Even as the furore of the riots which happened last month simmer down, attention remains on the affected hotels in exclusive use government contracts. But while the contracts provided solutions especially during the Covid-19 pandemic crisis, owners and operators are now having to seriously consider what life looks like when their contracts end, an eventuality that looks ever closer as the number of hotels under these contracts diminish.
As at September last year, around 400 hotel properties in the UK were being used exclusively by the Home Office to house asylum seekers. However, according to latest government figures from the end of March 2024, the number how stands closer to 250. So what does this mean for the hotel sector?
Insurance
Although the primary worry for hotel operators under exclusive use contracts during the riots was the safety and security of their properties and staff, experts warn the damage may have more long-term consequences particularly to do with the cost of insurance. “A bit of the challenge going forward is that the unrest will have caused concerns amongst insurers,” warns Malcolm Kerr, managing director at hospitality consultancy Horwath HTL.
He explains further. “And so when it’s time to renew, there may well be further exclusions or additional premiums related to riot, unrest or related damage and the impact that that might have on future operations. I would expect that there will be some impact on insurance premiums. Ultimately, it may mean paying more for insurance and we may see some costs going up after the riots.”
These increased costs, coupled with the overall rise in insurance premiums seen in recent years, could pose a significant financial challenge for these hotels.
Reintegration
But their worries don’t stop there. As these exclusive use contracts expire, the hotels face the daunting task of reintegrating into the competitive hospitality market. Kerr notes that this transition is fraught with challenges, particularly in communities where the presence of asylum seekers has been contentious. “Any property coming out of an exclusive use contract will have the challenge of renovating, restarting their marketing and positioning, and in some cases, rebuilding bridges with the community. So that will include trying to recruit people to work in the property, which is already very challenging across the hospitality industry,” he says.
Additionally, many of these properties have been closed to the public for extended periods, often since the COVID-19 pandemic. With the hospitality market having evolved significantly during this time, these hotels must now adapt to new consumer behaviours, increased operating costs, and a more competitive environment.
But positively, Matthew Plax, head of corporate banking at Mizrahi Tefahot highlights a strong appetite for value-add opportunities such as for hotels coming out of exclusive use if they have a clear business plan.
“We will only fund if the owner has a business plan or strategy for when the hotel is handed back to them. Do they have an appraisal? Do they know how much it’s going to cost them? How easy is it going to be for them to re-engage with staff to restart the hotel and make it operational again. All those things are factors that we will consider when we underwrite or assess a transaction.”
Ker advises. “Get a thorough use analysis and business plan which takes into account the current operating environment. The world has changed a lot in the past few years both on a macro level but also in the local hotel market in terms of the competitors in the marketplace, the mix of the guests, the operating costs that you're likely to have, the difference in how consumers behave and what they expect.”
Plax adds: “If there’s a clear plan, we see opportunity for us to step in to be able to support and assist borrowers to repurpose these hotels and to bring them back to the market. We will continue to lend in the sector because we see more opportunity as these contracts slowly start to wind down.”
Alternative uses?
However, Kerr notes that while some properties may successfully reintegrate into the market, others may not. The financial strain of necessary renovations coupled with rising operating costs, could push some owners to consider alternative uses for their properties.
“Some properties we anticipate will move away from hotel operation completely, not because of the riots particularly but because of the commercial realities," Kerr predicts. He suggests that these properties might be repurposed for long-stay accommodation, student housing, or even residential use, depending on the local demand.
Plax agrees, noting that in some areas, during the period of time where a hotel may have been in exclusive use, other hotels may have been built and therefore reopening essentially as a new hotel may not be viable. “So there may be an alternative use to student accommodation, co-living or some other kind of asset class.”
However, he says the appetite remains unchanged. “We will continue to support owners who are either buying assets or who own assets and are looking for a lender who has the ability to support them as that contract expires, and to support them to bring the hotel back to life or back to its former use or another use.”
Brands
And it seems the brands share broadly the same mindset. Many international hotel brands have supported their franchisees through the tough years and through the duration of time in these contracts.
While Kerr says that some brands will already have been looking at the sustainability of remaining in exclusive use contracts under the brand, Plax points out that the demand from hotel brands for properties coming out of contact remains strong. He anticipates that as exclusive use hotels become vacant and are refurbished to brand standards, there may be significant interest from brands looking to establish new agreements.
“From a lender perspective, the conversation that we’re having with the brands are that their appetite for new assets is as strong as it has been for a number of years. And I say that in respect of some of the new-build hotels that we’re looking to fund where our borrowers are saying that several brands are desperate to be able to take it on.”
He adds: “And that for me, shows that when you have an exclusive use hotel that does become vacant and the franchise agreement is coming to an end, our expectation is that the demand from all the brands – location-specific of course – to step in and take on a new agreement once the hotel has been refurbished and brought to brand standards is very strong. That’s one of the reasons we will continue to fund– because we know that the appetite exists from brands.”
Overall investor sentiment
Despite the recent unrest and potential challenges, Kerr says that while there may be some impact on ongoing negotiations particularly in areas directly affected by the riots, there hasn’t been a reduction of investment interest, nor does he foresee a significant shift in overall investor sentiment.
Plax agrees. “We haven’t seen any change in attitude or appetite from investors, developers or operators for the hotel sector. And at this moment in time, we’re actually busier than we’ve been on new hotel transactions in the wider market since about 18 to 24 months ago. As a lender, we’re not seeing a reduction in inquiries or a change in attitude from buyers.”
In summary, while hotels coming out of these contracts will need to grapple with challenges in their bid to become operationally sound again, many industry stakeholders see opportunities in the upcoming transition.