Developers in London are reviewing their pipelines, as an era of cheap development finance for hotels appears to have temporarily closed off some options.
Two high profile schemes in London have recently been reappraised by their developers, the tip of potentially a much larger wave of projects that will not proceed as planned. Alongside concerns over the return of business travel to previous levels, the constrained lending landscape is forcing reconsideration.
In Kensington, developer Queensgate has opted to dispose of the Kensington Forum development project, after experiencing a bruising battle with the UK capital’s planning system. It has hired Eastdil and Savills to market the property as a standing investment, having withdrawn its current planning application for redevelopment of the site.
Queensgate bought the Kensington Forum site, with its 1970s-built, 906–room Holiday Inn, in 2015 for GBP400m. With the concrete structure acknowledged locally as an eyesore, and being difficult to upgrade to meet modern standards, Queensgate partnered with developer Rockwell and hired architects Simpson Haugh to design a redevelopment. The proposals include a 749–room hotel, 340 serviced residences and 62 affordable homes, in a podium block with 22 and 30 storey blocks.
However, the project struggled to win planning approval. Local authority Kensington & Chelsea refused the plans in 2018, but were then overruled by the mayor of London, who granted permission in 2019. The council launched a legal challenge on a technicality, with a court dismissing the mayor’s approval in 2020. Following changes to the project increasing its public housing content, the city’s deputy mayor then approved the scheme in late 2020 – only for a government minister to pull the scheme for a public inquiry. That inquiry will not now take place.
“It’s being sold as a trading business, with a two–acre freehold site,” said Rob Stapleton, director of hotel capital markets at Savills. “It’s obviously a great asset, in time there’s the option of development.” With Queensgate having formally ditched its controversial plans, “I think it keeps the slate clean for a new owner.”
Stapleton said there was financing lined up to support a purchaser, and bids are expected shortly from a number of interested parties. “There’s a terrifying amount of money in the market, more than I’ve seen in 20 years.” He added that the site came close to sale during 2020, giving those in the market some idea of value then: “But the market doesn’t know where things are today.”
In Hammersmith, developer Dominvs has revealed it will now switch one of two planned hotels in its development there, to student accommodation. The site was to have two blocks, one a 400 room Premier Inn, which is to go ahead as approved. A second, 23–storey block that Dominvs planned to operate as a Hilton Garden Inn, with 425 rooms, has been held up, with Dominvs blaming financing issues. Instead, the developer will convert the project to a student accommodation block instead – for which it says development finance is more readily available.
Dominvs director Jay Ahluwalia told a public consultation on the changes to the project: “We are really committed to the hospitality business as a family and company, but we are trying to bring the whole scheme forward with a use that’s more fundable. In the current climate the pandemic poses quite a challenge to the hotels business. We think this will make it deliverable – the student market is still very fundable.”
Reconfiguring the design will slightly reduce the height compared with the approved design, and provide 696 student rooms, in a mix of studios and rooms with shared amenities. Operator Scape has been lined up to manage the completed project.
Ahluwalia added that if the new application for student use was not approved by planners, Dominvs could wait a couple of years until hotels were more fundable, and build the consented tower – or sell on that portion of the site.
Dominvs continues with an active development pipeline of hotel projects, and in January 2021 agreed two development finance deals with mainstream lenders. Coutts has advanced GBP48m for development of a 278 room Hampton by Hilton hotel in London’s Aldgate, which should complete in 2023. Clydesdale has provided GBP20.5m to refinance a recently completed 151 room Courtyard by Marriott in Oxford.
Alastair Carmichael, investment director at HB Titan, told Hotel Analyst: “Operational assets such as hotels have always been more difficult to finance – hotels require specialist expertise to structure something that is appropriate. In contrast, during the pandemic, residential finance has become easier.”
With market opinions divided over the pace and ultimate volume of returning business travel, it has become easier to delay than press ahead with projects, particularly for business-oriented hotels in city centre locations. “As soon as there’s uncertainty, that has made it harder.”
“A number of existing lenders have pulled up the drawbridge, and won’t be lending to hotels for some time.”
Carmichael said even pre-let hotel developments may now look less attractive than they did a year ago. The financial pressures of pandemic lockdowns will ultimately have compromised the covenant of even well-capitalised hotel tenants. “The world has changed, you’ll have to reappraise all the development variables, including the finance.”
He believes the constrained lending attitude towards hospitality will encourage investors to repurpose more hotel assets for alternative uses, such as serviced apartments, care homes, residential or student living.
Carmichael says HB Titan, which is a hybrid investor-lender, ready to put both debt and equity into projects, remains positive about the hotel sector. “We’re seeing a lot of opportunities out there, and we can be very flexible.”
HA Perspective [by Chris Bown]: Markets hate uncertainty, and until we’ve got more clarity about the pace of return of hotel demand, the traditional hotel development lenders are sitting on their hands.
What are the consequences? Clearly, some planned hotels won’t get built. Others will be delayed, and only go ahead if a deal is struck with a financially secure tenant (possibly dumping a less attractive one previously lined up).
Curiously, other types of development are – in the eyes of lenders – seen to be safer, and immediately fundable.
So how long could this go on? Comments from Dominvs suggest up to two years – but that’s unlikely, with such a weight of money eyeing investment opportunities. As the months go buy, those sitting on cash will reduce their return requirements, as hotel markets will start to gain better visibility of the return of business – and deals will get done.
But every cloud – a reduced pipeline will be great news for those already holding hotels in the market, of course. Time to dust everything off, and get open.