This way to the money, ladies and gentlemen

The UK’s hotel industry took a massive knock after the 9/11 attacks, as nervous holiday-makers chose to stay at home.

It has since recovered, and foreign tourists and business travellers are arriving in droves. As for last July’s bombings in London, they caused barely a blip in growth.

“This year is going to show the UK’s best ever trading growth, even better than the millennium,” says Richard Candey, director of the hotels division at property consultant Cushman Wakefield.

Specialist researcher PKF says UK hoteliers are making more money per room than they have since 2001. Between 2000 and 2005, only 34,000 new hotel rooms were built, but another 30,500 are under construction, to be completed by 2008. The average cost of a new hotel room is about £75,000, so if 10,000 rooms are built every year from now to 2008, that adds up to an annual budget of £750m. And that’s not counting the hundreds of millions that will be spent on refurbishment.

Even more rooms will be built for the London Olympics in 2012, and a race is on to bring existing stock up to scratch: “A lot of property in London will be refurbished to bring it up to standard for the Olympics,” says Steve Lacey, a partner in Davis Langdon’s hotels group.

Although London is where the major chains make most of their profits, there is also development in cities such as Manchester, Leeds, Glasgow and Edinburgh, and around airports, boosted by the rise of cheap flights.

Who’s in charge here?

Hotel chains trade on strongly defined brands to attract guests, but for construction firms, the market is a bit messier. You’ll rarely be working for the operators – most rely on developers or investors to build hotels and lease them back. Over the past three years, companies such as Hilton and Holiday Inn have sold their assets to investors and taken on a management role, so maintenance is carried out by the owners in line with the tenancy agreement.

“You’ve got to remember who the client is,” says Andrew Nycyk, senior partner at John Rowan and Partners and head of its hotels and leisure division. He spent four years seconded to Intercontinental Hotels and is working on the £85m Savoy refurbishment. “The operator deals with the day-to-day aspects but the owner will make the big financial decisions.”

That said, the operators will often suggest suppliers – budget chains Whitbread and Travelodge are both looking to add firms to their preferred lists. “It’s good having relationships with operators because they’re the ones who find sites and put everything together,” says Dominic Murray, director of consultant CB Richard Ellis’ hotels division.

Hotel clients want firms that know what they’re doing and that can move from job to job cutting timescales and costs each time. Travelodge, for example, has got time on site down to 19 weeks. Pete Halsey, Travelodge’s commercial director, demands exceptional loyalty, even though it does not employ contractors directly. “We don’t have to be the most important client they have, but if firms can’t show they’re hungry to work with us, there’s no point.”

UK firms need to be careful because they’re going to get the market snatched from under their noses by European
contractors

Andrew Nycyk, John Rowan and partners

Alex Flach, Whitbread’s group head of construction, says its three main criteria are time, cost and quality, but what he’s really looking for is innovation. “Nobody comes to me saying, ‘If we do it like this, it could take half the time or half the cost’. Come to us with good ideas and we’ll snap your arm off.”

Budget, super-budget and refurb

Boutique hotel chains such as Hotel du Vin and Malmaison will provide opportunities for designers, but PKF forecasts that 45% of the 30,500 new rooms will be in the budget end of the market. Whitbread is the market leader and its brands include Premier Travel Inn and Brewer’s Fayre. It will spend £100m on building 15,000 rooms a year over the next four years. Travelodge is expanding at a similar rate – it will add 14,000 rooms in the next five years. At an average cost of £40,000 per room, that comes to £560m.

It is also worth keeping an eye on super low budget entrants to the market from Europe and Japan, such as Easy Hotel, France’s Etap and Yotel, which is opening its first hotels at Heathrow and Gatwick airports later this year. They are tipped for rapid expansion over the next 10 years.

In addition, there is a lot of refurbishment work around, as hotels reinvent themselves as plush conference venues – see Holiday Inn’s Academy offering – or upgrade to compete with newer hotels. Refurbishment is a continual process for the large chains and a good bread-and-butter earner for mid-sized contractors, says Nycyk.

How the work is let

The hotels is a specialised market, but not a difficult one to enter. Most development in the budget sphere is on a design-and-build basis and contracts are awarded primarily on price. Flach says Whitbread will look at contractors that have worked on student homes, housing or even offices – the main thing is to show keenness. Firms that can get themselves on a tender list should “bite the bullet”, says Nycyk. “Go in at a lower margin, get a couple under your belt and get in with specialist contractors.”

On a £50-80m project, it’s a bit harder. Nycyk, who has just interviewed contractors for the Savoy job, says there are only about five firms that are able to combine hard construction with high-quality finishing, and there is a similar scarcity of consultants. Firms could cut their teeth on smaller,

high-quality refurbishments and move up the scale, hire experienced project managers or acquire a specialist firm with a good reputation.

It’s not only tourists who are flocking to the UK’s hotels – European contractors have spotted the opportunity to get a foothold in the construction market. Nycyk says he has been approached by a couple of big firms interested in projects like the Savoy. “UK contractors are not proactive enough. They need to be careful because they’re going to get the market snatched from under their nose by European contractors. Some have excellent capability. They can pull in good quality labour from Eastern Europe for a good price and their costs are lower.”

To fight back, UK firms could sell their organisational skills in Europe, he says, or strike up relationships with subcontractors to bring their labour over. But they should act now or risk losing out.