taken place in the branded sector, which has expanded rapidly in recent years, frequently at the expense of unbranded independents.
Travelodge’s UK development director Tony O’Brien estimates that the nation’s total serviced accommodation stock – including all hotels, guest houses, bed and breakfasts and hostels – totals around 730,000 rooms.
“Of that market, the majority – about 55 per cent – is still independent unbranded,” he says. “In more mature markets like the US, the independent sector is less than a third.
“Customers don’t really want that nowadays. In most sectors they want the certainty they can get from brands, so the unbranded sector is under a real squeeze and is shrinking significantly.
“When I entered the industry 20 years ago, about 75 per cent of the sector was independent unbranded. That will shrink further to about a third, so there is significant structural change going on.”
Travelodge Hackney London
Mr O’Brien argues the internet has further contributed to the decline of the independents, which are unable to compete with the digital marketing resources available to the big brands to help push their hotels to the top of the list on internet search engines.
Budgeting for growth
The five largest UK hoteliers are Whitbread-owned Premier Inn; InterContinental Hotels Group (IHG), which owns brands including Holiday Inn and Crowne Plaza; Travelodge; Accor, owner of the Ibis, Sofitel and Mercure brands; and Hilton.
Together they account for more than 180,000 of the 267,436 rooms operated by the top 20 UK hotel brands in 2014, according to the latest figures available from the HotelAnalyst UK hotel brand listing. They also account for much of the new hotel construction planned or under way.
Mr O’Brien says Travelodge, which has 510 hotels, is looking to add another 150-200 hotels in the next 10-15 years. The chain will open 19 this year and is seeking to expand by a further 20-25 annually.
Premier Inn remains the biggest UK hotel chain with more than 700 hotels. Alex Flach, construction and maintenance director for Whitbread hotels and restaurants, say in the 2015/16 financial year the company added just under 5,500 rooms in 34 new hotels.
“Our plan is to open 5,000-5,500 a year for the next few years,” he says. “Last year we opened 4,300. This year was the biggest opening programme we have had.”
Both Travelodge and Premier Inn operate at the budget end of the market, which has already seen vigorous growth and is expected to expand further.
“In the UK we have 29,000 rooms operating and 6,500 being built in 168 hotels in total. The UK is a very important market and we look at opening 10-15 hotels a year here”
Nick Smart, Hilton
“The branded budget sector only accounts for 19-20 per cent of supply in the UK,” Mr O’Brien says. “In France it is 25 per cent and in the United States it is over 33 per cent, so it is under-represented here.
“We expect the market share of the sector to grow to around 30 per cent because people want good locations but they also want good value. The airline industry has seen a similar trend, so have supermarkets with the growth of Aldi and Lidl, and clothes retail with companies like Primark.”
The big international chains such as IHG, Hilton and Marriott, which comprise mid-market and luxury brands as well as budget hotels, are also looking to expand.
IHG’s UK associate vice-president for development Andrew Shaw says: “We are pretty consistent. We open 20-odd hotels a year. Most of those are limited service and mid-market. The higher up the scale you go the fewer opportunities there are.”
Hilton vice-president of development for north and west Europe Nick Smart adds: “In the UK we have 29,000 rooms operating and 6,500 being built in 168 hotels in total. The UK is a very important market and we look at opening 10-15 hotels a year here.”
London vs the regions
The UK hotel market has, perhaps unsurprisingly, hitherto been dominated by London. The BDO Hotel Britain 2015 report shows that in 2014 about the same number of rooms were added in the capital (5,240) as in the rest of the country (5,288).
According to research from consultants CBRE, 7,000 new rooms are expected to be added to the London stock in 2016 – the highest number since the Olympics-fuelled surge in 2012.
Hotel room occupancy rates in London stand at 84 per cent, compared with around 70 per cent in the regions, says Owen Pritchard, senior director and head of EMEA development in CBRE’s hotels team.
“Locations like London, Aberdeen, Cambridge, Manchester and York have strong year-round business and leisure demand. Business demand drives Monday to Thursday, leisure Friday to Saturday”
Tony O’Brien, Travelodge
“Macro-economic factors, tourism and leisure have helped cement London’s performance and the pressure on stock has caused developers and operators to supply more rooms there,” he argues.
London and the South-east remain top targets for most hotel chains, but there are indications of increased interest in regional cities. “It has gone from a relatively London-centric environment to the provinces having a strong performance,” Mr Smart says. “For the past three years they have been the stars of the show.”
Of the three new ‘core brand’ Hilton hotels to open in the UK last year, only one was in London – the other two in Bournemouth and Southampton. The Hilton under construction in Leeds will add another regional location to the operator’s portfolio.
Hilton hotel Bournemouth under construction 3
Northern Irish developer-contractor McAleer & Rushe has built around 20,000 hotel rooms in the UK and Ireland and hotel work accounts for half of its contracting division’s turnover, which development director Graham Mitchell estimates will be around £240m in 2016. He says the market recovery that began in London is now “trickling down” to the regions.
“It started with Edinburgh and Manchester and we are now down to the likes of Bristol, Glasgow, Birmingham and Belfast. The interest from hotel brands in Belfast at the moment is phenomenal. That is a good indication of how far the market has come.”
The best locations for hotels are those likely to attract both commercial travellers and holiday-makers throughout the year, Mr O’Brien points out. Proximity to a large university or teaching hospital is also an advantage.
“Locations like London, Aberdeen, Cambridge, Manchester and York have strong year-round business and leisure demand,” he says. “Business demand drives Monday to Thursday, leisure Friday to Saturday. Sunday is always a quiet night across the whole country.”
Models for expansion
The major hotel chains have adopted a variety of different models of ownership and expansion. Some prefer to own their hotels; some take leases from developers; others are ‘asset-light’ and expand through offering management contracts or franchises to owners and owner-operators.
“We own about £4bn of property and that means when times get hard and occupancy dips, we don’t have the rent roll to pay that some other hoteliers have”
Alex Flach, Whitbread
Premier Inn aims to purchase sites. “We are one of the few hoteliers that buy freeholds,” Mr Flach says. “Our new build is around 60 per cent leasehold and 40 per cent freehold. Leasehold is quite often the only option because people won’t sell us the freehold, so we will do deals with a 25-year lease.
“We own about £4bn of property and that means when times get hard and occupancy dips, we don’t have the rent roll to pay that some other hoteliers have. Freehold also gives us the best options for growth.”
Ideally Whitbread looks to buy plots big enough to build a hotel and restaurant, but the company also purchases larger mixed-use sites and then works with a development partner which builds the other uses.
“We are also keen to buy buildings to convert them into Premier Inns,” Mr Flach adds. “We will buy offices and warehouses and we even converted a hospital once.”
By contrast international chains like IHG and Hilton no longer own their UK hotels. “The big change in the last 15 years is that the major American brands have moved to an asset-light model and out of bricks and mortar,” Mr Pritchard says.
“They are effectively big marketing machines. You build a hotel to their specifications and they either operate it for you and brand it, or they just brand it.
“They are big drivers behind development. They are invariably public companies and their share price is a function of their profit, which comes from the fees they generate from hotels, so they always need new hotels coming into the system to keep that model working.”
Hilton London Bankside
Hilton’s Mr Smart says: “Franchising in the hotel space is now driving substantial growth in the UK. Two-thirds of the deals we sign are franchises – the other third are management agreements.”
Consequently, many hotels are developed and owned not by the hotel chains themselves, but by companies with names that guests will never have heard of: Shiva Hotels, Crimson Hotels and Dominvs Hotels are prominent examples. Other investors choose to own the property but employ a management company like Interstate Hotels or BDL Hotels to run the business, frequently under the brand of a well-known franchise.
McAleer & Rushe often employs an alternative approach: building the hotel and retaining the freehold while granting the hotelier a lease.
“Franchising in the hotel space is now driving substantial growth in the UK. Two-thirds of the deals we sign are franchises – the other third are management agreements”
Nick Smart, Hilton
Mr Mitchell says: “Premier Inn, Travelodge or Jury’s Inn or might take a lease from us and we will gain the funding to develop it out and retain it as part of our portfolio. The good thing about the leasehold model is those leases are very attractive to institutional investors and therefore very fundable.”
Travelodge leases its hotels. “Franchising has an advantage for international companies like IHG, Hilton and Accor because they are looking to get volume worldwide and rolling out across multiple countries and regions on a leasehold basis is very difficult, time-consuming and asset-hungry,” Mr O’Brien argues.
“The challenge you have got with that model is funding. After the start of the recession those assets were not fundable for a six or seven-year period. You can count the number of Hiltons and Holiday Inns built in that period on two hands. In that period Travelodge opened literally hundreds of hotels.”
Working with contractors
Hoteliers’ relationships with the development and construction industries vary according to their property ownership structure.
|Top 10 UK hotel chains ranked by rooms|
|Source: HotelAnalyst: UK hotel brand listing 2014
Franchises do not employ contractors directly – that role is usually undertaken by the developer or owner-operator. Technical services agreements to ensure brand standards are maintained are commonplace, however, and some brands get more closely involved with the design and construction process.
Mr Smart likens his role at Hilton to that of the conductor of an orchestra: “We have a host of experts in architecture and design, quantity surveying, safety, operations, procurement and marketing who are there to partner with operating companies and owners to help deliver the product.
“Typically the owner would have their own design team, but we would assign a project manager to interact with that team to ensure it is built to our brand standard and is operationally fit for purpose. We work very closely with them and are very involved from the original concept to delivering the key.”
“You see the true contractor relationship in an environment where there are guests and the contractor has to work with the operations team on site. Then we progress them from there to working on larger projects”
Alex Flach, Whitbread
Whitbread builds many of its own Premier Inns and therefore often deals with contractors directly. Mr Flach says the company works with around 20-30 construction firms around the country, usually regional contractors with a turnover of £20m-£100m.
Typical contract sizes are £1m for a 20-bedroom extension, £4m-£5m for a 60-bed hotel with restaurant, and £6m-£8m for a large 200-bedroom hotel. Occasionally projects may be much bigger: the 400-bed hotel McAleer & Rushe is building for Premier Inn at King’s Cross will cost £25m.
“The majority of our contractors have worked with us for 10-20 years or more, but every year we add a few new ones,” Mr Flach says. “Quite often we introduce new contractors on extension projects.
“You see the true contractor relationship in an environment where there are guests and the contractor has to work with the operations team on site. Then we progress them from there to working on larger projects.”
Travelodge employs an approach midway between that of Premier Inn and the comparatively hands-off franchise model. “The majority of our schemes are developer-led so they employ the contractor,” Mr O’Brien says.
“We take a fairly active role in those circumstances. We view it like a partnership. It is in our interest that the developers build on time, on budget and defect-free, because within five or six days of practical completion we will be open and trading.”
Occasionally Travelodge will act as development manager on a forward-funded scheme where the landowner or investor lacks expertise or appetite for development risk. The company does not have formal framework agreements with contractors, but has a number of longstanding relationships with builders and has been seeking to add to its list of trusted partners in recent months.
“We place an obligation on developers that if they go out to tender they include one or two of our preferred contractors on that list,” Mr O’Brien explains. “They don’t have an obligation to use them, but at least it allows them to do some benchmarking against people we have worked with before and are happy with.”
Not just new build
New construction is not the only opportunity for contractors in the hotel sector.
“Operators will have a cyclical refurbishment plan on something like a five-yearly basis,” says Richard Harris, head of capital work services at consultant JLL. “There are soft, standard and hard refurbishments, ranging from decoration to stripping out the whole room including the bathroom.
“It might be a defensive refurbishment so the hotel doesn’t lose business when a competitor opens nearby, or an aggressive one to reposition the hotel and increase the room rate. Another source of refurbishment work is when an investor buys a hotel or portfolio of hotels and wants to put his brand on it.”
Travelodge Weston super Mare
Robust growth in the sector has seen burgeoning opportunities for both new build and refurbishment over recent years, but will the market run out of steam?
The CBRE’s Mr Pritchard predicts a slight cooling. “There are a lot of rooms coming on in London and regionally and those have to be absorbed,” he says. “If I was a contractor I would think the supply pipeline could possibly be a bit tighter going forward.”
McAleer & Rushe’s Mr Mitchell takes a more bullish view. “People are taking advantage of the under-development that has happened during the recession and they are targeting the markets where there is opportunity. I see that continuing.
“Development programmes take a two or three-year period from initial conception to completion and opening so we are probably mid-cycle in terms of that activity.”
Mr Smart also sees plenty of expansion potential for the Hilton and its ilk. “Our research shows we are still at the beginning of the journey not the end of it. We still have an embarrassingly long list of major markets where we are not there or are under-represented.
“In this Darwinian world there will be losers and maybe an awful lot of stock will come out of the B&B sector and be converted to residential use, but we don’t plan on easing off any time soon.”