Building Hotels: A Guide for Family Offices

Our previous article 'Investing in Hotels: A Guide for Family Offices' focused on investing in the hotel market, this article looks at building and redeveloping hotels and the current challenges faced by family offices considering this option.

Often the first decision for a property owner looking to open a hotel will be redevelopment vs renovation. This debate remains a challenge for the entire property industry, with renewed emphasis under the Labour government due to its more relaxed, pro-business approach to planning. This is counter-balanced by an increasing emphasis on the environment, sustainability and reducing embodied and operational carbon emissions.

There have been a number of interesting recent renovations in London giving rise to new luxury and boutique hotels, including the following, that are due to open this year:

• Cambridge House, Auberge Resorts Collection: A Grade I listed building in Mayfair, London – formerly the In and Out Naval & Military Club.
• The Chancery Rosewood: A Grade II listed building in Mayfair, London – formerly the US embassy.

So, with such eclectic and iconic existing buildings in London and other cities around the UK ripe for renovation, why might you consider going down the new build or redevelopment route? There are a number of factors that will come into play.

Cost

With the cost of construction rising, renovating can be a more cost-effective option. New builds often involve higher initial costs and longer development timelines due to land acquisition, regulatory approvals and ground up construction. Redeveloping an existing property can offer cost savings and shorter timelines, as the infrastructure is already in place. This option is particularly appealing in prime locations where land availability is limited.

Sustainability targets

Property owners with a robust ESG strategy may consider retrofitting to align with their own sustainability targets. Alternately, during redevelopment, eco-friendly building materials and energy efficient systems can be used to minimise the environmental impact. 

Market positioning

New builds provide greater flexibility in design and layout,  offering the opportunity to create bespoke, state-of-the-art facilities that cater to modern guest preferences, potentially attracting a different clientele compared to renovated properties. Renovated properties may however be more appropriate for offering the boutique experience. In addition, new builds offer a unique advantage in terms of branding consistency and customisation. By starting from scratch, investors have the opportunity to design every aspect of the hotel to align with the brand’s identity and values. This includes architectural style, interior design, and the integration of signature amenities that reflect the brand’s ethos - ensuring a consistent guest experience across multiple locations.

Another key consideration is the evolving regulatory landscape, which can significantly impact project timelines and costs. We delve deeper into some of the key regulatory issues below.

Building Safety Act

For those venturing into hotel investments, understanding the regulatory landscape is crucial, particularly the Building Safety Act 2022. This legislation introduced a new building control regime and occupation regime for buildings classified as ‘higher risk’ (HRB) which applies to structures that are 18 metres or taller or have seven or more storeys, and contain at least two residential units. While hotels are specifically excluded from this regime, according to government guidance, serviced apartments will not come within this exception and there may be grey areas in between.

For the construction phase, HRB projects must pass through three regulatory checkpoints, known as gateways, to ensure safety compliance with the Building Regulations.  Once an HRB is occupied, there are substantial duties imposed on those with a legal obligation to repair any common parts of the HRB etc in order to ensure residents’ safety.

Hotels might be subject to the HRB regime in specific scenarios. For instance, if a hotel is part of a mixed-use development where other parts of the building meet the HRB criteria, the entire structure may be classified as such, at least for the construction phase. There are rules around distinguishing ‘independent sections’ during the occupation phase, which should be carefully considered at the design stage of the development. Additionally, if a hotel includes permanent staff accommodation within the same building as guest rooms, it could also be treated as an HRB.

Significant delays are being reported by those who have had to grapple with the building control gateway regime for HRBs since its introduction in September 2023. An inquiry has now been launched into building safety regulation, focussing on the building safety regulator for HRBs. In the meantime, measures are being put in place to ease the delays. In the case of HRBs, investors must factor these potential delays into project planning and financial agreements, ensuring that milestones are realistic and accommodate regulatory timelines to avoid triggering default clauses in loan agreements.

Navigating the Building Safety Act's requirements is essential for investors in hotel developments.  Where applicable, the new HRB requirements will inevitably increase complexity, costs and duration of a development. However, by understanding the implications of being classified as an HRB and ensuring compliance with the relevant obligations, investors can mitigate risks and enhance the prospects of a successful and profitable hotel venture.

Environmental Social and Governance (ESG)

ESG considerations are pivotal in UK hotels sector, as ESG-aligned development strategies are increasingly required by hotel operators, corporate clients, lenders and planning authorities but also enhance the overall value and appeal of hotel developments. There are various strategies developers can employ to enhance their sustainability profile, including:

Embodied Carbon and Materials

Opting for refurbishment over new construction can significantly reduce the embodied carbon footprint. Investors can further enhance sustainability by selecting low-carbon construction materials, such as low-cement concrete, FSC-certified timber, and recycled steel, alongside locally sourced materials to minimise transport emissions.

Operational Energy Efficiency

There are a number of ways that hotels can increase and measure energy efficiency, such as:  

• Targeting a BREEAM ‘Excellent’ or ‘Outstanding’ or LEED Gold/Platinum. BREEAM is the UK’s leading sustainability assessment method for buildings and rates buildings on their design, construction and in-use performance. Whereas LEED is a global sustainability certification and is widely used for international hotel chains and luxury developments. These are both widely recognised as the ‘gold standard’ and are increasingly being expected by investors and consumers. More recently, the UK net zero carbon buildings standard was launched as a pilot in September 2024 and can be used for hotels.
• Adopt the NABERS UK Energy Rating (increasingly expected for commercial developments and extended to hotels in 2025) to provide a clear evidence-based rating of actual energy performance in use – not just theoretical design performance.
• Design for natural ventilation and daylight to reduce HVAC and lighting loads.

These environmental strategies not only support sustainability goals but can also lead to lower operational costs, favourable loan terms from ESG-focused lenders, and enhanced brand value and guest loyalty.

Public Realm Enhancements

Hotels offer opportunities to enrich the surrounding community by creating open spaces, seating areas, or art installations. Such initiatives can foster local engagement and enhance the hotel's social impact. It can also support local job creation through construction and hotel operations.

WELL Building Standard

Designing rooms and communal areas to meet WELL Building Standard principles can improve air quality, lighting, acoustics, and ergonomics, promoting guest well-being and satisfaction.

On the flip side, businesses that do want to highlight their “green credentials” must be mindful of increasing consumer protection measures focused on anti-greenwashing. A recently strengthened anti-greenwashing regime in the UK cautions businesses to ensure that any environmental or sustainability claims made are clear, accurate and substantiated, among other things. Investors should therefore ensure that ESG requirements are embedded in development agreements, funding conditions, operator selection and exit strategy – not added as an afterthought. For more on anti-greenwashing see ‘Anti-greenwashing in the UK, EU and the US: the outlook for 2025 and best practice guidance’.

Cost Inflation and Supply Chain Disruption

Post-pandemic volatility, Brexit-related import restrictions, and geopolitical instability continue to impact material and labour costs across the UK. These fluctuations can be particularly challenging for hotel developers, where profit margins are often tight and opening timelines crucial. As a result, we are seeing contactors take less risk in terms of cost and programme for ‘neutral’ events.

Increasing costs and labour shortages (which further exacerbate project timelines) and added regulatory compliance are contributing to levels of insolvency in the construction industry. The insolvency of main contractors and key subcontractors remains one of the most disruptive risks in hotel construction. The risk is heightened in the hospitality sector due to the reliance on specialist sub-contractors, whose work is often highly bespoke, brand-driven, and not easily substituted without delay or compromise to design integrity. To address these risks, consider the following.

Security Measures

Consider securing parent company guarantees and performance bonds not only from the main contractor but potentially also from key trades to safeguard against insolvency risks.

Collateral Warranties

Obtain collateral warranties from key design subconsultants and subcontractors, which should include step-in rights to provide additional protection and flexibility in the event of main contractor insolvency.

Project Insurance

Consideration should also be given to project insurance layers to cover business interruption and delays in opening.

Regardless of whether your family office is just beginning to explore opportunities in the hotel industry or you’re looking to redevelop a property, our team at Charles Russell Speechlys is here to provide expert guidance and support. We understand the unique challenges and opportunities within the construction industry, and we are committed to helping you navigate this complex and highly regulated area. We invite you to contact Melanie Hardingham or your usual contact to discuss how we can assist in achieving your strategic objectives.