Developers should not be caught napping on potential of hotels

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The trend towards mixed-use over the past decade has brought interesting changes in how schemes are structured, financed and delivered.

With retail, residential, office and leisure frequently all combined in a single development proposal, we have seen something akin to jockeying for position in terms of who leads, who calls the shots and who, ultimately, delivers the prelet that kicks developer-led schemes into action.

For a long time now, the supermarkets have had that lead. Securing a prelet of 35,000-50,000 sq ft or thereabouts to one of the big four sounded the starting gun, and other users and occupiers tended to be slotted in once the big retail anchor had signed up. Department stores played a similar role to supermarkets on non-food schemes.

Because the fundamental changes in retailing and multichannel are driving a structural shift in the retail marketplace, we’re seeing the old rule book for mixed-use developments being torn up. Now, it’s frequently hotels that are stepping up and delivering the major prelet and strength of covenant to kickstart major mixed-use schemes. Hotels are moving from component to centerpiece. Premier Inn, for example, can be equivalent to some supermarkets in terms of the space we typically want to take and covenant. There is no dilution of investment value.

So what does this mean for the market? Two things. First, that developers need to recognise this shift in the balance of power and be alive to how they can configure and deliver mixed-use schemes by doing the right deal with the right hotel occupier. Many developers are doing exactly that but, with competition for space so acute, more could take the initiative and reappraise how they assemble their mixed-use projects to pull in the best hotel leaseholder.

Second, it means that hoteliers will look at alternative ways to get what they want if they can’t buy it in the market. By this I mean taking on the developer role and doing it themselves. Certainly, Premier Inn has made a shift towards taking more unconditional sites and doing the development management while seeking greater innovation in unlocking locations.

We have moved considerably from ‘OpCo’ towards ‘PropCo’ in the past 12 months, and I think others will be tempted to do this too if the market is not serving their needs.

One reason that hotels can and should anchor major mixed-used schemes is based on the financials that the smart-thinking operators are delivering. With many driving revenue by available room aggressively and effectively - and achieving high occupancy rates through sophisticated advertising and online booking - hotel operators can compete on lease-value terms with alternative uses.

I know of several examples where a developer or landlord has done very well from working a 25-year lease from a decent hotel occupier into its development appraisal. Our investment at Caltongate in central Edinburgh enabled this scheme to progress, and the project was six times oversubscribed when Artisan Properties took it to the South African financial market.

The days of hotels being bolt-ons are gone. They should be seen as the catalysts for mixed-use schemes. We opened 28 hotels last year - just over 20% were within mixed-use schemes, and that percentage is rising. It’s the future, and developers that stay ahead of the curve will reap rewards.

Getting planning consent can be a challenge for any transformational project so it’s worth a quick word on employment too. Hotels are major job creators. Hotels deliver career opportunities for entry-level recruits. Last year, more than 550 apprentices were working towards their qualifications and, just as I did, are working their way up in the industry.

There is a positive case to be made for hotels as part of the commercial/employment package within a mixed-use scheme. I sense that local planning authorities are getting it but, as always, there is more for the property and development industry to do to articulate the message.

With supermarkets and big retail occupiers pulling their horns in and redefining their requirements, we’re seeing a shift from checkouts to checking in. Supermarkets will always be competitive but hotels are increasingly often best placed to anchor successful mixed-use schemes.