Knight Frank hosted its annual hotels roundtable at its Baker Street offices, with a panel of experts discussing the key themes affecting the sector. CoStar News moderated a lively debate on topics including what the Chancellor should introduce in the upcoming Budget, and what the challenges are for operators and investors.
The attendees were: Shaun Roy, head of hotels, Knight Frank; Alex Bradbeer, partner, specialising in hotel valuations, Knight Frank; Francesca Scott, executive support, hotels team, Knight Frank; Paul Norman, managing editor, Europe, CoStar News; Cristina Balekjian, director of hospitality analytics, CoStar; Vedrana Bilanovic Riley, founder and chief executive, Ciel Capital; Zain Kajani, director, JMK; Bob Silk, relationship director, Barclays Bank; Louise Gillon, director, head of hotels, Puma; Robert Alley, brand development director, Best Western; Claire Hughes, head of the London real estate practice, Pinsent Masons; Frazer Callingham, managing director, Starboard; Oliver Powell, director, Coutts.
PN: There's a budget looming. It has been curiously delayed, which is obviously causing issues for business. What are the implications are for the hotel sector in terms of what you have been hearing on what is expected? And what could the government do that would help the sector?
Bob Silk, relationship director at Barclays: Just to be clear, these are my personal views, not those of Barclays Bank! Firstly they could reduce VAT, and secondly the could reverse the changes in Employers’ [national insurance contributions]. I think that this is also a widely-held view across the sector.
PN: Does it hold you back, waiting for the Budget now it has been delayed?
BS: Personally or corporately?
SR: I’d be interested in both; does it stop you spending?
BS: So, just the other week on a Tuesday evening, my youngest son and I, and one of his friends, we went out for dinner in our local village pub. Three of us. It was £150 for two courses and one drink each. That felt expensive.
Corporately, as far as Barclays Bank is concerned, we are busy; my diary is full at the moment. That said, merger and acquisitions transactions are thin on the ground, due to a persistent gap between bid and ask.
PN: OK, you've painted a clear picture for everyone to talk about as well there. What about the government, the budget and Best Western?
RA: I look after strategy, business development and hotel development, hotel ownership, the relationship stuff for Best Western. We all look at the same things through different lenses, don't we?
For us, we are very sensitive to our owners. This is the story we hear all the time. All the comms channels that we have are going to dinner with about 11 or 12 of our owners and those are purely listening events to talk about what they're feeling. We're a really hopeful, friendly kind of brand and we're not so onerous towards our owners and they're having a really difficult time and that's what I hear consistently.
Similar to Bob’s point, some of the things that they would like to be doing are under, sort of, watch because there's a stick or twist situation, isn't there? You know, do you spend money now when it still sometimes feels a little bit expensive? The squeezed middle of the [profit and loss] account for owners is they're a having really difficult time. So, we're very sensitive to that. We work our hardest to pour some business in, we do a pretty good job. I wouldn't say from that side of things we’ve gone through much difficulty. Business is pretty good on the outside, but it's everything in the middle for the hotel owners which has been tough.
So, in terms of the Budget: obviously, the minimum wage always affects the hotels and we absolutely expect that to change, or go up a little bit for next April. Business rates is the most obvious issue. I mean there will be elements of taxation elsewhere, as Bob said. So, they are looking at every opportunity they can, but I think the big business concern is how on earth they approach long-term strategy with what seems to be coming in terms of business rates.
PN: And they'll announce the percentages for the revaluation on Budget day, as well.
RA: I believe so. I'm certainly not the expert on this but obviously ever since 2020, we've seen various shapes or forms of business rate relief. Hotels, obviously, saw that particularly through COVID. But I think long term, a reset is what everyone would like to have, and then we'd like to talk about VAT, obviously, in the hospitality industry. We'd like to see this change.
Again, it's not really clear that it's within the government's gift to do a huge amount to help. Somehow a £20 billion black hole has become £50 billion in a year. So, I'm not sure where the good news will come from on Budget day.
But, we're obviously close with UK hospitality; they will always talk about business rates and VAT relief to try and stimulate growth, talk about growth and the government has talked about growth a lot. Whether they enable some of that through some VAT change, we would love to see that.
PN: But you're not hopeful?
RA: We’ll see if it will actually happen.
CH: I think for us, not having transactional activity is a bit of a killer and probably over the last number of years the focus has been on everything other than transactional activity. There have been some transactions, but they have been big ticket sizes and small in number.
And I think, looking at repurposing, looking at ESG, looking at fire, cladding and health and safety, thinking about the implications of what's happening out there to make projects viable, all of that has been an ongoing discussion helping advance client strategy. And the feeling we got, actually back in the Spring, was that things weren't going to come good in the Autumn and it was going to be next year. But actually, fantastically, we're really busy now and I think there's a good uptick on transactions. That is fuelled, I suggest, because everyone feels it can't get any worse, and so they're just pushing ahead and, thankfully, there's quite a lot of optimism, which I'm quite surprised about in view of the fact that there's still much negative market spin.
PN: So that's in terms of people buying hotels, developing them?
CH: Development less so, but transactions yes. And pricing is the problem because of the uncertainty in the marketplace and so the equity hasn’t been churned. There has been a lot of debt being made available and quite a few of our clients have been making money out of lending, and in all sorts of different ways, not only standard senior loans, but there's mezzanine, bridging et cetera. And there's a short-term gain there, but actually we're now seeing equity being churned a bit more. So that's the change.
I think development still remains a bit of a challenge. Just because of the labour, materials and the uncertain costs of all of that, plus we’ve talked about the unpredictable world of taxes. And all of that fuels a bit of uncertainty. And, actually, the cost of developing as opposed to refurbishing and staying put… it's a no-brainer. So, I think development has still got a while to go. I think the supply-demand situation has to reach a certain level before it starts getting to a point where it's viable.
VBR: To add to your point, I think the biggest challenge is not so much the development costs, because we’ve all come to terms with materials and construction costs, it's the asset valuations post-works. If you're developing a project these days and you've got a guaranteed exit, say you’ve got a Premier Inn or a Lamington [Group] lease or something like that, the exit price for that lease, or the value of that lease, is nowhere near where it used to be. I think that's where the problem lies. Pension funds and institutional investors used to pay sub-4% for a decent lease in central London. Today, we're talking 5-6%. A similar shift has happened for franchised/managed hotels. With the lower valuations of exit prices, how can you afford to build? Therefore, in my opinion, it's the exit values of the assets that have been slowing down developments.
SR: In my opinion, that all comes back to the gilt price, right? So, everyone is looking at what else they can do with their money and the number of times I have people say “why would I buy that at 5%, when I can go and stick my money in HSBC Monaco or, you know, buy a 30-year gilt?”. It makes the job for an agent a little bit harder.
VBR: It’s tough. We've been trying to sell one of our assets and we’ve had it on the market for coming up to over six months now, and it's in Edinburgh. It's in a great location, it’s a Marriott franchise. We were in negotiation with an initial buyer and after we issued heads of terms, they back-tracked on timings to complete, “oh, I'm not going to be able to do it before the end of the year”. We were then in June. If delays continue, we may just end up keeping the asset, dropping the sale and extending it ourselves.
SR: Or change your agent, it sounds like.
VBR: In the Budget, I'm worried about taxation. We've lost so many people already. As you can hear from the accent, I’m French-Croatian, and I've been in the UK coming up to 20 years, believe it or not. And I married a Brit, and I adore London, it's my favourite city on the entire planet and that's why I choose to live here. I have lived in Paris, in Germany, I've lived all over the place. I think the reason why I chose London is because it's halfway, it's not the States, but it's not Europe. And it's always been this happy medium for all intents and purposes where you don't have social taxes in the European sense but there is still some protection. You don't come to the UK because you want to live on benefits, because this is not the country for that.
In short, I'm really worried about the potential consequences of additional taxation. There has already been an effect, the highest tax contributors have been leaving the country – we are witnessing it firsthand, because our daughter goes to French international school. We've lost so many kids already. Last year, they had just over 1,000 pupils, they’re down to 850 – the school goes from preschool all the way through to A levels, and has 3 campuses in central London. It’s lost 150 pupils, in one year. This is the effect of the VAT as well as that is families leaving the country. We're yet to see the full effect of what's happening right now, and the Budget is yet to come.
PN: And Shaun? The same question on budget.
SR: I wouldn't want to get into specifics on what is relatively political. All I would want from the budget is certainty. I would agree that a lot of it is priced in, but people just want the facts. People can deal with facts, they can make decision with facts. What they can't do is…every day, you pick up a paper or you read your phone and there is a new potential tax being trialled. You know, they put it out there, they see how it goes down. See if everyone is totally allergic to it or a little bit allergic to it, and then it goes back in and that's their kind of road testing. I just want decisions to be made.
Putting it back a month or a month-and-a-half was very, I think, lily-livered, that really annoyed me. Because what they were doing, they were just delaying and hoping something might turn up and that's bad leadership.
So, what I want to stimulate the market is certainty. So whatever policies they're going to put in place, let's know them, put them in place, get on with it. Everyone can price it in, and we get on with our new reality, whatever that will be.
I would agree there is, you know, a number of people leaving the UK. I think that's quite a self-inflicted policy from the UK. I'm not originally from the UK myself, wasn’t born or brought up here. I’ve probably got options to leave, but I don't want to leave. I want to stay here. This is my home, I’m married, I've got kids here et cetera.
But the international super-wealthy, who are the ones that are creating a lot of the wealth in this country, whether we like that or not, are the ones that are way more fleet of foot. They can get on the private jets and go to Italy or Portugal or Abu Dhabi or Monaco or wherever. It might be unpleasant and not the reality that we want, but it is the bare facts.
So that's what I would want. Can you organise that, please Paul?
PN: Yes, I’ll sort that out.
LG: So, we're currently prioritising development finance and value-add opportunities in the market where construction costs remain elevated. I think people have stomached that cost now. They understand what it is, and we are seeing investors wanting to power forward where delaying projects can be more costly than proceeding. So, it still makes sense, as Vedrana touched upon, the end value, it is an issue. Obviously a lot of investors are not doing it for short-term profits, they're doing it for long-term gains. It's become very expensive to own property with interest rates the way they are – it’s very expensive to employ people, and I think those two together are having an impact on activity in our market. Everybody's hoping for interest rate cuts.
I think we're less hopeful seeing those now in the short term. And I've noticed that investors are very much focusing on technology in their hotels for staffing efficiencies; where either they can't find staff, or they just simply can't afford to hire the number of staff that they need. So, we'll see very much in the new developments, focuses on self-check-in and the like to really keep those costs down.
I think that raises broader concerns around the reduction in entry-level hospitality roles – once a key employment path for younger generations. My teenage niece recently struggled to find seasonal work, where previous generations would commonly have found roles in reception or food service, and they're just not there now. There’s a risk that tech-led assets could potentially limit guest experience and there will need to be a balance.
PN: It’s a real problem.
FC: I think probably I am one of the few operators around the table, we have hotels under most brands. Shaun said he wanted certainty. I think ours is probably fairness, because a lot of what came through last year wasn't fair. It came out of nowhere but it actually heavily impacted, as Louise says, the short-term workers. The most expensive workers we then employed became the people that work between 8 and 15 hours a week. So, you had to not give them the hours and you had to give them to people working over 20, and it was as simple as that. So that's why there's less jobs going. But in terms of fairness, minimum wage went up by more than twice inflation, which was completely unexpected. So, if there is going to be a change, it's got to be at or close to where we hope it's going to be.
That's obviously then impacting inflation, which then leads on to interest rates. We've been doing a lot of work with UK hospitality on their programme on, you know, what are the fair rates protecting it, and then on VAT. We've met probably half a dozen so of our MPs around our estate. The most interesting part is, one we met the other day, we asked “since coming into Parliament, what's your biggest eye opener? What have you learned?” And they said: "We don't know what's going to happen until you know what's going to happen." They said it's very much out with Parliament that the top table know what's going on and then after that, you find out at the same time. Their gut feels are there's probably going to be a move on VAT.
PN: So this was a Labour MP?
FC: It was an MP. They believe that there's going to be a move on VAT and the problem in the hospitality industry is VAT isn't a straightforward move for us. We can't just take that and add it back to the price and pass the price back on to the customer, it doesn't work that way. So, it's as simple as that. We have our agreed rates and the customer will pay what they are, whether that's there or not. So, we will have to swallow it, or parts of it.
PN: One thing that's been floated is that the government will do something to help big supermarkets with business rates, and large retailers. How close is the government to the hotel and hospitality industry? Do you feel like they're listening?
FC: On rates, I think we're nervous. Because, if they do change it from the current rateable value to something profit based or [earnings before interest, taxes, debt and amortisation] factored… at Annual Hotels Conference [recently held in Manchester], funnily enough, we spoke to somebody that had been speaking to the government on how they're going to change rateable values. But they were talking to some of the larger operators, so Premier Inns, Travelodges, that don't bear some of the franchise costs. So, their middle line and bottom line numbers are going to look a lot better.
VBR: 10%, right?
FC: Yeah, I think that's our primary ask, and that is a concern, because we also don't pass the whole thing on, as well. I mean a lot of our suppliers don't charge us VAT, so we are, in effect, a customer to VAT in the same way that our customers are. And funnily enough, some of the government groups, government rates, are some of the biggest culprits of not moving with inflation. We were recently made aware of a Government [requests for proposals] that hadn't had a change in rate for nearly 11 years.
SR: Wow.
OP: As a bank, we like certainty. We're still scarred by the Liz Truss mini-budget a few years ago. So, any big, big surprises, obviously, can affect the markets. I guess there is a fear Labour are still relatively early in their tenure, so if they want to get any big hits out of the way, anything painful, it's probably going to be sooner rather than later. They don’t want to do anything negative near an election.
And then, I guess, one thing that affects our clients quite a lot is inheritance tax, especially hotel owners looking to pass on to the next generation where they've got, you know, a substantial illiquid asset. If you're passing that on and there's a £30 million to £40 million asset, there's suddenly a £10 million tax bill to pass onto your children. Then where are they going to find that £10 million, when there’s already debt on it. It may be good for the [private equity] houses, and they might come in and snap those up because they can't afford to keep them in the family anymore. So that's something that our clients are certainly a bit worried about.
PN: Is that holding back transactions?
OP: It might increase transactions.
SR: We are definitely seeing that. We're seeing more family owned, not just hotels, other sectors too, who say “actually, we want to get ahead of tax changes and just get on with things”. You know, if you're going to do that, you sell your family business, be it student, care homes or whatever sectors, and move overseas and take your dividend when you're overseas in a different tax jurisdiction. I mean it's just a double taxation ludicrous[ness] from the UK, in my opinion.
AB: In terms of the upcoming budget, the sector has obviously been buffeted by several challenges over the past year. As it gets over the peak of one, attention turns to the next thing that's going to be hit. The payroll cost increases from six months ago have had a big impact on bottom line.
The one that I think is probably most pertinent in my mind, in terms of its impact, is business rates, which is linked to the Budget. There is a scheduled business rates revaluation coming up in April 2026 and the rateable values for hotels are determined, slightly rudimentarily, by their trading performance from two years previously. So, looking back to the 2023 revaluation, that was based on trading as at April 2021. This was in the heart of the COVID-19 pandemic, and the sector saw around a 30% saving on average from business rates.
Unfortunately, now in 2026, they're going to be based on 2024 trading. It's speculative in terms of exactly what's going to happen, but our view is that you are likely to see fairly substantial increases in the rateable values of hotels.
The other part of the equation is the rates multiplier. And in the Budget last year, it was announced there's going to be a level of reform, so, we're likely to see a stepped multiplier for retail, hospitality and leisure properties. Assets with rateable values of below £50,000, which doesn't really affect too many hotels, will have one multiplier, with another multiplier for rateable values up from £50,000 to £500,000, which a lot of hotels will fall into. This is supposedly going to be a reduced multiplier, lower than the standard multiplier, but then for properties with a rateable value of £500,000 and above, which could impact the larger London luxury hotels, the multiplier is expected to be increased, which I believe is designed to cover a lot of logistics warehouses, where online retailers are making big profits.
So, in addition to the rateable values, which are likely to go up, and how the government looks at what they do with business rates multipliers, there is also the possibility of changes to transitional relief, and this may all depend on whether they listen to the industry and understand what's happened to the sector over the last few years and take that into account. So, there is opportunity to present an element of kindness to the sector, but let's be realistic. There's a lot of groundwork being planted in the press at the moment about the deficit and the issues around it, and it feels like there is going to be taxation increases.
VBR: Then I would suggest that they got some of their maths wrong.
AB: Unfortunately, I'm not sure that the sector is going to be thrown a bone here, but hopefully there's something offered which at least enables the sector to deal with the change and take it on board transitionally moving forward.
PN: Zain, any of your hotels are in Ireland, so maybe you're looking on and thinking 'well, who cares what's going on there?'
ZK: The majority of the assets are in Ireland, but we're moving more across to the UK now.
PN: Ok, obviously you do care then!
ZK: I mean, we only mainly focus on London and Edinburgh because that's where developments stack, as such. We're developers, we like developing still. I still think there's good money to be made in development. We're not [internal rate of return] driven, so that helps us quite a lot, so more profit on cost and we mainly look at our covenants as such. So if your debt yields are strong, we’re ready to rock and roll. It's quite doom and gloom, to be honest. You still kind of get on with it as such because at worst, the EBITDA margins are maybe getting squeezed by 5%, which I know makes a hell of a difference. I think the underlying real estate value still in London and Edinburgh is only going to get better and better and better.
Valuations, as you can see from probably the last 10 to 20 years, have still gone up across London and, to be honest, you're seeing that in Edinburgh as well. So, from a long-term perspective, I still think it's worth investing into. I’m probably a glass half-full. And in terms of development itself, yes short development costs are substantially increased, but you're not going to be making profit on day one. I mean, you just have to get on with it. But if you're a long term holder, I think you can still make a stack and you'll make it up from the EBITDA where you might be paying an extra £5 million to £10 million on your build cost, you'd be making up that in your EBITDA in five years’ time.
AB: So, in terms of your profitability, you then tend to look at the hotel stabilised value rather than a day-one value?
ZK: Yeah, I'd say so, [as] long as my day one value, I can refinance it. But yes, so long as you could take out with tier one [capital], you'll be fine. And then you get a bit back on day two, and with a bit of amortisation. It might be that day one maybe a 55% [loan to value]; you get back down to 48% LTV.
VBR: That's actually a good point. I think for the first time in a long, long time, lenders are back and it's really welcome.
ZK: Oh, it's finally nice to actually be flexible for once, isn't it?
VBR: I know. Margins have reduced.
ZK: I know, they’re fighting for business, aren’t they? It’s great.
VBR: It’s wonderful.
ZK: Sorry, Louise!
BS: These things go in cycles. Also, if you're a borrower that's driven by LTV, then sadly that doesn’t always end well, because for operational real estate like hotels, lending money on the back of LTV can be an unsound concept because LTV doesn't pay the bills. It's cash that pays the bills.
VBR: Yes, but the thing is, I started working around 2008. The margins were super tight. I remember, we were talking one [percent] over base [rate]. You mentioned gilts before, we used to do a lot with the insurance companies and gilt-based lenders. Yes, of course, you needed a very long-term lease but we were talking 0.8, 0.9, 1% over. And the more traditional lenders were still well below the 2% margin. And it's only when interest rates went literally down to 0, that margins went up because “we can afford to charge a little bit more”, even a 4% over 0.25% was acceptable because we were “only” still paying 4.25 or 4.5 all in. Even the lenders charging 6% over during the development period, then ratcheting down to 4% were able to write significant business as it remained affordable. It was super happy days for banks and borrowers alike. But the reality is, for a sustained period of time, interest rates have been so high. Banks can't write business charging a 6% margin anymore. Who can afford 10%?
BS: But interest rates are not high, are they? The average bank base rate in the post World War Two period is about 5%. When I began my career, many years ago, the base rate was 7%-8%. That was commonplace.
PN: This borrower's market, how long it will be in their favour.?Has anyone else got any views about when that's ending?
OP: I think we haven't seen too much distress, have we? So, until the banks start experiencing financial loss in a few deals then everyone’s happy. I think the market's been slightly skewed by the fact that some of the hotels that maybe should have, or would have, struggled have been propped up by some of these asylum contracts. So, the ones that maybe would have gone into distress have got very, in fact, exceptional returns.
You know, again, it could come down to what happens in the Budget and how the outlook is for the next year in terms of trading. I think, as Bob said, these things come in cycles and obviously in 2008, we had a lot of distress. So, if you're lending very cheaply and values start coming down by 50-60%, all of a sudden you're losing money at the back end, which becomes very expensive. So, you know, if we start to see some more distress, then I think the cheap money could end very quickly.
VBR: Picking up on the word distressed – we've yet to see proper distressed. It just hasn't happened. And, actually, to the three lenders I can see around the table, you guys have been hugely patient. You've been very collaborative with all of the borrowers over the years. It's been marvellous. I'm not saying that we didn't service our interest, but we may have been close to some covenant breaches. With the interest rates going up so high, that there was no way we were going to be able to be [interest coverage ratio] or [debt-service coverage ratio] compliant. The reality is that lenders have been really, really understanding of the situation and you could have been way, way tougher.
BS: This is because in the lending community, there is an appreciation that value has a tendency to reduce very quickly in a distressed situation which is not good for a borrower/customer or a lender.
VBR: From a borrower’s standpoint, I think it's great. As an opportunistic investor however, it's been frustrating, because we've been chasing distressed like everyone else, trying to find those “distressed” hotels, but we’re not seeing those deals.
PN: And to go on to the investment markets, there’s not been enough transactions to lend to, and about the bid and ask gap being too wide. Is there evidence it's closing? I know in your predictions last year, Shaun, you said there would be moderate yield compression this year?
SR: I’m an agent, so I’m naturally glass half-full.
Yes, picking up a little bit on Bob's point, if we are extending-and-pretending and the realities of what is really going on are not being crystallised in transactions, it's hard to create the evidence of a true market, right? And if you aren't creating the evidence, you know, Alex [Bradbeer] and the valuations team can't point to transactions. We can't, you know, re-rate, revalue properties to where they should be. And this is not just a hotel-specific issue, it is across the market.
Certainly the fixed income space, which I probably do a bit more on, where are ground rents and income strips and, you know, sale and leaseback, where are they pegged to, generally? Generally, they're pegged to the gilt rate. And, as we saw, with Liz Truss’ mini-budget, and we've seen lots of spikes and dips and all that sort of stuff, bonds move super quickly because they're an ultra-liquid asset class. Properly done, you know, we see a gilt rate maybe moves 25 basis points, which it did December, January last year and beginning of this.
We weren't down valuing properties by 125 basis points in a month. Definitely not. But that's what your investor is pegging their pricing to, as something that is outside of our market. And property doesn't move as quickly as financial markets and that's to our benefit because we are seen as quite a stable, steady, slightly unglamorous sector, compared to lots of others. But it does mean that we, in this day and age, need to be a little bit more proactive on how we price, value, assess property, because we are not capable, and we don't operate in just the property industry. We are a sub-sector of a financial market, and we're a very small sector, and all the bigger sectors are far more important to our investor base. I think we need to be a bit better at understanding our place and reading the financial room a little bit better.
PN: Claire, you mentioned you've done quite a lot of transactional work for your clients recently. That question about an improving, closing gap? What are you seeing? Is there hope there that the market is picking up? You seem to think it is.
CH: Well, we're in legals on two very significant deals, and one is a mixed leisure and retail asset, where bids were called for yesterday. That's quite a significant ticket. And then a portfolio, which I can't talk too much to.
And then one other which is two hotel assets where things have changed, so our client has secured a new bidder and we've been in legals now for about two and a half weeks. We didn't expect any of those and I thought when the two assets fell over at the end of last year, we thought, “OK, we're going to hold fire probably for a year”. That was the indication and then a bidder came in; as I said we've been in legal for two and a half weeks and that's looking very good. The diligence, the approach that seems to be taken – actually on all three – is there's a lot of operational and technical due diligence ongoing before the legals come in.
So, I think there's a little bit of nervousness around the sorts of things I've talked about before. Fire safety, health and safety, ESG and we’re seeing clearing that off and looking at the operational returns, before legals start going down the line. Because you can generally fix legal problems. And, actually, remember we're implementing and we're looking at the documents to reflect what the commercial terms are. So, get all the commercials resolved, get all the technical worries sorted and then engage on the legals.
So, the market reflects that terms are agreed a long time before we are engaged on legals, because remember we're trailing everything that's been talked about here. The lawyers come in at least a month or two months after transactions are agreed. Often I get asked to look at heads of terms and I'll give a view on that. But actually, I think there’s just quite a lot of concern on legal costs and legal spend when you don't have deal certainty because of all the issues that have come up.
And tax is another point. Tax structuring is quite a big central discussion point as to what's going to happen and how can we try and mitigate. I don't think it's very easy to mitigate because I don't know that we know exactly what’s happening.
VBR: You're absolutely right. One of our friends in common was saying to me, and this was a few months ago, that they looked at and were under offer on around 10 properties, non-hotel properties, and they did not transact on any of them. And in all cases, it was due to cladding issues. And it was so expensive to fix the cladding issues that they decided that it just wasn’t worth it.
CH: Because, actually, you don't know until you start intrusive surveys. You don't absolutely know for sure what was done. I think that's the problem. So not having all the relevant certificates and compliance documents, I think it's a much, bigger spotlight on that.
SR: I have to say, one of Claire and I’s mutual clients, we are in year three of a sale on a hotel and I would say 90% of the work has been done on fire life safety. They bought it. They thought they knew what they were buying. It is kind of going back to the Budget point; people just want the facts. They want to know what's in the building. If you can't tell them what's in the building or what it’s made of, they can't buy it. Even if you say, “listen, it's this, that, and the other”, they can make a judgement on that. They just want the facts. So, anyone who's doing development at the moment, keep all your records, Take as many photos as you can. I mean, it sounds ridiculous, but photo every firebreak that you install.
CH: And it's only going to get tighter. I mean, that's the other point. You go back a number of years, it was only about residential – is it a “high risk building”? Or is it a “relevant building”? If it's neither of those, you don't need to worry. Well, that's just not the case across the “beds” space now.
SR: Compliance isn’t the test, unfortunately.
PN: So, to ask about the more trading side of things, where are we in the cycle? [Revenue per available room] is currently trending down. When will that ease?
FC: I think I've got the same answer as most people, that the summer has been actually better than we expected. So, June, July and August, September actually held up very well, provincial as well as London. October, it does seem to have stalled a little bit. So, we haven't quite got a finger on why that is. We just need to see how we finish out this month and then keep fingers crossed for the rest of the year. I know that's a very vague answer…
PN: Well it goes from month to month, day to day.
FC: We're reforecasting every week. Trade rather than budget. And sadly, with even my commercial team, we sit there and say, well, why are we back? And the answer is, well, that's what the market is doing.
PN: And is that what everyone’s seeing? Robert, is that what you’re seeing at Best Western?
RA: It's certainly just flattish and we're not necessarily as sensitive to London, being largely more provincial. So, I suppose there’s certain pockets which are nice little markets doing really well. We've got some great operators who are doing just fine.
To your point, the rate growths we saw over the last two to three years are long, long gone now. So, I think if you're ticking up one or two percent, you're fairly happy with that because it’s better than some of the others. It's relatively soft; summer’s been pretty good and we definitely saw Q2 sort of pause and then it got going again. It's alright at the moment. There's no panicking going on. But we’d all like it to be better, given that the cost is the issue, the trading isn't keeping up with the cost squeeze. That's the frustration. That’s the noise from the hotels.
VBR: To add to what you're saying, I think that the top line has been trailing broadly in line with expectations. And, it's been helped with all the marvellous events we've had over the past couple of years. Long may they continue. May Taylor [Swift] come back! Now that she's getting married, who knows?
However in the UK, the challenge is now the conversion rate. The top line is strong but costs, unfortunately – back to inflation and everything else – have spiralled and it's been tough. Employment costs increases being a major factor. Of course the use of technology does help mitigate some of this – Starboard, as an example, is very good at that.
FC: We try. But I think when you mention technology, I think one point of hospitality is that you're never going to fully replace the people that work on the ground. So, it doesn't matter how good technology is. I mean, even pubs, restaurants. Sure, there's pubs out there where you can sit at the table and the beer tap is in the middle of the table now, but there is still a human requirement.
FC: Technology is about efficiency, rather than necessarily saving costs. I mean, there are AI-led webcams or camera systems now that can – I mean, you can question some of the [General Data Protection Regulation] elements – but they'll sit and they'll watch your team work and then they'll come back with predicted efficiencies. Even on kitchen layouts, for instance, that’s a big one. Put a camera in your kitchen and it will watch your team work for a week, and then AI will suggest how you move your equipment and how you make your kitchen more efficient.
BS: I am aware of at least one multi-site restaurant business, they have an AI application that works with their CCTV, and maps the customer journey. The rationale being to hasten table turnover.
FC: It's just trying to make it more efficient. You can't take the people out of the mix.
SR: What are they trying to do? Are they trying to get the customer sat down quicker?
BS: Yes, the AI application maps how long it takes between the meet and greet to being sat down to getting the menu to taking the orders, serving the food, paying. So, it's about driving higher sales.
RA: Does that not neglect the value of going to dinner? The conversation that you're having with the person you’re having dinner with?
BS: Like most things, there's a balance to be struck.
RA: Exactly. If you rush people out the door, you’re not likely to go back again as a customer.
BS: I recently was at a presentation and up on the screen, this thing says, “You think my name is 'xxx' but it's not, I’m an avatar”. And it delivered a 10 minute presentation, and you would not know the difference. This was created from one photograph and a three second soundbite of someone’s voice.
SR: That's really scary.
PN: Next year this will just be avatars around the table.
BS: I was also shown as an avatar on a Teams meeting. You would not know the difference.
SR: People do buy from people, don't they? So, yes, you can haste some people in and out of a steak restaurant. But you're not going to have that interaction of “do you want an extra this? Do you want a dessert?”
I've got little kids and are a lot of the jobs that are around in today's day and age going to get internet-ised and AI-ised? Yeah, probably. But, if they are nice people that people want to work with or buy from, I think the most important skill that young people can have is sales skills. Whatever you are. If you're an academic, you're selling a hotel, you're selling lending, you're selling your legal service – you need to be able to sell. Humans like to buy from humans.
RA: I'm definitely an old-fashioned soul in the hope that hospitality will shine through and not be overwhelmed by AI. I totally get it. We're looking at elements that are relevant to us as a brand, probably less application than there is in hotels in terms of the efficiency and administration and all of that. But the point about the restaurant, the actual point of going to dinner is to have a conversation, not just eat a meal faster. I am hoping hospitality doesn't lose the experience over AI.
SR: And people, in my opinion, are needed to extrapolate conclusions from. You don't just tell your client, “here's a research report”. What does it mean and what does it mean to you? And what is the advice that comes off the back of that?
VBR: There's a big difference between processing the data and understanding it – and understanding how it applies to your case. And it goes right back to exactly what you said. I never used to believe that we should have a salesperson in every hotel -–most of the smaller hotels’ business plans did not include a sales person in the planned payroll. I have completely backtracked. In my opinion, every single hotel needs to have a dedicated salesperson, because no one can replace that human relationship. Because why are they going to book with you? It’s because they like you. That's what it comes down to, in my opinion.
PN: So it is time to do a prediction for the year ahead.
RA: I’d like to hear CoStar’s predictions for next year. Obviously, notwithstanding the budget, we would expect to have a relatively similar year to this. A little bit of churn in terms of hotel ownership, some distress amongst our hotels. Some transactions. We’ve got a decent pipeline, so we’ll add quite a lot, we’ll squeeze a few out, just in terms of the quality journey. The trading will be uneventful, probably.
PN: Right, shall we move on to 2027, then?
RA: Haha, I don't think there is any reason for any drama either way next year. I hope we don't get the pain after [the Budget on] 26 November that some people are fearing.
VBR: If you do come across that distress, please, give me a call! I've yet to see any, as we were discussing earlier.
I'm always glass half-full, and I've been hoping that things were going to get better since 2020 and it has yet to materialise. There was this great economist that I heard a few months ago that was saying “this year is an unprecedented year”, and he's been saying this for a few years in a row... “Surely I can't say this anymore”. I would like to think that with lending appetite increasing and the margins softening, it should help.
What I'm generally hoping for is that this upcoming Budget is not going to throw too many spanners into the works. If we get say 1% increase on the VAT, we can probably live with that. It wouldn’t be ideal as Frazer was saying earlier, because we probably wouldn’t be able to pass it on to the customers, because there is a ceiling to what we can charge in the hotels. More recently, the trend has been dropping rates to pick up bookings. So realistically, we won’t be able to pass that on. But, if all it is, is 1% on the VAT, fine, I think we can live with that. My concern is that our Chancellor doesn’t have the right degree or experience for the job.
BS: I don’t have a degree, either!
VBR: But you have experience!
SR: So, prediction is 1% on VAT?
VBR: Yes and I hope that’s the worst of it.
CH: Looking at the bigger picture, I think, amongst the shambles and surprises that we've had from Trump, I think, actually, we have now got to take our hats off and we have got to say the man has actually achieved something with Gaza and Israel and the difficulties there. And maybe he will move on to Ukraine. He has actually achieved some peace.
And I think with geopolitics Europe is massively impacted by the problems across EMEA and the USA and so some stability there and some calm with knowing what the output is on the Budget – even though we know there's more to come – that continues to price uncertainty, that continues to get increased confidence. I am optimistic that after the 26th of November Budget announcement, with that certainty, things will continue to get better. So, looking at the bigger picture, I’m hopeful that that helps all businesses.
RA: Obviously tariff noise was a massive part of this years’ disruption. So, the fact that [Trump's] focused on world peace, it’s obviously very important, but it has also stopped the tariff noise.
SR: I'll give you one work-related prediction and one less so. I would agree with Claire on a lot of the positivity that is coming back into the market. I think that's going to feed into increased volumes and particularly portfolio sales. So, I would suggest that we will see maybe a 10-15% uptick in transactional volumes, but a lot of that will still be concentrated on portfolios, as the style of money that comes into the market is more adept at trading quantum and portfolios. And a bit of a bolder prediction, I reckon we're going to have a new prime minister by this time next year. Don't know who it's going to be!
LG: I don't think we will get the certainty that we want after November and I think that the uncertainty will continue into next year. And, therefore, I would assume it to be a relatively flat year, but not a disastrous year. As Vedrana stated, there isn't really the distress in the market, but I do think that not having the certainty is limiting investor appetite.
FC: Yes, without touching on politics, I guess I'd like to say we'd see some improvement. Don't know what, though. I think we will be surprised in November. I don't know by what though, there's been so many – I think somebody else said – so many different news tests and public tests, that it's almost impossible to factor [in] what's actually going to happen. My one hope, though, is it's going to be a summer of experience. I think the spend on experiences have gone through the roof. The spend on, not even fives-tar, but boutique as well as five star hotels, it's just going up and up. And you've got some big fivve-stars opening in London, which you haven't seen for a long time, which is going to be really interesting.
But also not just London, the secondary cities, have seen the success in London over the last two years. And you’ve got a four-month run now of events at Wembley, whereas you used to have one or two concerts per summer. And that started in London, but also out in the secondary cities as well, where they're just seeing the benefit of pulling in either big names or general finding fields. We were looking at an asset the other day and there used to be two known concert events and now there's a third, which is the field behind one of the smaller ones because, why not? It's just a blank space to build something on. And, hopefully, that’ll come through.
LG: And the spa and golf hotels did very well, as well, which again shows that it's that experience economy which is still doing very well.
FC: People want to spend on something that they can enjoy.
OP: I think Claire's probably right that geopolitical events could have a bigger impact than whatever happens in the Budget. If trade wars erupt or something kicks off somewhere, that's probably going to have a bigger impact than any domestic issue, because we're so integrated with the world economy now. I think whatever happens in the Budget will become much less impactful compared to something major that is happening in the world. And my even more bold prediction than Shaun’s, is that England are going to win the World Cup next summer – that will certainly boost the domestic economy.
PN: So that’s the headline, England win the World Cup.
OP: And Taylor Swift goes on tour…
SR: So next summer we’ll have Oasis, Taylor Swift and the World Cup. Get your chequebooks out.
OP: That’ll keep the hotels happy.
AB: I've noticed that the predictions seem to be getting bolder and bolder as we move down the table, as people realise that they can't say what other people have already said.
I think in terms of the outlook, it's very much a mixed bag. From an operational perspective, you have some positives. You have to look around a bit to find them but you do have, an improving level of calmness and peace on the world stage in terms of geopolitics. You have some positives in terms of hotel trading, we're now seeing a downward trend in utility costs, which is helping to offset things like the increases in payroll.
Being as positive as I can, I don't think we're going to see a bumpy year next year, and you will find some patchy stories of success. So, whilst you look at the wider data for London versus the regions, the regions generally look a little more positive in terms of top line performance. I think you might find that there may be events-led cities or locations in there which see a greater level of success. Experiential hotels and destination hotels have performed very well for a number of years now. And I see that as more of a structural shift, really, in terms of what consumers are looking for. Whilst the cost of living crisis is hitting hard, people are happy to spend if they know they're going to get a good experience and a memory out of it.
So, I think you will see some success stories, but I don’t think it’s going be across the board.
CB: I wanted to echo what Alex has said. This year, first half of the year, was really poor in terms of trading, so hopefully at the beginning of next year it will be a little bit better, probably a little bit flat but a little bit better than this year. Speaking to people on the ground, you know, everyone's a bit thinking it's mixed picture looking into next year, because it's been so hard to predict what's going to happen. Last-minute bookings, people are very price sensitive to that.
But I would agree that event-led cities and a lot of events are driving a lot of business to cities and other areas of the country, so if we can succeed in attracting events to the UK at those major concerts and things like that to key cities across the country, then that will help to boost performance. And that's been really key this year, especially during the summer, September, and that's what's really helped, I think, to drive performance across the country. So, that momentum, I think we can keep going.
PN: I hear Bob Dylan might be back next year.
SR: Biggest prediction of all.
ZK: Mine is so bland in comparison to everyone’s. After the Budget, I don’t want to say doom and gloom, but I think it’s going be a bit tough. People's pockets are going to be squeezed, so I think domestic tourism, unless there are great events coming up – fingers crossed – domestic tourism's going to take quite a hit. We’ll be relying a lot more on the internationals and hopefully their pockets aren’t squeezed, so they can start spending a bit more every year.
From a development perspective, I think offices to hotels are going to become more tough. From a construction perspective, there's a lot of grants for offices, but they're not being built, as such, because the costs are so high. And, to be honest, to get the prime rents, small businesses can't afford to pay the prime rents, so you still need the older office blocks, even though they aren’t strongly ESG rated, small businesses will still be going to that. So, planning grants will become tougher.
BS: I’ve decided, ladies and gentlemen, my very bold prediction is that in 12 months’ time, I will still be working for Barclays Bank.
SR: Good prediction.
PN: Well, that sounds like a good place to end it. Thank you very much, everyone.