Fears were growing today that London’s hotel building market is being threatened by interest rate rises as sky-high borrowing costs prompt operators to pull back on investment decisions.
PPHE group, which operates the Park Plaza chain of high-end hotels, today said build costs on its landmark 27-storey art’otel site in Hoxton were set to come in several million pounds higher than planned after repayments on construction finance soared.
PPHE CFO Daniel Kos said: “There’s only one item that drives [the higher build cost] and that’s the interest cost. We borrowed £180 million in 2020 [to fund the Hoxton site] and since that time the interest rate went up significantly.
“If you want to build something at this moment interest costs are up to 10% and construction costs are up too.”
Kos said he had not gone as far as to halt all future London hotel developments until interest rates cooled, but added: “With any project we need to look at the underwriting in terms of what we can achieve in this market.”
UK hotel transactions fell to £825 million in the first six months of the year, according to data from property company Savills, 66% below the 10-year average.
“The rising cost of debt and the resultant mismatch between seller and buyer expectations has significantly reduced deal volumes,” Savills said.
“With lenders scrutinising profitability more than ever to ensure appropriate interest coverage ratios in the face of rising debt costs, protecting and even driving margins has become the focus.”
It comes as PPHE reported record revenues in the first half of 2023 amid a resurgence in tourism and work travel. Revenues rose 59% to £180 million as the company swung back to a pre-tax profit of £3.6 million.
Trade in the firm’s London hotels was especially strong, led by a bumper summer events calendar including the coronation of King Charles. PPHE also said London was also boosted by heatwaves in Europe, prompting Brits to take extended stays in the capital rather than travel overseas.
PPHE shares rose 5.2% to 136p. The Hoxton hotel is due to open in early 2024.
