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. Last Updated: 07/27/2016

Understanding the Hotel Development Process

David Jenkins
Director, Russia & CIS
DTZ Hospitality Group

The ability to add value and to create a sustainable hotel project ultimately starts from the first brush on paper and opportunities for this are all the way through to the final touch of paint on the finished product.

The crisis has had a huge impact on all real estate development, including hotels. But due to the gap between hotel supply and demand across the country there remains great opportunities for hotel projects.

Hotels are typically more complex to develop compared with other asset classes, as their design is tailored to the brand operating the business.

The design of these can also have an impact on the overall profitability of the hotel operation, as design deficiencies affect the operation of a hotel and ultimately have a negative impact on the bottom line — and hence asset value.

In order to reduce the risk of developing a hotel, which may not be commercially successful, it is important to seek advice from a hospitality consultant, who will ultimately act as the commercial conscience of the developer.

At the start of the development, prior to building and design stage, the most important question to answer is “is the project viable?” Demand and supply factors for the hotel project need to be identified in order to understand the dynamics of the future operation — to basically understand who will be the target audience for the hotel and build for that. A developer needs to have an understanding of the estimated cash-flow income of the future operation from the opening day of the hotel. This will then provide any potential investor with a comfort level that debt can be serviced from the operation.

When hotels are part of a wider scheme, the design and development of the hotel needs to be in line with the overall development vision of the scheme. In a resort environment, it is important to understand the relationship between hotel, golf, spa, residential and other facilities, and in an urban mixed-use scheme.

The hotel will, more often than not, be managed by a professional hotel operator. It is always of benefit to ask a consultant to run a competitive tender processes (be it tailored or to the wider market) when looking for a hotel company to manage your property, as this provides the opportunity to drive the process in order to achieve the best commercial deal terms available in the market. These contracts typically run for 15-25 years and key terms agreed at the beginning will have a major impact going forward.

Hotels are particularly sensitive to market changes, economic downturns and to alterations in supply and demand — for example when competitive hotels open up next to your own hotel this can severely impact performance. It is better to have all advice and information prior to decisions being taken on concept, design, architecture style, number of rooms, size of facilities, star classification and so on — to avoid the need to either redo all the aforementioned or to face the possibility of building a hotel which no operator wants to manage or which will not be commercially viable.