Viewpoint
Hospitality is at the heart of real estate repositioning across the UK
Market Recovery and Performance:
Repurposing and repositioning properties into hotels and alternative uses in towns and cities across the UK is an innovative strategy for investors. However, due diligence and careful planning are essential to mitigate risks and optimize returns.
Hotel Revenues Have Bounced Back
One of the standout stories in the real estate sector last year was the remarkable rebound in hotel occupancies and rates, both in the UK and globally. Despite initial fears that the hotel industry might never recover from the COVID-19 pandemic, the sector has shown resilience and adaptability. Domestic leisure travel has boomed, and revenue per available room (RevPAR) has continued to recover in 2023 across most UK markets. As international arrivals and corporate event demands gradually return to pre-pandemic levels, stakeholders remain confident in the future of the sector.
No Return to Business as Usual
Despite top-line revenue optimism, the hotel industry is undergoing significant structural changes. Returning to pre-pandemic revenue levels does not necessarily equate to trading profits. Hotel owners in the UK are striving to optimize operating efficiencies as inflation erodes real growth, while rising operating costs and interest rates increase pressure from lenders. The coming months and years will offer unique opportunities for investors and operators to refocus their businesses, adapt to consumer demand, and adopt smart technologies.
Uncertainty Continues to Cloud Investment Decisions
Despite strong trading performances in 2022 and cautious optimism for 2023 RevPAR forecasts, factors like higher taxes, rising interest rates, inflation, regulatory changes, and a new banking crisis weigh heavily on hotel real estate investment decisions.
The Development Pipeline is Slowing
New hotel builds have been steady due to pre-pandemic funding, continuing into 2023 and 2024. However, signs indicate a slowing of construction due to rising project and finance costs, which will flatten supply growth in many markets in the medium term. Additionally, there is a limited stock of quality operating hotels available for purchase. Investors seeking well-located operating hotels at a discount may be disappointed, as few high-quality hotels have come to market recently. Government contracts to accommodate asylum seekers and refugees are also boosting occupancy in economy and midscale hotels.
Repositioning Real Estate to Hotel and Alternative Accommodation
Footfall in UK town centres collapsed during the pandemic and has struggled to recover. While hotel revenue rebounded impressively in 2022, other real estate sectors like physical retail and offices have struggled to reinvent themselves. Successful projects and Net Zero targets have led local authorities to recognize that repurposing existing properties to meet visitor demand is key to revitalizing town centres. An increasing number of repurposed hotels have contributed to neighbourhood regeneration, creating value for neighbouring properties and communities.
Examples of Successful Repurposing Projects
- The Wesley Camden Town: Former church
- Cheval Edinburgh: Former bank
- Malmaison Manchester Deansgate: Former warehouse
- The Ned: Former Midland Bank headquarters
- NoMad Hotel: Former Bow Street Magistrates Court
- OWO London: Former old war office
Repurposed properties in town and city centres typically target leisure and 'bleisure’ guests, offering residential or limited service to maximize sales flexibility and operating efficiency. Major hotel groups have launched lifestyle brands targeting potential conversions of existing hotels, enhancing marketing efficiencies and providing comfort for prospective investors.
The Devil is in the Detail
Repurposing properties for hotel use presents unique challenges and opportunities for each asset. Comprehensive analysis and due diligence are essential, including market analysis, planning reviews, and technical and structural studies. Assessing the tax position of assets and their potential is also crucial.
Capital Allowances
Capital allowances can significantly impact project viability. These allowances permit the deduction of certain capital spending against taxable profit, as outlined in the Capital Allowances Act 2001. The latest provision introduced in the Spring 2023 Budget allows companies to claim 100% capital allowance on qualifying plant and machinery investments from April 2023 to March 2026. This can reduce taxes by up to 25p for every £1 invested in qualifying assets.
Understanding and identifying capital allowances is complex but valuable. Engaging specialist advisors early on helps stakeholders assess values and support the acquisition, ongoing investment, and sale of properties.
In summary, repurposing real estate into hotels and alternative accommodations is a strategic move for investors, with significant potential for revitalizing town centres and achieving substantial returns. However, thorough due diligence, planning, and understanding of capital allowances are critical to successful investments.
This article was published in Hotel Management Magazine, June 2023.
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