The challenges and pitfalls of hotel development

Where do you start in the complex world of development? Looking at all the moving parts, there is a lot to think about: property owners, developers, agents, valuations, planning and licensing, funding, leasing, owning, managing, operating companies, brands, competitors.

For ambitious brands like us, even with a healthy covenant able to offer up a strong institutional lease or raise the development capital, it’s still not as simple as sticking pins in the map of where we’d like to go.

It helps to start with a clear strategy and not get caught up in the endless cycle of property prospecting. Be clear where you are heading and the variables you can control to get there. Buying, developing, leasing, managing and franchising are all options on the table. Location and site selection are unique to your brand or business, so let’s say you’ve already leapt over that hurdle. You know where you want to be. You understand the reach and distribution you want to achieve and the markets where you can make an impact. But making the numbers work is a big challenge.

In today’s world, it takes some focus and clarity of vision to get a deal over the line. Each party needs to see all sides, which means the owner/developer should also appreciate the long-term value that the operator, the tenant and particularly the brand can bring to the arrangement and the end value. No deal gets off the start line without a collaborative approach that works from every angle.

We’ve seen too many opportunities stand still for months and even years where the short-term expectations are in conflict with the long-term value of a good operator tenant, who can generate income and lifetime benefit for a development. And that’s without the intrinsic value and character that unique brands can generate for an owner and the wider scheme.

It’s a shame that great sites lie empty because a lease cannot be agreed for long-term performance and end value rather than just short-term returns. This vision must also be shared with the planning and licensing committees, who are less concerned with the valuation but can dramatically support the process to bring fresh purpose to old and new locations alike.

Another big question to think about is the complexity of conversion versus new build. Some of the best opportunities, locations and exciting buildings are standing around empty begging for attention, which seems like a golden opportunity for development and growth. However, the intricacies of design and complexity of cost drives out prohibitive rents once again, unless the long term value of a Full Repairing and Insuring (FRI) lease and asset appreciation is rolled up into the mix for the longer view without making the lease cover the bill from signature.

New builds would seem to keep things simple these days with a formula for the major brands that seems to work. But location is always king and the challenges of making existing building conversions in great locations fit the brief and brand must be compared to new builds where you might get what you want but compromise on the location. Conversions seem to be hard to stack up, with high expectations on existing value and high conversion costs making it hard to breathe life into some of the amazing city centre buildings which sit dormant today.

For us, the aparthotel and serviced apartments category is finally getting some of the attention it deserves. Long considered too ‘alternative’ for investors and funds, we were some way down the list of potential solutions, as developers and valuations missed the potential of high occupancies, strong guest retention and great operating margins. The case for aparthotels today is strengthened by these reliable incomes, flexible approach, established brands, solid model and distribution, proven operators and even alternative use.

However, even when it looks like your lease discussion is taking shape, the yield offered by your ‘alternative’ category might not stand up against the old familiar cookie-cutter solutions like Private Rented Sector (PRS) and office. The path to successful development still needs a bit of vision and perspective in the valuation to get it off the ground.

The world of hotel operations is increasingly complex these days with brands, operators, owners and asset managers all taking a piece of the action. It’s no longer obvious who is actually running the show, and the guest has to weave their way through so many brands claiming to be the answer to all their needs. Where do you begin to find the operating model that works for you?

Our owners took a decision a long time ago to build a brand to be proud of and look after our own guests and people. These days, it takes a brave person to start a family business from scratch, get the finance to back a scheme and to put your own brand on it. The investment into the brand, the technology, the people and distribution cannot be overstated. It’s a lot of work and takes a long time, with a genuine commitment to excellence required in order to succeed.

The biggest hotel operators have wide distribution networks, powerful marketing and loyalty platforms, and finely tuned brand operating manuals. An independent brand can provide flexibility, character, innovation and agility which cannot be matched. Many owners these days look for the reliability of established management companies who share their expertise for a fee and a slice of the profit.

These experienced management teams don’t tend to have the brand or the system to plug into, so for another set of fees and another slice of the pie, a big brand can put their name over the door. As an owner, you want to make sure that the management company and the brand are working hard enough for you, so you also employ an asset manager to ask the difficult questions and squeeze a few more pips out of the business. Unless you’ve done this before, you may never know what you’ve missed or what the right questions were to be asking.

So, a bit like my golf swing, there are so many moving parts to grow the pipeline for development. However, with a great model and brand, genuine focus, the right team and a balanced approach, there can be a great future ahead.

By Robert Alley, chief operating officer at Roomzzz Aparthotels