A perfect storm of contributing factors has caused this: Scotland repeatedly punches above its weight in terms of inbound tourism; it has developed outstanding business and academic hubs with a supportive government; it attracts a diverse mix of visitors, smoothing seasonal variations; the Scottish government’s major events strategy has improved its international standing; yet, despite all this, it has not successfully developed the necessary infrastructure to keep pace with demand.
When you include policy decisions designed to protect city centres and residents at the expense of visitors, the result is clear: high investor interest, strong and sustained yields from hotels, but not enough development to match.
The market is hence buoyed by an increasing volume of hotel sales and strong interest from developers to find new plots and renovation opportunities.
Luxury market
Little wonder, then, that Edinburgh was crowned the top UK location for hotel investment in Colliers’ recent UK Hotel Market Index. This comes hot on the heels of a recent Savills report showing that hotel sales in Scotland more than doubled last year, with transaction volumes reaching £310m.
Context is also important – it hasn’t been long since one of Europe’s most substantial mixed developments completed in Edinburgh. The St James Quarter is a world-class example of placemaking in action, with an estimated investment value of more than £1bn. With a high-end aparthotel, a 244-room W Hotel and 152 luxury residential apartments, all set in a World Heritage Site, the development has set a new standard for premium accommodation.
Indeed, the luxury hotel segment seems on the rise in both Glasgow and Edinburgh. Recent examples include a £9m investment to open the Address, a new boutique hotel in Glasgow city centre, and a £50m investment in renovating and expanding the Caledonian Waldorf Astoria Edinburgh and the Hilton Edinburgh Carlton.
The factors driving demand for hotels in Edinburgh and Glasgow are relatively unchanged and are too many to list here.
They all have one thing in common, though, and that is Scotland’s ability to rank highly among international audiences, attracting large volumes of visitors consistently and repeatedly.
Whether this is to see global stars like Beyoncé and Taylor Swift (the latter being cited as the reason for a surge in demand for hotel rooms in Edinburgh for 7-9 June this year), to attend one of Scotland’s world-class universities, to enjoy Edinburgh’s various international festivals or to take part in major events ranging from cycling championships to marathons, Scotland’s capacity to drive demand for hotel accommodation seems insatiable.
Which all raises the question of why more has not been done to invest in the appropriate hotel stock to quench people’s thirst for visiting.
Investors and developers alike have long seen the potential in Scotland, but so few are the opportunities for entirely new construction that some are turning to more creative ways to enter the market or increase their footprint.
Retrofitting
Retrofitting has increased in popularity in recent years. One of Covid-19’s lasting impacts in Scotland is the changed working patterns of city residents.
Look at the city centres of Edinburgh and Glasgow on a Monday and you will see that they are quieter, with fewer residents coming in to work. This has led to reduced occupancy of commercial spaces, particularly offices, but not exclusively.
Retail has also been hit hard by this trend, with several major retail thoroughfares in Scotland under increasing pressure. In short, new stock is becoming available and much of this is ripe for conversion into hotels.
Sustainable solution
Office spaces hold great value when retrofitted as they already possess many similar attributes to hotels, such as central locations, ample floor space and existing infrastructure like lifts and utilities.
Not only this, but repurposing is a sustainable solution for investors, because developers can reuse building materials and reduce emissions when compared with a new build.
A great example of this is the £12.5m acquisition of 28 St Andrew Square in Edinburgh. Formerly home to a range of financial services institutions, it will soon become a Clayton Hotel.
The Category A listed building will have 153 bedrooms, a bar, restaurant and gym and is expected to be completed by mid-2026. Irish hotel group Dalata cited Edinburgh’s status as a top-performing hotel market within Europe as the main reason for the deal.
Edinburgh and Glasgow are rarities with unique markets coloured by history and heritage, yet improved through innovation and international standing. No wonder investment is on the rise – as long as we keep being creative and respect the cities’ natural strengths, that appetite should remain for some time to come.
Demand for rare Scotch whisky remains high because investors enjoy the blend of substance and style: it tastes good, but there is also a story behind every dram. Scotland’s hotel market is no different.
This article originally appeared in EG: Raising a dram to Scottish hotel investment (egi.co.uk)
