Rising costs taking the shine off London’s hotel resurgence

London hotel rooms are in great demand as tourism has roared back after the pandemic, but there are concerns over the building market as some operators, faced with higher interest rates and rising costs, are reviewing investment decisions.

The alarm was sounded by PPHE Hotel Group, which operates the Park Plaza chain and is listed on the London Stock Exchange. “If you want to build something at this moment interest costs are up 10% and construction costs are up too,” said PPHE’s CFO Daniel Kos.

Building costs on PPHE’s art’otel site in trendy Hoxton, a 27-storey building, will be several million pounds higher than planned as repayments on construction finance have gone up. The 27-storey cylindrical building will have 357 guest rooms as well as a restaurant and bar, art gallery, event space, auditorium and indoor swimming pool. Due to open in 2024, it follows the successful launch of art’otel at Battersea Power Station.

“There’s only one item that drives higher build cost and that’s the cost of interest,” Kos said. “We borrowed £180 million in 2020 and since that time interest rates have gone up significantly. With any project now we need to look at the underwriting in terms of what we can achieve in this market”.

PPHE is pressing on with future hotel developments in London as demand is strong, and the group reported record revenues in H1 this year, up 59% to £180 million thanks to the resurgence of both tourism and business travel. London hotels performed particularly strongly.

According to Knight Frank, London hotels achieved an occupancy rate of 82% in June 2023, a rise of 3.2% from last year, and a 35% uplift in revenue per available room. The positive trend is set to last, said Philippa Goldstein, senior analyst, hotels and leisure, Knight Frank: “London is set to benefit from the continued uplift in overseas arrivals.”

However, despite the positive outlook, PPHE’s concerns about rising costs are shared by others and are having a material impact on transactions.

UK hotel transactions fell to £825 million in H1 2023, according to Savills data, which is 66% below the 10-year average, as, “the rising cost of debt has significantly reduced deal volumes. With lenders scrutinising profitability more than ever to ensure appropriate interest coverage ratios in the face of rising debt costs, protecting and even driving margins has become the focus.”

The pipeline continues to be strong: in the second half of this year there will be a spate of openings of luxury hotels in London, including the Raffles London at the OWO, the Peninsula London and the Mandarin Oriental Mayfair. Other luxury groups, such as Six Senses, Waldorf Astoria, Rosewood, Park Hyatt, St.Regis, Oberoi and Langham have plans to open new hotels in London over the next few years.