Hotels in mixed-use developments

Copyright: David Lawson - Property Week June2001

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Tony Carey would never claim to be an expert on hotels. The managing director of St George is a housebuilder through and through; a veteran who has survived decades of wild market swings and come out  the other side with some of the biggest development projects in the UK. But he has suddenly found himself on an accelerated learning curve about the complexities that lie behind star ratings and room rates.

  Hotels feature largely in three major schemes he is planning in central London. They are almost within spitting distance, yet each has been approached differently. Land at Riverside West, Wandsworth, was sold for Oriel to develop its own premises. At Imperial Wharf, Fulham, Carey is in talks with an operator  likely to want a  shell-and-core scheme. In Vauxhall, he will go one step further and build a turnkey scheme for Marriott.

  Housebuilding used to be fairly straightforward: build, sell, move on.  The  swing away from productionline housing on green land to regeneration of large, town-centre sites has changed all that. Planners are keen on mixed uses. Commercial property developers are  happy with that, as they can always bring in housing partners. Firms like St George which do not want to play a junior role have pushed back from the opposite direction by taking  crash courses in property investment.

    But hotels can leave both sides gasping for air as they are a different animal again. Most developers would prefer to ignore them altogether. ‘Assembling town centre sites is an expensive business and returns are higher from other uses like housing and offices,’ says Steve Evans, of Miller Developments. But there is often little choice, as  planners have taken a liking to the jobs generated by hotels.  They also slot in nicely with leisure uses, retailing  and housing  more comfortably than offices.

   Given the hairy economics, it is crucial to choose the right kind of operator, and that has to be done before a brick is laid – sometimes even before a line is made on a drawing board. No-one builds speculatively because demands range so widely. At one extreme a budget chain may want to do its own thing on a freehold site.  At the other end of the spectrum, star-spangled operators each have their own list of requirements such as room sizes, shapes, the proportion of conference space and  external appearance.

  Then there are groups who refuse to dirty their hands – and tie up capital – with bricks and mortar.  They prefer to act only as manager, which  can  leave an investment headache for a developer used to moving on swiftly.  Freedom to choose a type of operator  is often restricted anyway by the site, the development mix and  even the planners. ‘They do not have the legal power to demand particular star ratings but it can be pretty obvious what type of scheme they want,’ says Tom Oakden, vice president of Jones Lang LaSalle Hotels.

   The type of scheme also has an enormous influence. ‘Obviously, the hotel must match the development, ‘ he says. ‘You don’t put a budget hotel in a luxury scheme or a five-star one in a funfair.’  That means a local authority can manipulate choice of operator through the kind of development planners allowed on the rest of the site.  At the Mailbox in Birmingham, Crosby Homes had a major input into choosing an up-market name like Malmaison to complement its luxury homes, according to Chris Rouse of Insignia RE. But he points out that the developer needed little arm-twisting. A classy operator was just the statement a scheme like this needed as a distinct ‘signature’ to help it stand out.

   But just to complicate matters, a site may be suitable for more than one class of occupier. Evans points to a single building, London’s former County Hall,  which has both a £200-a-night Marriott and a £70-a-night Travel Inn under the same roof. It all depends on local markets. In Birmingham, soaring demand for rooms in the city centre meant the Mailbox developers bought a piece of less prominent neighbouring land for a Day’s  hotel.

  This shows how much the business has shifted over the last decade. At one time, budget hotels were stuck out on motorways and business parks. A Travel Lodge would be tacked onto a Happy Eater or Little Chef and no value assigned to the site, says Rouse. Today, chains are scrambling to pay the equivalent of £15,000 to £17,000 a room for inner city space.

  This comes from a combination of customer pressure and development economics.  Business travellers are increasingly seeking better value. ‘They only need a bed because other facilities like restaurants are common in town centres,’ says Evans. This suites inner-city developers. Ground floor shopping makes the juicy returns but high-density regeneration schemes, particularly those involving existing buildings, are left with the problem of what to do with upper floors. Budget hotels, with a narrow ground-floor entrance and limited catering facilities, are one solution. They can also be easier to bundle into packages for investors than residential.

   This complexity means developers spend enormous amounts of time on research and preparation. ‘You have to rely on the skill of experts,’ says Carey, who brought in specialist David McLean for the Vauxhall scheme.  Oriel was chosen at Wandsworth only after testing the market to discover the site appealed to three-star operators.

  Agents have a pretty good idea  who will show interest as they know the gaps in operators’ networks, says Oakden. But timing can be crucial. Operators need an approved outline plan before they will show interest yet this cannot be so far down the line that they cannot influence designs.

  Deal structures are also critical, adds  Jonathan Hubbard of Weatherall Green & Smith.  Developers must plan exit routes, as they are rarely in for the long term, and  that can pre-determine potential operators. Some will want a freehold site, which may not be possible where uses are mixed too closely. Others prefer long leases, which requires confidence to take on an investment for some time, as pre-funding is still relatively rare. St George, for instance, has the financial strength to hold the Marriott at Vauxhall as an investment

   Hotels have traditionally been taken on by private investors but institutions are starting to come into the market, raising the possibility that schemes can be packaged for their  investment potential. CGNU and Standard Life have dabbled, while the Hilton has helped raise the sector’s  profile by selling a £300m portfolio to Bank of Scotland. Moves to launch a hotel section in the Investment Property Databank Index this year should give other funds more confidence to move in.

  Carey points out that developers will have to become more flexible as regeneration takes over as the prime source of business. ‘This was not out first level of expertise but we have gradually found our way through, he says. One major lesson is that mixed use requires a lot more research and preparation to be viable. ‘You have to get everyone on your side early: planners, potential occupiers and investors, ‘ he says.  ‘Only by getting early feedback into designs can they work successfully