Hotels in smaller UK markets try harder to stand out
 
Hotels in smaller UK markets try harder to stand out
19 DECEMBER 2019 9:17 AM

With large sums of capital pouring mostly into its superstar cities, the United Kingdom’s smaller markets require hoteliers to be innovative, open to partnerships, aware of sustainable construction techniques and comfortable with risk.

MANCHESTER, England—Hotels and hotel brands remain in rude health in the United Kingdom, although the larger cities are doing by far the best, according to sources.

For hotels to work and prosper in places outside capitals and other larger cities, hoteliers need to be innovative, flexible on revenue streams and willing to work with other real-estate asset classes, speakers said during a panel at the Annual Hotel Conference.

It has been a traumatic few months in the U.K., with a general election, lingering uncertainty over Brexit and volatility in the pound sterling. Despite this, on 5 December, the U.K. currency posted a seven-month high against the U.S. dollar and a 31-month high against the Euro—moves that are linked to opinion polls over the election.

Panelists said hotels in the U.K. are still active, with supply strong, branding still important and differentiation at the core of design and marketing.

During a session titled “Sky rise or bargain buys,” moderator Richard Candey, of Cushman & Wakefield, quoted Paul Slattery, co-founder and director of business consultancy Otus & Co.: “The U.K. is not oversupplied, just under-demolished.”

Much talk during the general election has been on boosting communities throughout the country that are left out in the wake of London and other cities.

“There has always demand for London and Edinburgh, but we’re seeing movement in secondary cities involved in regeneration projects with their councils. Increasingly, councils are involved in more commercial development than hotels, in office, retail,” said Asli Kutlucan, senior partner of development and acquisitions at hotel-management company Cycas Hospitality.

Kutlucan said the hotel industry needs to help re-ignite buildings with other things such as retail and co-working. She also added that Cycas believes it is helping hand by not taking fees on the top line, but only on profitability.

Smaller markets are often at a disadvantage because everyone is fishing in the same pond, said Allan Davidson, managing director of property developer and management firm Bricks Capital Hotels.

“Much stock in primary cities are legacy from the 1970s, and the guest has changed, so there is a gap there that you can develop into well-recognized brands or in which develop a new demand,” he said.

Kutlucan and David Curtis-Brignell, deputy CEO of VisitKent, looked at this idea through the prism of two markets, the town of Slough in Berkshire, just outside of London, and the county of Kent, southeast of London.

“We certainly need more hotels in Kent, and that is why we are here. The data defines our top hotspots, and we use Kent County Council’s inward investment arm to find exact locations,” Curtis-Brignell said.

Kutlucan said she has seen markets such as Slough bounce back because of commercial-government partnerships and feasibility studies.

“We’re seeing local councils becoming more entrepreneurial,” she said. “It’s a two-way street. (The hotel industry has) a responsibility to inform councils what the lay of the land is, not for them just to insist on 5-star hotels, which they all wanted for reasons of vanity.”

More brands please
Panelists said there remain strong reasons to work with brands, but if the main driver is not corporate, attention should be placed on what would be a unique product in any market.

“In the five or six primary (U.K.) cities, the customer knows what they want and know the brands, but in some secondary cities bringing any brand can quite likely increase (revenue per available room),” Davidson said.

John Spencer, partner at design firm and consultancy Arcadis, said brands occupy 70% to 80% of the whole pot in the U.K. He added he favors dual-branded hotels, which help save 30% on back of house, he said.

Curtis-Brignell said he is putting his efforts into business and MICE hotels, which he said have been neglected by many councils and are the lynchpin of leisure business.

“The mix of guests is critical,” he said. “Do guests at any one hotel need to pay more to have that international brand flag flying over the door?”

Kutlucan said discussions on brand standards are always a challenge, and success derives from dialogue and relationships.

“Brands are becoming more open-minded, and American companies are becoming more European-minded,” she said.

“It’s been a long time since we had a robust discussion with brands on brand standards,” Davidson said.

Modular Britain
Modular construction is on the rise, Spencer said.

“The speed to open and quicker yields make (modular) compelling. There are challenges in aesthetics, but with, for example, a CitizenM you would not tell it is modular, and demolition is easier,” he said.

He added, though, that research shows little difference in savings between traditional and modular construction.

“Costs still have not come down as we expected 10 years ago, but it gives you comfort in that you know what you’re getting, and it is faster to get it up and running,” Davidson said.

Spencer said costs are indeed rising.

“Two percent to 4% per annum rises in construction costs. Labor and materials will always rise, but appetite for construction and supply are factors and how developers assess risk. The supply chain is obviously nervous about Brexit,” he said.

“The risk is hard. How will risks transpire, and who owns and will pay for them? Exchange rates always will fall or increase, too, so we can do somethings such as ring-fencing exchange rates,” he added.

Asset classes
Davidson said hoteliers have to make sure any plans are robust and be sure of how they will make a difference to the market.

“Brexit or no-Brexit, the world keeps turning,” he said.

Curtis-Brignell said another political trend is austerity.

“We have seen a £15.7 billion ($20.5 billion) cut in government funds to local authorities, so you have to do it yourself. Tourism offices are closing down all over the place as providing them is not a statutory requirement,” he said.

Candey said that the centrally fixed local authority borrowing rate increased on 9 October by 100 basis points.

“That has an effect on the feasibility to support new schemes,” he said.

Curtis-Brignell said “councils are not only borrowing; they have investments and access to other capital that might be cheaper.”

Sustainability has to be a central concern as the U.K. “has a lot of millennials, and that is every second word they use,” Kutlucan said.

“LED costs were significant, but they have returned to normal, and the replacement cycle is longer. Sustainability is about getting over that hurdle right from groundbreaking. It is a question of being leading edge, not bleeding edge,” Davidson said.

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