Hotels which were unlikely to remain viable due to the pandemic should be allowed to redevelop, potentially into residential, through a relaxation of the costly planning process in the UK, said Colliers International.
The comments came as one observer said that hotels were likely to fall foul of their financial covenants as a result of lockdown.
Paul Barrasford, director, hotels agency, Colliers International, said: “A few hotel owners are faced with the conundrum of wanting to reopen but knowing that unless something close to previous revenue is achievable, then there are significant risks in doing so. Unable to wait for a return to re-pandemic operating conditions, looking at redevelopment options may be a far more realistic and rewarding route for a few hotel owners to optimise the equity from their investment. A relaxation of planning restrictions could be just what they need and would boost the economy and provide much needed housing.
“Historically, most owners seeking a change of use have to prove it was not unviable as a hotel. This often required marketing a hotel for sale for an extended period of time, sometimes as long as 12-months. With acute cashflow pressures put upon hotels by Coronavirus, it would be greatly welcomed to see planning authorities relax some of the legislation around redevelopment of hotels for alternative use; not least the time taken to prove any unviability.
“We are expecting many hotels to bounce back from this pandemic stronger and reinvigorated, in particular, the UK ‘staycation’ market which is due to rebound sooner and stronger than the rest of the sector, and in parts of Europe where the outbreak was considered under greater control than the UK. We anticipate a rebound in investor sentiment will follow a similar trajectory to that of consumers and as the country gets moving again, so will the market for hotels.
“However, until a vaccine has been found and the spread of the virus has abated, there are many changes a hotelier will need to implement to abide with social distancing measures. Hotels which may theoretically work well under social distancing guidelines (e.g. limited service hotels) will face the added challenge of significant changes to consumer behaviour. Not least attitudes to travel and socialising in hotels, but also reduced spending power will reduce some leisure and corporate clientele spend as a result of the economic downturn.
“Colliers has sold plenty of hotels to residential developers in the past and is continually asked about hotels that might suit conversion. The downside for hotel owners is that such interest is normally subject to a lengthy planning process which can jeopardise the trading performance i.e. their guest clientele become concerned about the long-term existence of the hotel and bookings diminish. The pandemic has already caused that change in consumer behaviour so now would seem an opportune time for some hoteliers to consider whether redevelopment to alternative use is a better and more profitable strategy than reopening as a loss-making hotel; particularly whilst they remain closed for business.”
Anthony Aitken, head of planning, Colliers International added: “ Extending the permitted development rights, even if only for a temporary period of three years or thereabouts, to allow for hotels (Use Class C1) to be converted to Dwelling Houses (Use Class C3) has inherent planning logic.
“It is worth remembering that many hotels were originally built as residential accommodation and all that would be occurring in many instances is restoring these properties back to their original planning use. We have a housing crisis, with a chronic lack of housing supply, which is particularly acute is the south east and particularly in London and anything that can augment this acute shortage should be grasped, to also assist the wider economy recover.”
The comments came as James Stripe, an associate in Fieldfisher's banking team, said that hotel closures as a result of lockdown meant that revenue streams from both hotel guests and conference and event hosting would have been “drastically reduced and, from a financing perspective, will mean that hotel owners and operators who have previously sought financing in connection with the business from lenders will fall foul of the financial covenants set out in the financing documents”.
He added: “At the very least, this will require borrowers to 'come to the table' and begin discussions with their lenders about the best route forwards. Different lenders have taken different approaches in relation to Covid-related breaches, certain lenders have provided blanket covenant waivers and others are assessing on a case by case basis.
“The banks in particular are coming under pressure from the government not to default loans where there have been breaches solely as a result of Covid measures imposed on venue owners and operators. The best course of action for any borrower is therefore to open a dialogue with their lender to ascertain what flexibility there is and to establish a solution that will work for both parties.”
Insight: The under-demolished mid-market has been a topic of some debate since the term was coined back in the mists of IHIF lore and there were many trends expected to raze them. The rise of branding, the rise of Airbnb, the cost of using the OTAs. But they largely continued, helped by pretend and extend, throwing their lot in with Oyo, generally lingering around the last-chance saloon. Whitbread is one group hoping to pick up independents, but for rebranding.
Will the pandemic be the end of these should-have-been culled? It seems likely, if only because of the cost of reopening. It is hard to close a hotel - those failing sites in portfolios are often propped up by their more successful stable mates - but once closed, the job has been done.
Hard decisions, but good news for the rest of the market, where the sector could see a rise in quality. The only area where a potential boost could be seen is if the UK sticks with its quarantine plan and its residents stay at home. Demand could be high and rates perky. A stay of execution.