In an ideal world, new hotel developments would be able to wash their own faces, commercially speaking. However, that is not always the case at the best of times, which these certainly are not. The era of cheap development finance is over for the foreseeable future and construction costs have gone through the roof.
At the same time, many places up and down the country are desperate to see new hotels developed. After all, they are seen as vital components of sustainable economic development. A town cannot hope to develop its tourism offer if there are insufficient beds, after all, and potential investors are likely to look elsewhere if there is nowhere decent to stay.
For these reason, in recent years some local authorities have started to find ways to support development in a variety of ways and at different degrees of risk to themselves and their residents. Below, we highlight three approaches.
Radisson Blu, Sheffield
In summer 2022, construction topped out on a new Radisson Blu in Sheffield. The hotel, which is expected to open imminently, forms part of Sheffield City Council and developer Queensberry’s Heart of the City development - a key regeneration project for the city - and comprises 154-rooms, as well as a rooftop bar and terrace.
By local standards, the Radisson Blu will be a pretty high end establishment. It is little surprise, therefore, that Mazher Iqbal, executive member for city futures, development, culture and regeneration at Sheffield City Council, is chuffed to see the development coming to fruition. “Radisson Blu is a key part of the Heart of the City jigsaw and I’m positive it will be a huge success,” he says.
However, the project would not have been possible were it not for the council’s intervention. In order to get the hotel off the ground, the council agreed to fund construction directly and to then retain ownership of the hotel, at least for a while. Radisson, meanwhile, agreed to pay the council around £2.5m a year in rent.
“The hotel was considered an important catalyst for Heart of the City and, as a result, the council invested in that direction,” says Marc Finney, head of hotels and resorts consulting at Colliers. “The intention will be at some stage once the hotel is up and running is that they will find a buyer for and recover their capital that way.”
Finney adds that the council shouldn’t have any difficulty finding a buyer. Investors, he says, are comfortable with established assets - it’s the development risk they want to avoid. “There's a healthy market for up and running hotels,” he says.
“One of the reasons the council got involved in the first phase was that getting a new hotel developed in that location was always going to be tough. But once it's up and running, there was always going to be a ready market for it. People didn't want to take the development risk and hotels are not flavour of the month with banks and lending institutions.”
Hampton by Hilton, Stockton-on-Tees
Stockton-on-Tees provides another example of a council prepared to take on development risk. There, the council decided to borrow money in order to fund the construction of a new Hampton by Hilton in the knowledge that the market alone would not deliver. In this case, however, the idea was that the hotel would provide a revenue stream in the long term.
“The private market didn't want to turn around and do it, so they borrowed the money, built it out and now they’ve got the hotel on a management contract that they're only operating themselves,” says Martin LeGrice, a director at JLL. “I think that one works quite well because there's not really much competition.”
The timing of delivery wasn’t great: the hotel had barely been operating for a year when the Covid-19 pandemic struck. However, the council now reports that the hotel is once again trading well and providing a decent revenue stream.
"Generating income was always a big part of the plan - like lots of other councils, we viewed this as both a regeneration project and one which could also bring in funds to offset a small proportion of the cuts we've faced in recent years,” says Bob Cook, leader of Stockton-on-Tees Borough Council.
Hyatt Centric, Edinburgh
It might sound odd that the City of Edinburgh Council would feel the need to get involved in the hotel market. After all, demand for rooms in the Scottish capital is the second highest in the UK after London. However, in some ways the city is a victim of its own success.
Some years ago, the Edinburgh International Conference Centre (EICC) realised that it had a problem. It was successfully attracting major international events, but hotels were increasingly unwilling to accept block bookings from the EICC ahead of conferences and the like due to the fact that they knew, rightly, that their rooms would fill up closer to the time at far higher rates.
“The EICC was finding it really difficult to get hotel rooms, so they were missing out on big events,” says Finney. “The local hotels were selling rooms so expensively that they they were quite happy to not sell it to the conference centre and tie their rooms up two years in advance when they knew they could profit at the last minute.”
As a result, EICC, a wholly owned subsidiary of the council, decided that it wanted greater control in order to retain and enhance its competitive edge. Ultimately, the council decided that it would take a lease on the potential building, effectively providing a guarantee to an international hotel brand. In June 2022, Hyatt Hotels Corporation announced that it had entered a franchise agreement with the EICC for a 350-bedroom Hyatt Centric.
The project should also provide wider benefits due to the council’s involvement. Hospitality skills in Edinburgh are notoriously think on the ground, so it was decided to include a “hotel school” on the site in addition to the hotel. Itself, which it is hoped will help operators in the city and offer opportunities for local people.
“Importantly, the initiative enables us to create a pipeline of talent that speaks to key drivers for enterprise and skills development in the region,” says Audrey Cumberford, principal and CEO at Edinburgh College, which is signed up as the college partner to the hotel school. “[It’s] a new model for industry/education collaboration.”