Is the UK hotel sector sitting on a capital expenditure time bomb?

23rd March 2010, 10:26am

The lack, and misallocation, of capital expenditure could see a significant number of hotels miss the initial phase of a recovery that is moving ever closer, and also impact on their long-term viability, according to Christie + Co.

Capital expenditure (capex) tends to be one of the first things to be cut during a downturn, as owners focus on short-term survival over long-term strategy. A significant number of hotel owners either cannot afford or are ignoring the continuing need for capital expenditure throughout their businesses.

At the same time, lenders and operators are increasingly taking an active interest in the Capex and Furniture, Fixtures and Equipment (FF&E) reserves of the hotels that they are involved in to see if the funds are being used as intended or as a means to mitigate trading shortfalls. They now want to see that a clear rationale exists for how the capex fund is being, and will be, used.

Customer expectations are also constantly evolving, and hotels that are failing to update their offer could lose repeat business in the face of new hotel supply coming into the market.

Andreas Scriven, Head of Consultancy at Christie + Co, said: "Capex is often the first thing to be cut during a downturn, but owners who haven't invested are likely to miss out on the initial upturn in trade when it comes. In addition, a hotel that has not seen investment is at risk of affecting a brand's reputation, which is of significant concern to brand owners looking to protect their brand equity.

"Any lack of investment now will impact businesses at the beginning of the recovery and in the long-term, as they are not only competing against existing hotel supply but also new supply entering the sector. The list of underinvested, underperforming legacy hotels in the UK is already long, so owners seeking to avoid being added to that list need to ask themselves if they can afford to stand still. Similarly, lenders who refuse to release additional funding for capex programmes may find themselves with a permanently impaired asset on their books."

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• 04 Jul 2011 - Legacy Hotels takes control of two East Sussex hotels

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