Despite sharp drops in profitability over the past year, hotel operators continue to invest heavily in refurbishment. In this quarter’s cost model, Davis Langdon & Everest examines the key elements and challenges of hotel refurbishment, giving detailed costs for guest rooms and front-of-house areas
Trends driving refurbishment
Although hoteliers typically keep tight control of their expenditure on properties, regular refurbishment is a necessity to maintain customer loyalty, room rates and market share. Guest room refurbishment schemes fit into two broad categories, depending on the extent of work – refreshment, and remodelling/rebranding.
Guest room refreshment is required every five to seven years and involves adding new elements to rooms to ensure that the hotel is competitive within its market. The typical scope of works includes:
- replacement of furniture, fittings and equipment
- minor works to improve ease of operation, such as changing door sizes to accommodate larger room-service trolleys.
Remodelling or rebranding aims to move the hotel into a different market sector, increasing room rates and overall yield. Such a refurbishment involves major works on guest floors, including:
- creating new guest rooms from redundant space
- replacement of bathrooms and services
- changing room layouts and sizes
- adding comfort cooling
- introducing new guest facilities, including IT and in-room entertainment
- complete replacement of finishes, furniture, fittings and equipment.
Major refurbishment can have a dramatic effect on the performance of a hotel. In the first year of operation following the completion of a refurbishment at the Savoy Group’s Claridges in central London in 1998, turnover increased by 38% and profitability by more than 90%. Similarly, Le Meridien’s planned £90m makeover of Grosvenor House in central London should see its value increase by 80% to £600m.
Rising customer expectations
Competitive pressure for refurbishment has come from changes in the demographics of the hotel market and from innovations by niche operators. In the business and luxury sectors, new standards have been set by the boutique hotels, aimed at a younger clientele. These are either design-led, such as Ian Schrager’s St Martins Lane and Sanderson Hotels, or service-led, like Gordon Campbell Gray’s One Aldwych. There are three key areas in which hotels are responding to these changing expectations:
- Room size Five years ago, 28-32 m2 was normal for guest rooms in business-grade hotels. Now, 32 m2 is the minimum room size in new developments, with some operators increasing rooms to 36 m2.
- Room aesthetics Hotel guests are increasingly design-conscious and affluent younger people have become an important target sector. Design is a key differentiator in this market so hotels have moved away from traditional finishes, furniture and fittings to adopt a style influenced by the latest generation of designer hotels.
- Room quality Demand for high levels of comfort and in-room service, derived particularly from the US market, has led to substantial investment in the fitting-out of guest rooms. Extremely high-quality bathrooms, high-performance air-conditioning, extensive in-room entertainment, IT facilities and enhanced safety in line with international standards are all important.
Hotel refurbishment cost breakdown
This cost model details the works associated with the refurbishment of the guest rooms and front-of-house areas in a four-star hotel in central London. The scheme involves upgrading 250 guest rooms with a total floor area of 7000 m2, together with 9000 m2 of public areas. All works are carried out in phases while the hotel continues to trade.
Refurbishment works on guest floors involve the complete replacement of finishes and services and of furniture, fittings and equipment in rooms and corridors and the replacement of services in risers. Works in the public areas involve remodelling and total refurbishment of the reception area and restaurants and a major upgrade of conference facilities.
The unit rates in the models are based on price levels in central London in the second quarter of 2002, for phased work based on a lump-sum competitive tender.
The costs exclude enabling works, external works and services. The costs of operating supplies, professional fees and VAT are also excluded. Adjustments to the unit rates should be made to account for location, site conditions, programme and procurement route.
Because the cost breakdown is based on a project in central London, figures should be adjusted by the location factors given in the table on page 71 for schemes in other regions.
Potential problems and technical risk factors
Building condition is the major unknown associated with hotel refurbishment projects. Hotels that have expanded over the years often comprise a complex of old, stitched-together buildings. Problems can be encountered relating to differential movement, freestanding structures, uneven floor levels and convoluted and often redundant services installations. A legacy of ad hoc maintenance and an absence of record drawings and other technical information can compound things further.
A key element of risk management on refurbishment projects is carrying out condition surveys and measured surveys of the building fabric. This information will assist in the early allocation of budgets for repair and alteration works and will reduce the risk of uncovering asbestos or other unexpected difficulties during construction.
Working in occupied buildings
Most hotels will continue to operate during a refurbishment, retaining clients and key members of staff, to minimise loss of revenue.
Ideally, refurbishment works are undertaken in a small number of discrete phases, with whole floors being taken out of commission to minimise disruption. At least 30% should be refurbished in a single phase to maintain continuity of work. Working in phases increases cost because of the works associated with high-quality hoardings, isolation, diversion and resupply of building services, and other temporary works between phases.
Once on site, key issues are:
- Developing and maintaining a good working relationship with the hotel management team.
- Speed. Working six or seven days a week and extended hours is often necessary to minimise disruption and loss of revenue. Typically, a refreshment project involving 100-120 rooms can be done in 10-12 weeks; a more extensive rebranding scheme may take 16-18 weeks.
- Maintaining continuity of work. The co-ordination of multiple trades is highly complex, particularly in bathrooms, where finishes and services trades are concentrated. Maintaining the sequence is critical.
- Providing safe, segregated access for guests, operatives and materials.
- Restricting noisy and disruptive activities to daytime periods.
- Co-ordinating service shut-downs.
- Achieving certainty of completion, zero defects and compliance with statutory requirements to permit immediate occupancy of guest rooms in accordance with the programme.
The influence of existing structures on new room layouts and services distribution routes is another area of potential risk. Restrictions on floor loadings, floor-to-ceiling heights and the construction of openings can adversely affect the design of rooms and function spaces, circulation and the installation of services and lifts.
Floor plans and fenestration
The depth of the floorplate and the arrangement of windows have a major influence on the potential to replan guest rooms. It is not always possible to create consistently shaped and sized rooms. This is a problem for hoteliers who want standardised rooms as part of a global brand, but others see rooms with individuality as adding value. It will cost more to fit out irregular rooms because standard designs for furniture, fittings and equipment need to be adapted to fit the space.
Refurbishment schemes often involve introducing more extensive and sophisticated services. The size and location of existing plant rooms, together with the limited availability of extra space in basements and on roofs to accommodate new equipment, can be a constraint on the options available to the design team.
The size and location of existing risers and horizontal distribution routes can be a source of particular difficulty as the requirements for building services in hotels are enhanced. Installation costs increase and programmes are extended when services need to be threaded through the structure of an existing building. High-tech solutions like vacuum drainage can help to divert services distribution from crowded risers into the ceiling void.
Enhanced requirements to upgrade the performance of the building fabric and services to reduce carbon emissions came into force with the introduction in April of the revised Part L of the Building Regulations. Areas that will require particular attention include the thermal performance of the fabric, airtightness, use of low-energy services and the sizing of mechanical plant.
Programmes undented by reduced occupancy
After a buoyant 2000, the UK hotel industry was badly hit in 2001 by the triple blows of global economic slowdown, foot-and-mouth disease and 11 September.
According to data published by specialist hotel consultant Tri Hospitality Consulting, room rates and room yield have fallen by nearly 14% in London and by 3% in the regions, although occupancy is only marginally below that of 12 months ago.
Despite poor trading conditions, however, many operators are involved in major refurbishment programmes, responding to changes in the market and in client expectations. Prospects for the hotel sector are encouraging: the London Tourist Board predicts that domestic tourism will grow by 2.5% a year on average in the medium term, with overseas visitor numbers to rise by 4.0%. The number of passengers travelling on north Atlantic routes has already recovered to just 5% below the figure for March 2001.
As hotels are typically long-lived assets and the rate of addition of new rooms is relatively slow, refurbishment is the best way of responding to such changes in demand.
Some operators have even accelerated their refurbishment programmes to take advantage of lower occupancy.
Another factor influencing the present round of refurbishment schemes has been changes in ownership and funding. The disposal of most of Compass Group’s hotels and sale-and-leaseback deals by operators such as Hilton or new entrant Nomura – collectively worth £1.6bn for these two groups alone – have introduced rebranding requirements while releasing substantial capital to fund acquisitions and the revitalisation of properties they already own.
Property taxation and hotel refurbishment
Capital allowances for hotels are available in two forms. Allowances for the total capital cost, excluding land, of qualifying hotels can be claimed on a 4% per annum basis over 25 years. Allowances for capital expenditure on plant and machinery can be claimed on a 25% reducing balance basis. Furthermore, small and medium-sized businesses will qualify for a 40% first-year allowance on plant and machinery capital expenditure.
Typically, some 30-40% or more of the construction cost may qualify as plant and machinery, depending on the facilities provided and the standard of the hotel. The balance of the capital cost will qualify for hotel allowances. It is also worth noting that 100% first-year allowances are available on designated energy-saving plant and machinery. Small businesses can also claim a 100% first-year allowance on information and communication technology until March 2003.
Refurbishment projects present additional opportunities for tax relief:
- Works incidental to the installation of plant and machinery, for example the formation of new plant rooms and risers, can be included in a capital allowances claim relating to an existing building.
- Works specified by a fire authority as necessary to comply with the 1971 Fire Precautions Act can also be included.
- When a hotel property is in beneficial use and is generating revenue, the costs of repair, maintenance and replacement works can usually be wholly deducted as a revenue expense, reducing taxable profits. Work that can be treated like this includes structural repairs, redecoration and like-for-like replacement of sanitary fittings and suspended ceilings, but if it involves alteration or improvement it will not usually be an allowable deduction.
Successful claims for plant and machinery capital allowances and for revenue deductions rely heavily on documentary evidence supplied by either cost consultants or tax specialists. To make it more likely that the Inland Revenue will accept the claim without amendment, the documentation should isolate the cost of qualifying assets and establish clear connections with building work. Considering design and documentation early on can help the recovery of additional tax allowances that will generate significant benefits for the client.
Key components of a hotel refurbishment
Hotel refurbishment projects are almost invariably budget-driven, and the main task of the project team is to achieve the optimum balance between the hotelier’s vision and the constraints imposed by the budget, time scale and condition of the building. Refurbishment projects are often initiated at short notice and difficulties can arise if the available budget is not stated at the outset or a clear brief not provided.
- Creation of new rooms Adding rooms immediately adds to hotel revenue and capital value. Opportunities can be found in light wells, in redundant staff accommodation and through building extensions or annexes. However, such projects can face significant planning problems, usually associated with traffic generation, rights to light, and aesthetics.
- Adjusting room sizes As part of a rebranding exercise, room sizes may be increased to accommodate larger bathrooms and to provide more working and living space. Existing structure and fenestration determine the practical extent to which rooms can be remodelled.
- Improving bathrooms Bathrooms are an important source of differentiation and present a great opportunity to introduce contemporary design themes. At present, glass, natural stone and high-quality lighting are the preferred signature components.
- Providing high-quality entertainment and IT Hotels are now expected to equip guest rooms with CD and DVD facilities and video games and sometimes TVs in bathrooms. On the IT front, the emphasis is on the provision of intensive in-room facilities, including Cat 6 cabling, broadband internet and private DDI incoming phones.
- Increasing individuality Some operators are moving away from the provision of standard rooms, using different layouts, interior design furniture and fittings to give greater variety to repeat visitors. Cutting-edge refurbishment projects are adopting a “less is more” approach, giving larger rooms a smaller number of better-quality fittings.
Investment in other operational areas will be prioritised according to available budgets. It is quite common for work in connection with non-revenue generating elements – such as programmed maintenance of roof finishes – to be put on hold to allow other works to proceed. Areas where investment is typically directed are as follows:
- Front-of-house areas The current fashion is to design bars and restaurants as stylish destination venues. But as the marketplace becomes more crowded, less emphasis is likely to be placed on leading-edge design.
- Conference facilities These are a valuable generator of revenue, in both city-centre and out-of-town locations. Facilities need to be configurable to a range of meeting room sizes using moveable partitions and well-located power and control panels. Clients also require the facility to control and manage extensive audiovisual and building services installations remotely.
- Back-of-house areas Investment here may include improvements to layout, circulation and facilities to improve staff productivity and working conditions.
- Improvement of on-floor circulation This typically includes the addition of new and larger lifts and changes to corridor layouts to simplify access and orientation.
Successful procurement for hotel refurbishment depends on using specialists at all stages, from designers to subcontractors. Consultants need to understand the client’s objectives and aesthetic expectations and be able to identify solutions that can achieve the required effect within a tight budget. Contractors need an understanding of how hotels operate, access to a specialist supply chain and the ability to work effectively on phased projects in occupied buildings. Above all, the client, project team and hotel general manager have to create a team ethos aimed at completing the project on time and within the budget.
A particular problem associated with the speed of hotel refurbishment – especially for finishes and for furniture, fittings and equipment – is the need to secure sufficient materials to meet fast programmes. Early procurement, through either client direct order or early appointment of contractors, is a common solution. Direct orders by the client may yield benefits associated with buying power, but can expose the client to greater risk, such as knock-on delays to the rest of the project if deliveries are delayed. Where direct buying is used, it is advisable to transfer responsibility for the management of orders to the contractor.
Traditional, lump-sum procurement based on sequential design and construction can, in a hotel refurbishment, deliver the best results – if the right level of design information is made available on time to the contractor and if variations are kept to a minimum.
Construction management can be an attractive alternative, as it has many features that may help to deliver complex, fast, high-quality projects. However, the opportunity to start on site before the design is fully developed is a source of considerable risk if the production of design information cannot keep pace with progress on site or if design changes are introduced. In these circumstances, the combination of split responsibility, no early cost certainty and a lack of detailed working drawings can result in post-contract difficulties affecting both cost and programme.
Since the duration of construction is usually short, detailed design work must be completed before construction starts. Where the overall programme is particularly tight, a good option is two-stage tendering of lump-sum contracts – initially based on the pricing of preliminaries, overheads and profit and either some early packages or a schedule of rates. This approach generates benefits of early contractor involvement and improved co-ordination, reducing the risk of delay and cost overrun, which in turn helps to offset the higher initial costs that can be experienced with two-stage tendering.
Once the main contractor has been appointed, selection of specialist or trade subcontractors should be carried out on the basis of joint competitive open-book procurement, with the main contract being converted into a lump-sum contract before work starts on site.
Davis Langdon & Everest thank the following for their contributions to the preparation of this article:
- Pat O’Connell of specialist hospitality architect Donovan O’Connell
- Patrick Reardon of specialist hospitality architect Reardon Smith
- Andrew Green of property taxation consultant NBW Crosher & James
- Roger Clark of fit-out contractor Beck Interiors