Good Morning everyone In today’s presentation, I am going to look at some the issues surrounding hotel development, with a particular focus on London: We’ll look at: The current state of play – where are we now? what new hotel projects have recently opened; forthcoming projects into the capital; as well as Future prospects for London; Different development options; and The hotel development process For those of you who don’t know TRI is, we are specialist advisors to hotel developers, investors and operators in the UK and Europe. All the performance data in this presentation is taken from HotStats, our own database comprising roughly 3,000 branded hotels across Europe. In addition, and particularly relevant to today’s presentation, is the London Hotel Development Log, which tracks the progress of all hotel projects in the capital and which we compile in exclusive partnership with Visit London. So……..CHANGE
Where are we right now? Hopefully through the worst of it and in all likelihood just starting up the incline of recovery, which in itself presents opportunities for hotel development (assuming you can get a banker to give you money)…. The most pressing factor remains the results of May 6th and its consequences on the UK economy. I’ll leave the political punditry for another time but clearly a working majority for any one of the three parties is preferable for economic stability Looking at the more positive signs however, the prospects for the sector are encouraging. A number of transactions last year in London struck a positive note. The Stafford sold for £88million (which TRI advised on), the Park Inn Russell Square, (which attracted a lot of interest) sold for £50.3million and Firmdale Hotels acquired the Ham Yard development site for £34million. This interest in London is not surprising. Demand for hotel accommodation in the capital has held up relatively well during the recession. Overseas visitor numbers remain substantial and real estate values for central London sites remain high. Let’s have a quick look at current hotel performance……. CHANGE
You can see that whilst average room rates in both the London 5-star and wider full-service markets (which also includes 3 and 4 star hotels) has slipped marginally, room occupancy has actually increased in the past 12 months. 79% in the five-star market and 81% in the wider sample. Business mix, which is illustrated in the two graphs below shows that roomnight mix across both samples is pretty consistent. Interestingly, corporate demand for 5 star hotels is notably proportionately higher than the wider sample – clearly there’s still plenty of Goldman Sachs bankers out there…. In the five-star sample, total revenue PAR (that’s including all food and beverage, conference and leisure club revenues) decreased only marginally in the past 12 months to approximately £247 PAR. In the wider London full-service market, it is roughly half that figure at £128 per available room. The demand for hotels in London underlines its profitability, with five-star hotels converting profit from revenue at 44.5% and the wider full-service sample at 47%. Noteworthy is that profitability in London hotels has actually improved during the recession!! Not sure how many other sectors of the market can claim the same thing. In addition to capturing business mix and profitability of hotels in London, HotStats also tracks the average room rates of different hotel sources of demand….
Across all demand sources, London five-star hotels achieve significant sector rate premiums. If you’re on business in London and you want to stay in a five-star hotel it’s going to cost you on average £219. Trade down to a full-service 3/4 star hotel and that cost comes down to £127 per room. If you’re here to see the sights and sounds of London on holiday, the five-star average price is £177 per room compared to £117 at three/four-star hotels. In light of this sort of performance premium, you can start to understand the attractiveness of developing five-star hotels in London relative to three/four star properties, particularly when one considers the high-price of land in the capital. Oftentimes, particularly in established inner London locations, a five-star hotel development can provide the best return on investment as the differences in profitability per available room are disproportionately greater than the differences in costs of development. CHANGE……
The graph details new hotel bedrooms in London since 1989. The market peaked in 2000 when 3,650 new bedrooms opened in the capital. Since then new supply has fluctuated quite substantially although the moving annual total (the dotted blue line on the graph) has generally tracked above the average annual new build rate of approximately 2,000 bedrooms per annum (illustrated by the horizontal single black line) since 1998. Not surprisingly, 2009 was a relatively quiet year with (only!) another 1,868 new bedrooms entering the market. This included the 433-bedroom Grange St Pauls and 307-bedroom Travelodge at Heathrow. 2010 looks more like the bumper years of old, with an additional 3,000 odd (3,042) bedrooms set to open in the city by the end of the year. Another 3,579 bedrooms will come on line in 2011 a further 3,972 bedrooms are confirmed to open during 2012. The Olympics is undoubtedly a factor there although as you will see in a later slide, new hotel projects are spread right across the capital and not just in Stratford. I should point out that this data does not include rooms that could be built but yet to have confirmed completion dates. It is stating the obvious that a number of speculative development schemes have fallen foul of the recession with many more “put on hold” due to the current funding environment.
If we look at the composition of new hotel supply in 2009 and forecast to open in 2010, you’ll see that it is very much concentrated in the budget and 4 and 5 star sectors, which represent more than 3,000 bedrooms over the two years. Five-star hotel supply alone accounts for 38% of total new supply. The most significant recent addition to supply is the 1,021-bedroom Park Plaza hotel at One Westminster Bridge, which had a soft opening in February this year and currently has around 850 bedrooms on line. I understand that the remaining 170 bedrooms will be on line in the next four weeks. Incidentally, the hotel has reportedly broke even in its first full month’s trading. Pretty impressive! The average size of new projects in London during 2009/10 is 160 bedrooms with the Park Plaza One Westminster Bridge being by far the largest. Let’s have a look at some of the other hotels due to open this year …. CHANGE
Due to open in late July, the Hotel Verta at Battersea is a 70-bedroom boutique hotel of exacting standards. Designed by Andrew Onraet of Aeon Architects, the Hotel Verta is the UK’s first heliport integrated hotel. It is Von Essen hotels’ first hotel in the capital and 30 th in the UK. Full food and beverage facilities are provided for in the Patrisey restaurant, which includes an al fresco terrace area overlooking the Thames, and conference facilities include a capacity for up to 200 guests. The hotel will also offer a subterranean spa, with private treatment rooms, relaxation areas and gym facilities. All the usual trappings of a five-star hotel.
Perhaps the most eagerly awaited project in the capital is the re-opening of the now Fairmont-owned Savoy Hotel. Due to re-open originally in May last year the hotel has now been closed since December 2007. Latest reports suggest that the refurbishment has now topped £200 million which together with the £230 million it originally cost to purchase, means that Kingdom Holdings and HBOS have now invested more than £1.6 million per room. Some refurbishments clearly don’t come cheap!! The hotel is now due to re-open in August this year with the latest delay the result of complications with the new sprinkler system. Not surprisingly, once the renovation work had started, the hotel was found to be in a much poorer state than originally envisaged. A case example of a hotel refurbishment that has turned out to be a little more complicated than originally planned and twice the price….
Another high-profile development, particularly given its location is the McAleer & Rushe development in Leicester Square. Incorporated in the scheme is a 192 bedroom W Hotel and 9 private residences, signature spa, fitness facility and full food and beverage facilities. The hotel will be operated under management contract from Starwood Hotels and is due to open in August this year. When it does open it will become Starwood’s 7th hotel in the capital. These hotels are just three examples of projects due to open in 2010. It’s no coincidence that all three are positioned at the top end of the market. If you’ll recall from the earlier slide which examined the composition of additional hotel supply for 2009/2010, 38% of total supply was in the five-star sector. Let’s see if that weighting to full-service operations is set to change going forward… CHANGE..
The short answer is no…things look like they’re going to stay the same. Looking at new hotel supply between now and 2013, hotels in the full-service (4 and 5 star) sectors still dominate, accounting for more than 9,000 additional bedrooms by 2013, approximately 2/3rds of all new supply. Budget hotels comprise roughly the other third, including Travelodge projects in Ealing and Covent Garden plus numerous other un-branded properties. Let’s have a look at a couple of the larger hotel projects due to open in London in the next few years…
Certainly one of the most exciting developments is the much-publicised Shard of Glass development or London Bridge Tower. Designed by Renzo Piano and developed by Sellar Property Group, the Shard is a mixed-use office, hotel and residential scheme. The hotel will occupy the 34 th to 50 th floors of the building, with offices sitting beneath it and private apartments occupying floors 53 to 65. The initial £350m fixed-price contract for the construction of the building, awarded to Mace in November 2007, has increased a couple of times already and latest estimates suggests that the final cost will be in excess of £450 million. I understand that (as of last week) the core is at level 21 but after the pour of the basement slab a week last weekend it is now stabilized to allow the core to progress. Eventually the core will be 72 storeys high and that shell and core is due for completion by the end of 2010. Project managed by Turner and Townsend, the hotel element is due to open sometime during the summer of 2012.
Currently in the planning stages and not due to open until at least 2013 is the Four Seasons hotel at Heron Plaza. Purpose built and incorporating 190 bedrooms, Heron Plaza is the second stage development by Heron International, situated adjacent to Heron Tower, which itself topped out a couple of weeks ago. What’s interesting about this project is that it shows how far the city has come along as a leisure destination and therefore how attractive it is to hotel operators. It used to be that during the week, room occupancies would be near 100% falling to less than half that at weekends. This has since changed with City hotels achieving a much more extensive range of demand sources at average room rates that make projects like this stake up.
You could be fooled to thinking that all hotel development projects are exclusively in the inner London boroughs, the graph shows that that isn’t the case. The TRI London Hotel Development Log tracks the location of each new hotel project in the capital. 4/5 star hotel projects are almost exclusively concentrated in the central London boroughs (Westminster, Camden and the City) with budget and select-service hotels concentrated in outlying boroughs such as Brent, Hillingdon and Hounslow. In Hillingdon (which adjoins Heathrow) an additional 2,300 bedrooms are set to enter the market by 2013. In Hounslow, an additional 722 bedrooms. In Westminster, that figure is 2,200. Notable projects include a second InterContinental Hotel for London at Queen Anne’s Chambers (254 bedrooms – 20-year management contract with Splendid Hotels) and the Crown Estates 350-bedroom five-star hotel on Northumberland Avenue, to be operated by Corinthia Hotels. It should be noted that this data only comprises developments categorised as “under construction” and “probable”. It does not take account of developments that are currently under review or which have no defined completion date (equivalent to an additional 11,747 bedrooms).
So what’s the future for London…. No reason to think that it’s not bright! As I have already highlighted, the capital has held up well during the recent downturn, demand for accommodation remains high and real estate values robust. The TRI view is that by the end of the year, room occupancy in London full-service hotel market will reach 81.8%; increasing marginally to 82.5% next year. We anticipate marginal increases in terms of average room rate, ending the year on £111.51 before pushing up to £114.37 in 2011. This is underpinned by our belief that commercial demand levels (corporate and residential conference demand) will continue to improve affording hoteliers the opportunity to yield higher rated business during 2011 with positive knock-on effects for Rooms RevPAR and total RevPAR. Clearly, London remains a profitable hotel market with Gross Operating Profit (as a % of total revenue) forecast to end 2010 at 46.5% before climbing to 47.5% in 2011. This compares to a previous historical high of 46.9% achieved during 2007/8, the height of the previous good times!!
So when’s the right time to take the plunge? If we relate this question back to the inverse of the illustration I showed you earlier, when I suggested that perhaps we were just starting up the slide of recovery, it would appear that now is the best time. Options are available to you – new build, conversion and refurbishment and the fundamentals of the deal should be improving. That said – access to finance remains an issue. In reality, there’s always opportunities. In each stage of the development life cycle, I have suggested the most attractive options available to potential hotel developers/investors. That is not to say that anyone of the other development options is not appropriate at any other stage of the cycle, but just that there are clearly easier deals to be done at different stages. Funding a new build hotel for example 12 months ago would have been more challenging than 3 years ago when you might have had a whole host of funders queuing up to bite you arm off. So what the development options… CHANGE
I have highlighted four options, each with its own advantages and disadvantages. Certainly the quickest route for development is just to go out and buy a hotel. Works well if you happen to be a Sheikh and you’ve got pots of cash and/or other barriers to entry, such as the lack of suitable sites prohibit you from building your own. Disadvantages include the premium you’ll pay to acquire the hotel and the potentially unknown refurbishment costs. Very few acquired hotels don’t benefit from some sort of investment. New Build – advantages include you can build exactly what the market requires! assuming you understand what that is. You can incorporate the latest technology and if you’re looking to go out to brands to manage the hotel on your behalf, you’ll have a wide range to talk to. Disadvantages centre on finance – new builds are (not surprisingly) capital intensive, particularly at the top-end of the market (4-5 star) and development timescales are also generally longer than other options. Refurbishment – you can tailor the level of refurbishment dependent on your financial position, ie there’s different grades of refurbishment ( light – replacement of finishes/fittings, some minor M&E replacement; medium – well as above but also including some minor structural alterations and re-modelling and; full refurbishment – major structural work, complete overhaul of bedrooms and public areas and installation of new plant equipment). The principal disadvantage is disruption to the existing business. Keep the hotel open and have a headache managing the process or close it down and forego the revenues. Lastly there’s conversion – often an attractive route in key city locations where sites suitable for new build hotels are harder to find. Assuming a high-quality conversion and you don’t want to manage it yourself, you’ll also have access to a wide range of potential brands interested in the completed scheme. Disadvantages, more often than not, lie buried in the fabric of the building; hidden costs are always there.
Assuming you’ve taken the plunge and decided to do a hotel project…what next? Fundamentally, the process has five key stages: concept, feasibility, construction, operations and asset management. The first stage of the process is to determine the concept in terms of product and markets that it will serve. Price, quality, atmosphere of the hotel, management and service are all important. Feasibility seeks to answer some fundamental questions – Is this a good idea? Is there demand and what are the likely financial returns? I will come back to this stage in more detail in a moment Assuming the project has been given the green light, the construction stage represents the physical manifestation of all the hard work that has been put into the planning and organising of the project. It doesn’t end there. Operational planning relates to organising of the hotel to meet the requirements for both the user and the operator, rather than just aesthetic or design themes. In practice, the technical services team of the hotel brand will be directly involved at this stage. Lastly, asset management – this doesn’t just relate to reviewing operating standards and budget negotiation. In today’s market it is as likely to involve safeguarding a hotel’s or group of hotel’s earnings capacity and value through product and service definition, as well as setting of strategic and operational goals and adjusting those goals in light of changes in the operational, debt and investment markets.
If I expand on my area of expertise a little which is feasibility, the key question relates to.. … .is this a good idea…? In practice a feasibility study answers many more questions and its uses are multiple (as you can see from the slide). Right now, more than ever before, funders and operators value the research and conclusions that are drawn out at this stage, and which ultimately help mould the successful project. Not every project can be successful however. We conduct plenty of studies that ultimately do not endorse the study as proposed, but in order to get to that position you must have conducted a rigorous assessment of the project and be doubly sure of your data and supporting research. The methodology of the study and validity of the operating performance data information used in the process is key.
We follow a fairly self-explanatory five-stage methodology with the end result being a ‘bankable document’ that supports the project and funding proposition. If it doesn’t …..why not and what needs to change? When you do commission a feasibility study however make sure that your advisors can tick the following boxes – Do they have the relevant experience? Do they have credibility in the marketplace? Will they add value? and Do they have access to relevant performance data? If they don’t or you have your doubts…come and speak to me. THANKS VERY MUCH. CHANGE….
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From A+ to Fail in Development, Funding, Design and Construction Charles Scudamore Director TRI Hospitality Consulting
The Running Order <ul><li>Current State of Play </li></ul><ul><li>Recent London Hotel Openings </li></ul><ul><li>Projects due to open 2010-2011 </li></ul><ul><li>Future Market Prospects </li></ul><ul><li>Development Options </li></ul><ul><li>The Hotel Development Process </li></ul>
Where are we now? <ul><li>RECOVERY </li></ul><ul><li>Improving fundamentals and returns </li></ul><ul><li>GDP Growth </li></ul><ul><li>Increased international travel </li></ul><ul><li>Increased demand for commercial lettings </li></ul><ul><li>Domestic consumer spend recovery </li></ul><ul><li>GROWTH </li></ul><ul><li>Demand outpaces supply </li></ul><ul><li>Increasing access to capital </li></ul><ul><li>Rapid supply growth </li></ul><ul><li>Hotel earnings grow but values stabilise </li></ul><ul><li>PEAK </li></ul><ul><li>Overbuilding occurs </li></ul><ul><li>Supply starts to exceed demand </li></ul><ul><li>Hotel earnings decelerate and stabilise </li></ul><ul><li>DECLINE </li></ul><ul><li>GDP decline </li></ul><ul><li>Reduction in consumer spend </li></ul><ul><li>Visitor levels decrease </li></ul><ul><li>Corporate spend reduced </li></ul><ul><li>Returns decline </li></ul><ul><li>Funding reduces </li></ul><ul><li>Supply growth slows </li></ul><ul><li>Profit margins contract </li></ul>RECESSIONARY PERIOD
London – Current Performance £157.57 £158.14 Room RevPAR £247.64 £255.02 Total RevPAR 2010 2009 44.5% 43.2% GOP £199.20 £212.09 Average Room Rate 79.1% 74.6% Average Room Occupancy Five-Star London Hotels (12 months to March) £90.85 £93.25 Room RevPAR £128.71 £134.41 Total RevPAR 2010 2009 47.0% 45.9% GOP £111.82 £116.82 Average Room Rate 81.2% 79.8% Average Room Occupancy Full-Service London Hotels (12 months to March)
London Hotel Projects - 2010 <ul><li>London Heliport location (Battersea) </li></ul><ul><li>70 bedrooms (4 suites) </li></ul><ul><li>Subterranean spa Verta </li></ul><ul><li>Extensive conference facilities </li></ul><ul><li>Design, lifestyle-led hotel </li></ul><ul><li>Due to open in Summer 2010 </li></ul>
London Hotel Projects - 2010 <ul><li>Fairmont-owned </li></ul><ul><li>268 bedrooms (58 suites) </li></ul><ul><li>Room rates starting at £350pn </li></ul><ul><li>£200million refurbishment? </li></ul><ul><li>Eco-friendly, energy saving systems </li></ul><ul><li>Re-opening delayed four times </li></ul>
London Hotel Projects - 2010 <ul><li>McAleer & Rushe development </li></ul><ul><li>192 bedrooms (9 suites) </li></ul><ul><li>Due to open in September 2010 </li></ul><ul><li>Mixed-use project (200,000sq ft) </li></ul><ul><li>Landmark location in London </li></ul>
London Hotel Projects - 2011 <ul><li>Mixed-use development (1m sq ft) </li></ul><ul><li>Hotel - 175,000 sq ft (34th-50th floors) </li></ul><ul><li>195 bedrooms </li></ul><ul><li>Initial fixed-price contract of £350m </li></ul><ul><li>Expected to open in Summer 2012 </li></ul>
London Hotel Projects – 2013? <ul><li>City location (Bishopsgate) </li></ul><ul><li>Purpose-built 190 bedroom hotel </li></ul><ul><li>43-floors: conference, leisure and 120 branded residences </li></ul><ul><li>2nd stage of £500 million Heron Tower development </li></ul><ul><li>4th Four Seasons Hotel in the UK </li></ul>
London - Future Prospects 47.5% 46.5% Gross Operating Profit Conversion (as a % of total revenue) £64.99 £60.71 Gross Operating Profit per Available Room (GOPPAR) £136.82 £130.57 Total Revenue per Available Room (TrevPAR) £94.40 £91.27 Room RevPAR £114.37 £111.51 Average Room Rate 82.5% 81.8% Average Room Occupancy 2011 2010YE London Hotels Forecast (2010 year-end and 2011)
When to develop? <ul><li>RECOVERY </li></ul><ul><li>Improving fundamentals and returns </li></ul><ul><li>Hotel earnings and values grow, with stocks appreciating </li></ul><ul><li>New Build </li></ul><ul><li>Conversion </li></ul><ul><li>Refurbishment </li></ul><ul><li>GROWTH </li></ul><ul><li>Demand outpaces supply </li></ul><ul><li>Increasing access to capital </li></ul><ul><li>Rapid supply growth </li></ul><ul><li>Hotel earnings grow but values stabilise </li></ul><ul><li>New Build </li></ul><ul><li>Conversion </li></ul><ul><li>PEAK </li></ul><ul><li>Overbuilding occurs </li></ul><ul><li>Supply starts to outpace demand </li></ul><ul><li>Hotel earnings decelerate and stabilise </li></ul><ul><li>DECLINE </li></ul><ul><li>Returns decline </li></ul><ul><li>Funding reduces </li></ul><ul><li>Supply growth slows </li></ul><ul><li>Profit margins contract </li></ul><ul><li>Acquisition </li></ul><ul><li>Refurbishment </li></ul>
Development Options <ul><li>Acquisition premium </li></ul><ul><li>Unknown redevelopment costs </li></ul><ul><li>Established business </li></ul><ul><li>Relative ease of funding </li></ul><ul><li>Easier to forecast future earnings </li></ul>Acquisition <ul><li>Building/planning restrictions </li></ul><ul><li>Hidden costs – remedial/repair work </li></ul><ul><li>Access to primary locations </li></ul><ul><li>Range of potential hotel operators </li></ul><ul><li>Timely </li></ul>Conversion <ul><li>Disruption to existing business </li></ul><ul><li>Limited re-branding opportunities </li></ul><ul><li>Reflect market needs </li></ul><ul><li>Different grades of refurbishment </li></ul><ul><li>Relatively quick vs. other options </li></ul>Refurbishment <ul><li>Capital requirement </li></ul><ul><li>Availability of land </li></ul><ul><li>Cost of financing </li></ul><ul><li>Timescale of development </li></ul><ul><li>Reflect market needs </li></ul><ul><li>Latest technology/innovation </li></ul><ul><li>New brand requirements </li></ul><ul><li>Range of potential hotel operators </li></ul>New Build Disadvantages Advantages
The Development Process <ul><li>(1) Concept – initial plans and concept drawings. What’s the vision? </li></ul><ul><li>(2) Feasibility – concept needs to be market tested and costed. Requirement of funding. </li></ul><ul><li>(3) Construction – architect, quantity surveyor and builder. </li></ul><ul><li>(4) Operations – compliant with brand standards, operational planning and suitable service levels. </li></ul><ul><li>(5) Asset Management – unit operations, maintenance and repair, maximising performance and profitability. </li></ul>Source: Developing Hospitality Properties and Facilities, J Ransley and H Ingram, 2 nd ed Asset Management Operating Design & Construction Feasibility Concept HOTEL
Feasibility Study - Objectives <ul><li>Provide a brief to the architect </li></ul><ul><li>Present to bankers/equity investor </li></ul><ul><li>Support an application for planning permission </li></ul><ul><li>Attract potential operators </li></ul><ul><li>Provide marketing information </li></ul><ul><li>Identify the market opportunity </li></ul>
Feasibility Study - Methodology <ul><li>Site Appraisal </li></ul><ul><li>(Visibility, Access, Size, Proximity to demand generators) </li></ul><ul><li>2. Market Research </li></ul><ul><li>(Competitive hotels performance, characteristics of demand) </li></ul><ul><li>3. Information Review </li></ul><ul><li>(consensus of opinion, analysis of data) </li></ul><ul><li>4. Financial Analysis </li></ul><ul><li>(Revenues, costs, profit and ROI) </li></ul><ul><li>5. Reporting </li></ul><ul><li>(what’s the conclusion and why?) </li></ul>
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