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Just nine months ago, it looked likely that the UK hotels market would be on its knees for a while. There were predictions that revenue per available room (鈥渞evpar鈥� in hospitality-speak) would fall by as much as 45% over the year, and everyone thought that commissioning new construction work would therefore be the last thing on operators鈥� minds. 鈥淛anuary was a scary time,鈥� says David Bailey, deputy managing director of TRI Hospitality Consulting. 鈥淲e thought there would be a double-digit revpar drop for sure.鈥�

But as we approach the end of 2009, things are looking quite different. The slump in the value of the pound last year made the UK an attractive destination, which meant that occupancy levels held up well and the fall in revpar turned out to be 9%. As a result, hotel operators鈥� confidence has been rising, and developers and investors are looking at a healthier market than anyone dared hope for, and they are looking to build more capacity while land and labour are cheap. Barbour ABI鈥檚 statistics show that 360 hotels are scheduled to begin in 2012 and market research group Mintel has forecast that by 2013 the UK hotel market will be worth 拢13bn, considerably higher than its pre-slump peak of 拢11.2bn in 2007.

Construction companies confirm these statistics. 鈥淭here is an appetite for prime location hotels that wasn鈥檛 there six months ago,鈥� says Martin Smout, chairman and chief executive of GB 好色先生TV Solutions, a contractor specialising in hotels and leisure. Paul Nash, head of hotels and leisure at Cyril Sweett, says clients that have secured planning consent for offices are asking if they can build a hotel scheme instead. 鈥淚鈥檓 working on one now for a major developer 鈥� a 250-bed hotel in central London where an office was going to go,鈥� he says. 鈥淐lients are not seeing the need for offices over the next five or 10 years but increasingly recognise there is demand for good hotels in good locations.鈥�

The attractiveness of the sector is increased by its immunity to public spending cuts and the prospect of a rapid growth in demand. However, a more detailed look at the sector shows that the picture is more complex than the headline stats suggest, and firms wanting to break into the market have to look at the way the hospitality industry is structured, and understand how its market is shaping up.

Supply and demand

What is, in part, driving the demand is that the UK, and London in particular, is becoming popular with private and foreign investors in the hotel industry, and they are supplying the capital that the banks are not. An STR Global Construction Pipeline Report, released in September, identifies London as Europe鈥檚 second most active city, after Berlin, for hotel development, with 3,768 rooms in the pipeline and occupancy levels resilient at 79%. The report also shows that UK room rates have been stable compared with the rest of the world, falling by just 1% from the second to the third quarter of 2009.

All of this has been instrumental in attracting overseas investment. 鈥淭here are hotel operators, mainly from Asia, Russia and the US who are desperate for flagship hotels here,鈥� says a senior industry source. 鈥淭hey want properties in Edinburgh, Manchester and Leeds, but London is the mecca. To name just a few: Peninsula, Banyan Tree and Oberoi are luxury operators with no UK flagships yet. I predict they will be here in droves now land and construction costs are down.鈥� A sign of just how hot London is at the moment came in October when the unfinished Silken Hotel was put up for sale and there were 150 expressions of interest in the Foster + Partners-designed scheme.

The more discouraging news for suppliers is that there probably won鈥檛 be a torrent of work, and established firms are in a strong position to win it. TRI Hospitality鈥檚 Bailey says: 鈥淭here won鈥檛 be an opening of the floodgates. It鈥檚 about knowing where to look.鈥�

Types of hotel

It is possible to target the work based on location, but brands tend to be global. Cyril Sweett鈥檚 Nash says: 鈥淭hese days many brands are owned by larger operators. When a firm signs up to work with a hotel group in the UK, they could end up with jobs wherever the operator has properties.鈥� It seems the trick is to hunt out types of hotel that have the healthiest looking pipelines. At the moment, the budget sector is looking like the best bet. Tri Hospitality鈥檚 Bailey says: 鈥淧eople aren鈥檛 suddenly going to switch back to expensive hotels when the economy starts to improve. The sector is well established.鈥� He adds that there were about 936,000 more budget room nights sold in 2008 than in 2007.

Alex Flach is construction director for Whitbread, the firm that delivers Premier Inn hotels, which with a 拢1.3bn turnover is the most successful of the budget chains. Flach says the future is looking bright: 鈥淭his year we delivered 1,620 rooms and next year we plan 2,000 more. Last Saturday our 41,000 rooms were 80% full, which is unheard of so close to Christmas.鈥� He adds that on top of the new build, Premier Inn refurbished 8,000 rooms in 2009, a figure that will leap to 13,000 in 2010, providing a swath of work for fit-out firms. New-build projects also look set to spring into action. Flach says the group has built up a pipeline of 10,000 rooms, 2,000 of which have planning permission and are ready to go.

And Whitbread is more than prepared to keep on investing. 鈥淲e鈥檙e allocating about 拢40m to construction work and for buying up land up until around 2013,鈥� says Flach, adding that the group is always on the look out for new contractors and consultants: 鈥淲e鈥檙e interested in anyone who can offer us new ideas and strategies or who has experience in modular construction.鈥�

Whitebread鈥檚 latest initiatives are a pledge to cut carbon emission 26% by 2020 and plans to build an eco hotel in Burgess Hill, West Sussex.

We have invested 拢200m for the construction of the Yotel brand so far and 拢30m of that is still up for grabs over the next two years

Gerard Greene, Yotel

Premier Inn is not alone. On top of a 拢77m expansion plan up to 2012, Travelodge announced last month that it will invest 拢47m next year on 10 hotels in cities including London, Edinburgh and Manchester. Paul Harvey, the firm鈥檚 managing director for development, says:

鈥淲e鈥檝e signed more hotel deals this year than ever before.鈥�

The other group worth keeping an eye on is Yotel. The brand was launched in 2007 and specialises in airport and city-centre properties made up of cabins. The cabins don鈥檛 require windows, which means they have 50-60% more rooms available so the land cost per room is relatively low. Offering timeslots as short as four hours, Yotel boasts 200% occupancy rates at times 鈥� the highest in the UK. Gerard Greene, its chief executive, says the group is always active: 鈥淭enders have just gone out for expansion on two sites at Gatwick and Heathrow and the ultimate goal is to be in every major UK airport and city. We have invested 拢200m in Yotel construction so far and 拢30m of that is still up for grabs over the next two years.鈥�

Greene declines to put a figure on the value of the development pipeline but does say: 鈥淲e are securing debt for expansion in a market where nobody is securing debt.鈥� He adds that Yotel has not committed to any construction firms for upcoming projects.

Location, location, location

There are also positive signs at the luxury end of the market. Indeed, a Pricewaterhouse Coopers report on UK hotels in 2009 commented: 鈥淭here is still plenty of stylish new hotels planned or recently opened and more could be likely.鈥�

Securing funding remains the biggest problem. The key for success is the old chestnut: a great location. Smout of GB 好色先生TV Solutions says his company is working on two upmarket schemes, the Great Northern Hotel at King鈥檚 Cross and a 拢30m luxury hotel in the centre of Leeds. 鈥淟ocations need to be first rate to secure funding: in city centres or near sports venues, arenas or universities.鈥�

He adds that developers and operators are increasingly having to turn to sources other than banks, which are prepared to provide around 30% of the funds compared with 60% or 70% during the boom: 鈥淵ou need an equity partner or be part of an equity club. And there is interest from foreign investors.鈥�

With funding still a challenge, another major area of work is refurbishment. But this, too, has not been without problems. There were reports that refurbishment programmes run by operators including the InterContinental Hotels Group and Hilton were going on hold, as hotels became reluctant to put whole floors out of action. For months, hotel experts have been urging operators to resist this strategy. 鈥淐onstruction costs are low now,鈥� says Chris Rouse, director of CB Richard Ellis. 鈥淣ot only is it a great time to be doing this sort of work, it鈥檚 vital. Hotels left with out-of-date rooms when the upswing comes will suffer. By then it will be too late.鈥�

It looks as though operators are listening. 鈥淩efurbs at the top end are going strong again,鈥� says Rouse. 鈥淭he Savoy is the obvious example.鈥� And despite earlier reports of a slowdown, the InterContinental group is rolling out a multimillion-pound programme worldwide and has invested 拢600m in updating 3,200 Holiday Inns.

The danger zone

The middle of the hotel market, the three and four-star independents, has long been considered a dangerous place to be. These are the properties that have suffered the most in the recession. The problem is that they cannot compete with the big brands, do not have the niche appeal of high-end boutiques and are increasingly abandoned for budget brands as people cut costs and plump for a well-known name.

But while it may be too late for some of these hotels, there are opportunities for the construction industry as a result of their demise. 鈥淢any of these independent properties will be bought up by chains,鈥� says Jonathan Hubbard, managing director of Jones Lang La Salle鈥檚 hotel division. 鈥淲e will see a lot of this happening next year. Once they are bought, the new owners will need people to come in to do the rebranding and renovation work.鈥� And that鈥檚 where you come in 鈥�