Local authorities in the UK have increased their investments in the hotel sector, in the search for long-term returns.
Hotel groups including Travelodge have been building relationships with local authorities to drive expansion.
According to Knight Frank, local authorities were planning over GBP600m of investment until 2023, through private-public partnership schemes, where hotels form the primary focus in a development project and which have either outline or detailed planning permission granted. Last year saw GBP93m spent, an increase of 182% on the year.
Shaun Roy, head of hotels, Knight Frank, said: “With the growing acceptance that councils need to seek new means of funding to cover budget shortfalls, we have seen many local authorities make the intelligent move of investing in hotels.
“By investing in hotels the council receives rental income generated by these assets, which offer a secure, long-term income stream, with inflation linked cash flows, combined with an increase in the underlying property’s value over an extended period of time. These are a strong option for councils as unlike investment in offices and retail, no asset management is required, as they are managed by their operators. Significant opportunity exists for councils to invest in hotels and we expect this trend to continue until 2021 when this method of borrowing will end due to new government legislation.”
Local authorities were able to benefit from low-interest loans from the Public Works Loan Board, a statutory body that issues loans to local government. Since 2004, local authorities have been able to borrow without government consent, provided they can afford the borrowing costs. In moves reminiscent of the institutional investors coming into the sector, councils were looking to the purchase of hotels, subject to an operating lease, with brands such as Travelodge. Both long leases and ground-rent investments aimed to provide long-term secure income and all profits help to fund the provision of future services in the borough.
Travelodge has been targeting the sector since 2014, and in 2017 wrote to over 200 local authorities on its target development location list to seek further partnerships. Hotels in the programme were built on surplus local authority land, with the funding provided either through the Local Authority’s internal resource or via low-cost funding from the Public Works Loan Board or third party resources.
Upon completion of the hotel development, local authorities have the choice of either retaining ownership of the hotel and receiving an annual rent into the Council’s revenue budget or selling the hotel with Travelodge as its operator.
Peter Gowers, Travelodge CEO said: “More and more local authorities are under pressure to find ways to help regenerate their historic town centres and local communities. Adding a low-cost hotel like Travelodge is an increasingly attractive choice, as it draws visitors, creates jobs and helps boost the local economy. Our customers are travelling more frequently and we are opening new hotels to ensure we are in locations where they want to be. We are delighted to be working together with forward-thinking local authorities to help support their regeneration programme with the opening of a new Travelodge.”
The Chartered Institute for Public Finance and Accountancy warned of a conflict between commercial investments and the need to deliver services and was concerned that councils were taking inappropriate risk.
Savills said that, in the wider commercial property sector, local authorities had spent GBP4.1bn in the four years from and including 2014 and had seen their share of total investment in the market grow from 0.2% to 3.4%. The figure was 1,868% up on the GBP93.8m spent in 2014 and was driven by the government’s announcement in December 2015 that local authorities would need to finance their spending entirely from locally-raised revenue by 2020.
The company said: “Investment in commercial property can deliver both an income return and a social return for local authorities, and we see no credible argument for discouraging or limiting their investment activity in this sector so long as it is well-informed, transparent, and benchmarked. Furthermore, while the proportion of investments by local authorities that are outside their operational area has risen to 39% this year, we believe that this is justifiable in the context of spreading investment risk.”
HA Perspective [by Katherine Doggrell]: Here at Hotel Analyst we have long backed the opinion that hotels are a strong asset class and, over the past year or so, with the increased involvement of the institutions, we have seen them enter the mainstream, with the alternatives now taking the form of products such as hostels and serviced apartments, which are not so very far behind being fully accepted themselves.
As was pointed out by Savills, even when the borrowing festival is bought to an end at the local authorities, the impact on the sector will be small – their activity was not so much that a bubble was being blown.
So is it worth forming a bond if spending is likely to wane? Local authorities are more than just potential investors. Travelodge has ling sound to build sound relationships not just because they might by hotels, but because they also hold the planning reins. Educate them about hotels and it may be easier to get plans past. Educate them about your brand and its more likely you’re be first in the queue for those tricky city-centre spots.