EDINBURGH is in the grip of a boom in new hotels despite a fall in visitor numbers last year due to the London Olympic Games.
Competition driven by hoteliers’ plans to add more than 1,000 rooms – particularly in the budget end of the market – has sparked fears that existing hotel owners will face a potentially fatal squeeze on profits.
French hotel company Accor, which owns the Ibis, Mercure and Novotel brands, is currently developing three hotels in Edinburgh with 420 rooms.
The company is opening a 237-room Ibis on the SoCo site, in the Old Town’s Cowgate, which has lain derelict since a devastating fire in 2002, while it will launch business-oriented Ibis Styles hotels at the former Scottish Life building in St Andrew Square and at Edinburgh Park.
German “budget design” hotel group Motel One opened its 208-room hotel in Market Street behind Waverley Station just before Hogmanay. Its second hotel in Edinburgh is being built in Princes Street. Malaysian budget brand Tune Hotels has opened a 175-bedroom hotel next to Haymarket Station.
At the other end of the market, De Vere is pressing ahead with a 120-bed “urban resort” at Crewe Toll despite being heavily indebted to Lloyds banking Group.
Colin Paton, chairman of the Edinburgh Hotels Association and owner of the Portland Hotels group, believes the increased competition will drive struggling hotels into a downward spiral.
He said hotel groups laden with debt and mid-market hotels with poor distribution – the method by which hotels sell and market rooms to potential guests – will feel the pressure of new hotels in the market.
He said: “The upshot for Edinburgh, I would say, is the normal Darwinian thing: the strong will survive and the weak will go.
“Companies in the mid market that don’t have good distribution do not have the cash to re-invest, so their product deteriorates. Anybody that is able to run their hotel well, it won’t put pressure on them. Those that aren’t in good shape will have to keep dropping their prices – they won’t be able to get the business.”
Alastair Rae, a partner with accountancy firm PKF, backed Paton’s view. He said hotel operators were attracted to Edinburgh, which has been the best-performing city for hotel occupancy in the UK outside central London for the last five years, despite occupancy and yields being down. Costs for hotel operators have also been increasing, which will put a squeeze on all but the best-run hotels.
He said: “For an existing hotel operator, a whole bunch of new entrants will be challenging. Most of the new entrants are budget operators. There is a squeeze somewhere in the middle. For every new hotel that comes in, it will increase the stress on the others. Eventually one will fall off the other end.”
But new entrants are set to make the market even tighter. Brian Wallace, the new chairman of budget hotel chain Travelodge, hailed the company’s ability to grow in Scotland, which is a “key territory” after the chain avoided collapse last year.
In September, the group completed a controversial company voluntary arrangement (CVA), which saw the group negotiate reduced rents with landlords and which will involve the sale of one in ten of its 500 hotels.
Wallace, who is on the board of transport giant First Group, said the hotel chain’s private equity owners “loaded it up with too much debt”, but now it was “stronger than it ever has been” due to the strength of its budget brand. As a result of the CVA, the group was able to wipe £709m from its debt, while its owners have pledged to spend £75m on refurbishment and improvements to the company’s website.
Wallace, formerly a deputy chief executive of hotels group Hilton, said: “The place to be in the hotel world is either at the Hilton end or the really good value end. The bit that tends to get squeezed is the middle: three-star, old, tired and under-invested.
“Our development people are constantly looking at new opportunities. It is very much on the radar – Scotland is key territory for us.”