Hotel developers from luxury to budget want to get into Edinburgh, Glasgow and Aberdeen. What is in demand, and what are the impediments?
Hotel developers looking to get a foothold in Scotland should form an orderly queue. Edinburgh, Glasgow and Aberdeen have seen two strong years of hotel trading growth. While many UK cities have struggled to get back to their pre-recession RevPAR levels (total revenue available per room), all three Scottish cities have surpassed their 2007 trading peaks.
This has encouraged brands to make their Scottish debut. Adagio is due to open next year at the New Waverley development, formerly known as Caltongate, in Edinburgh, and Village Urban resorts opened in Aberdeen last year and in Edinburgh this year, with a third planned for Glasgow.
Appetite is strong, but developers need to choose wisely to capitalise on the surge. The three markets differ in their attractions and their liabilities. Where should developers be looking, and which markets are best suited to them?
Edinburgh
Edinburgh has been courting hotel developers for some time. The expansion of the airport and the Edinburgh International Conference Centre saw the city celebrate a 6.4% RevPAR growth last year, according to Savills. PwC has also predicted that this year Edinburgh will see the highest occupancy levels in Europe.
Development is rife. Artisan’s £150m New Waverley site will include a new 146-bedroom Adagio aparthotel and construction has started on two Whitbread hotels: a 127-bedroom Premier Inn and a 121-bedroom Hub by Premier Inn, due for completion next year.
TIAA Henderson Real Estate is also marketing the hotels element of the £850m St James development, inviting offers from operators for a 210-bedroom luxury hotel and a separate 41,000 sq ft aparthotel.
What else does Edinburgh need? There is potential across the board, but limited-service hotels catering to business and leisure customers are in particularly high demand.
These are also much easier to develop than full-service hotels, which need a lot of space. Limited-service operators, with their smaller requirements, are in a better position to compete with office, residential and retail uses.
This is evident in land prices, which are creeping up. Marc Finney, head of hotels at Colliers International, says: “Land prices have started to reflect the issues in the city across different classes of uses and it is sometimes difficult to get a hotel project justified in the face of that high competition.”
Limited-service operators such as Premier Inn are starting to feel the pressure. Kevin Murray, head of acquisitions at Premier Inn Scotland, says: “It is a sign of economic confidence, which is good news, but conversely it does mean that we are now competing for space with office developers, which we haven’t been doing in the past two or three years.”
Plenty of opportunities are in the pipeline, including the Fountainbridge development. For those looking to make their Scottish debut, it is well worth looking at edge-of centre sites or even outside the city centre.
Glasgow
Although Edinburgh has a reputation as the leisure leader in the Scottish hotels market, thanks to the success of the Hydro entertainment venue and last year’s Commonwealth Games, Glasgow is hot on its heels, generating a huge demand for hotel development.
Glasgow hotels posted an historic high in RevPAR during July 2014 of £81.10, compared with an average July performance of £47.70 between 2010 and 2013.
There has also been a surge in demand on the back of the business premises renovation allowance, but Colliers’ Finney says developers and investors should tread carefully around these opportunities.
“I would always urge caution when going ahead with an investment simply in order to reduce tax liability,” he says. “They rarely work on that basis, and there have been a number of schemes that didn’t work in Glasgow because they were not welcomed, not well thought through and poorly funded.”
What kind of hotels does Glasgow need the most? The city already has a number of full-service hotels, but many of these are beginning to look outdated.
The first steps to improving this offering is to refurbish and improve existing assets. Brian Sheldon, regional director of hotels for Scotland at Christie + Co, says: “There is capacity for a few more hotels, but not that many more than the six or eight that are planned.”
Whitbread has also been looking to Glasgow, and opened a site at Pacific Quay in time for the Commonwealth Games. It has live requirements for another four hotels.
Whitbread’s Kevin Murray says the recent surge in economic confidence has encouraged openings and requirements in Glasgow, and although there is still competition for space, it is not quite as fierce as it is in Edinburgh.
“There are distinct micro markets in Glasgow. We are looking both inside and outside the city centre and there is appetite for both but, as with Edinburgh, there is competition from other use classes.”
The group’s other recent openings include an office-to-hotel conversion at St Andrews House and West Nile Street.
It is not as hard to enter the Glasgow market as it is to get into Edinburgh. Glasgow has fewer restrictions on space, fewer planning regulations to work around and more sites available.
Aberdeen
Aberdeen and falling oil prices might have had some bad press recently, but it does not look as though this will have a lasting impact on the city’s hotel sector. In fact, the market is looking up and Aberdeen even overtook Edinburgh in early 2013 as the UK’s second-best city for RevPAR, which grew by 7.2% in 2014.
Although it is doing well, it is not quite a seven-day market like Edinburgh and Glasgow. Aberdeen’s leisure offering is not as strong and its weekends are quieter.
However, the market is strong during the week, powered by the oil business, and although there are growing concerns about this sector overall, oil price fluctuations could in time improve the hotel sector, according to recent research by CBRE.
Joe Stather, CBRE’s EMEA hotels intelligence manager, says: “There are a growing number of companies moving to the city that are not related to core drilling activities. Instead they are involved with alternative energy projects in other areas of the world and benefit from Aberdeen’s outstanding infrastructure. This diversification has widened Aberdeen’s economic capacity and created demand in the hotel market.”
And most of this demand is for functional hotels and the extended-stay model as professionals seek to remain in the city for a longer period of time as they do their research.
Plenty of sites are available, and the advantage that Aberdeen has over Glasgow and Edinburgh is that not all visitors want to stay in the city centre, which makes competition for space less fierce.
Finney says: “I think there is still a lot of pressure on sites in the city. Again, the availability of good, well-located sites is still limited. However, a good proportion of the demand is prepared to stay out of the central areas.”
Conclusion
Aberdeen, Edinburgh and Glasgow are benefitting from improved market conditions, but space is limited. AMPM research shows that 19 hotels, providing 1,417 bedrooms, opened in these cities last year and another 19 hotels, providing an additional 1,328 bedrooms, are scheduled to open this year. Developers with an appetite to enter or expand in Edinburgh, Glasgow or Aberdeen should start planning now.
