Tyneside's booming tourism and conference scene is seeing demand continue for hotel development in Newcastle and Gateshead. Property experts take a look at the future for the leisure industry in the area.
NEWCASTLE-GATESHEAD continues to see real activity in terms of new hotels opening and over recent months this is emphasised by the development of the 175-bedroom Sandman Signature hotel on the site of the former S&N Breweries head office at Gallowgate, the new 200-bedroom Jury’s Inn at 1 Millennium Quay and the 200-bedroom Ramada Encore hotel at South Shore Road, Gateshead.
While these new hotels will contribute to the overall Tyneside offer as both a party venue and business hub, some commentators are increasingly aware of businesses within the leisure sector suffering as a result of the recession, particularly in terms of operating viability.
One of the major challenges for hoteliers is the continued inflationary pressure on costs.
With inflation predicted to be around 5% for 2012, the benefit of any revenue growth is being eroded by rising operating costs. Therefore, profit margins and growth remain under pressure, which particularly impacts hotels trying to service a high debt level. The hospitality and leisure sectors have seen a significant rise in insolvencies and business failures.
Trading entities, such as hotels, have been particularly impacted by the relative lack of available debt finance with banks and other lending institutions currently very selective about to whom they will lend.
Hotel development finance is particularly scarce given the high level of risk associated with a start-up business entering into a relatively flat market. There is a higher level of appetite for hotel investments subject to leases with a rental income and strong tenant covenant, such as Premier Inn and Travelodge. This is primarily due to the resilience of completed investment values which in terms of prime hotel leases have been supported by the institutional funds drawn to relatively long 25-year-plus leases with RPI review provisions.
Prime yields of sub 6% are currently being achieved in strong locations, although the gap between prime and secondary locations has increased considerably.
The branded hotel operators continue to operate on an asset-light basis with a commitment only to leases, management agreements and franchise agreements. The recession appears to have potentially strengthened the market position of both Travelodge and Premier Inn, taking advantage of mid-market hotel guests downgrading to limited service accommodation, be it on a corporate or leisure basis. These two operators are engaged in an intense rivalry to expand with a particular focus to secure the most significant presence in London during the 2012 Olympic Games.
The expected improvement in market conditions has failed to materialise and Government spending cutbacks have undoubtedly contributed to the expected growth stalling. The midweek corporate trade is likely to at best remain at similar levels and the domestic leisure sector may deteriorate as the UK tightens its belt.
Regional hotels are more affected by national influences and although no one knows how fiscal tightening will affect the economy and hotel sector, the outlook is likely to be challenging through the next 12 months.
Low interest rates have enabled many operators to service their interest repayments (albeit not their capital repayments) and banks have historically been relatively content to assist rather than force disposals. There is, however, some evidence that this situation could change if there are no signs of improvement in trading in the foreseeable future.
Hopefully market conditions will improve to overcome these concerns and the leisure and hotel sectors will continue to invest in the North East which will bring clear economic
:: Adam Harley, associate in valuation services at GVA in Newcastle
