LONDON—As the United Kingdom is bled for good locations, capital expenditure is becoming the “new build.”
But that doesn’t mean money will rain down from the heavens, according to a panel of U.K. hoteliers at the Finance for Hotel Investment and Development in the U.K. and Continental Europe conference in London.
“Yes, you have to spend it, but be careful when you spend it,” said Vivek Chadha, owner of Nine Hospitality, talking as part of a panel titled “Funding development and refurbishment.”
Capital expenditure in the U.K. is seeing an increase, panelists said.
“As opportunity in the U.K. starts to compress, which we feel has priced us out of many deals,” said Lionel Benjamin, director of hotels at Topland Group. “In turn, that has put us at looking very closely at our own house and how we can best position ourselves if there is a price movement.”
“There’s a lot of sweating as to how to best position ourselves, and as (earnings before interest, tax, depreciation and amortization) compress, too, as cost levels increase, despite great (revenue per available room),” Benjamin said.
Benjamin said Topland plans to use its CapEx budget in the first quarter of next year so “that we can get the most out of 2016.” Inevitably, he said, there would be average daily rate increases.
The other panelists agreed that this sweating of assets is occurring, as is the need to constantly manage changes in consumers.
“One question is, will the budget sector overwhelm the market, and would that mean less requirement for the 4-star-plus sector?” Benjamin asked.
Etienne de La Ronciere, director of asset management for U.K. and Ireland at AccorHotels, said his employees are foremost “delivering ironclad cash flow to support the development of growth,” but CapEx is high on the to-do list.
“We want to be the first hotel developer in Europe in the economy segment,” La Ronciere said. “Eighty-five of our 100 U.K. hotels are leases, but we’re not signing any more leases. The concentration is on purchasing freehold via (our) HotelInvest (division), with funding mostly from corporate bonds.”
Any money put in must pay for itself, panelists said.
“With CapEx, we ask firstly, can we afford it?” said Charles Scudamore, principal at Hetherley Capital Partners. “And what will it bring to the bottom line? And then we have to balance the CapEx budget across the portfolio.”
“In any development deal, CapEx has to be front and center. It is central to owning and operating a hotel in today’s climate,” Scudamore added.
Chadha, whose firm has acquired and developed nine hotels in its first two years of operations, said he also is looking at converting office space in London alongside a brand—a strategy panelists said is in line with a shortage of good locations.
“It’s difficult to compete with Travelodge and Whitbread for location when it comes to the budget space, so you need something to differentiate yourself, but refurbishment is complex in that you have to be very careful as to where the spend goes and that it adds value,” Chadha said, adding his firm bought buildings without knowing for sure that planning permission would be granted.
“Additional costs derive from bringing in management teams, and which need to be brought in at the right time,” Chadha said.
Accommodating brands
Panelists said developers and owners definitely benefit from having a brand on board when it comes to reassuring lenders and other parts of the development chain, but with locations at a premium, they asked that brands be flexible.
“We do not have (third-party) brand-owned or operated hotels yet, but I do think brands realize there needs to be a degree of elasticity in development while also, of course, looking after their brand integrity,” Benjamin said. “There is a conversation to be had here. Investors are getting far sharper and demanding.”
With competition fraught, more discussion between all parties is needed, panelists said.
“It’s easy for owners to beat up brands and say they just do not get it,” Scudamore said. “There still is massive value in brands, and owners have to consider this value post-refurb, too. If the brand says a tap will cost the owner £15 ($23), and you can find one for £8 ($12), the brands will stay tough, but if you think that £7 ($11) savings will add £1 ($1.50) to ADR, then think again.”
Chadha said brands could bend on operational requirements during renovations, which they often demand.
“It’s not easy to close rooms for refurb when the hotel is very busy and making money, so brands need to be flexible,” Chadha said. “Owners also need to keep an eye in changes to those brand standards.”
“Ultimately, how do we get the best value from our spend, and will that spend maintain our market share?” Benjamin said.
“That will maintain EBITDA, which is what the bank lends on, well, that and cash flow. Homework takes time, but it does add value,” Benjamin added.