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Increased cost price, how will the chain absorb these costs?

The geopolitical context, inflation and sustainable development are all elements that impact the costs linked to the development of a hotel project. Jean-Luc Guermonprez, Deputy Managing Director / Director of the Hospitality Division at Vinci Immobilier and Vanguelis Panayotis, CEO of MKG Consulting, discussed these current concerns and the different possible solutions during the Hospitality Operator Forum.

Impact of inflation

Vanguelis Panayotis: All these hotels have to be built, rehabilitated and eventually transformed, can you talk to us about inflation and the increase in production costs? Isn't it difficult at the moment for Vinci Immobilier to make ends meet?

Jean-Luc Guermonprez: Making ends meet is our business. As a property developer, our mission is to build the city of tomorrow and the hotel industry is an integral part of that. This is why we have always kept an important place for the hotel industry in our strategy. There are two strong elements that must be remembered, and which contribute to the cost price and investment costs of hotels, these are our strategies in terms of sustainable development and costs.

I will start with the increase in the cost price, the one that drives us and even more now so since the beginning of the war in Ukraine because it has had a double effect. There was an inflationary effect that started earlier and also a real problem with the supply of building materials that has grown due to this conflict. After it began, we found out that Ukraine was the supplier of all the material vendors.

Vanguelis Panayotis: Has this caused any delay in your projects?

Jean-Luc Guermonprez: There is indeed a delay, but thanks to our relationships we have managed to deal with it in a way that is doubly beneficial. We discussed each case with our clients, and the developer Vinci Immobilier absorbed all the additional costs linked to this inflation in accordance with its contract. When there was a delay, the client generally accepted it.

Vanguelis Panayotis: Are there any new solutions to consider in the way you work on projects?

Jean-Luc Guermonprez: Of course there are new solutions because inflation will rise to 5.5% by the end of the year. For example, BT01, the construction cost index, has risen by 6.2% over the last 12 months, which is equivalent to a very significant additional cost. Today, we must continue to develop and offer operations to our clients and partners at costs they can bear, knowing that our cost price is increasing due to inflation, the cost of materials and the cost of financing.

We have been working with an almost free cost of financing for many years and now we are caught between operations that last 1 or 2 years longer than ten years ago and a cost of financing and carrying these operations that is increasing. Our real challenge is to get these cost price increases accepted throughout the value chain. When I hear what was said this morning [during the Hospitality Operator Forum], we are delighted to see that things are getting better and better for our clients.

The avenues to be explored

Vanguelis Panayotis: So far the topline, RevPAR and average prices are holding up, run-off elements that lead to high renovation or construction costs. What are the other levers that can be mobilised to find a more balanced equation when setting up a project?

Jean-Luc Guermonprez: If we take all the elements that make up the cost price of an operation, the first is the land. Today, we have not yet succeeded in bringing down the price of land, even if the hotel industry is very attractive for local authorities. Each time a city or a community puts a piece of land up for sale, it is more and more expensive and soon they will add indexation to it, something they did not do previously.

Construction costs today are a bit like a crystal ball. We have the feeling that we are at a peak of increase but there is also a strong disparity depending on the location. In Paris, construction costs are driven by the 2024 Olympic Games and the Greater Paris project, resulting in a very strong pressure on prices. Outside of the capital, we are starting to see companies with declining order books who, despite inflation, are keen to win new contracts.

Vanguelis Panayotis: Given the financial context and regulatory obligations, what will remain and how can we address it? Are there ways to be smarter?

Jean-Luc Guermonprez: There are always ways of being smarter and more efficient. We need to achieve on construction costs what we have achieved on sustainable development.

Sustainable development, which is part of our global strategy and on which we have made strong commitments, has been integrated into the entire value chain over the years, and investors and operators are willing to pay for it. Although sustainable development is initially an additional cost, it subsequently generates operating savings.

For construction costs, the first lever is design. We need to return to a design that is the most efficient and optimised, but also to arrive at prices that are acceptable, knowing that our clients also have an increase in the cost of their financing. We consider that, at the moment, it is the most difficult period to bring out new projects even though demand is still very strong.

Rehabilitate rather than build from scratch

Vanguelis Panayotis: In the last 15 years there has been a lot of new construction, will this continue?

Jean-Luc Guermonprez: Today, we are carrying out fewer and fewer new projects on greenfield sites. Amongst our commitments in terms of sustainable development, there are two very strong ones. The first is to achieve zero net artificialisation by 2030 and the second is to achieve more than 50% of our turnover via rehabilitation. This means that we can prohibit ourselves from carrying out operations if they do not fulfil these criteria.

To make our strategy a success, we have also developed a number of tools. Tools to increase the skills of our employees in terms of sustainable development and rehabilitation. We also developed a tool a few weeks ago for our partners and designers. It's a list of sustainable development recommendations for hotels on which we have defined a baseline with a certain number of criteria that we undertake to respect as well as a certain number of options for each project.

I am quite positive on this point since it has been entirely taken on board by operators and investors. Today it is impossible to sell a project to an investor if there is no certification label, the label is the baseline whatever happens. The second element is rehabilitation, I would say that in the hotel industry we are much more advanced than the residential or office building sectors on this subject.

For example, Vinci Immobilier delivered four hotels last year and all are refurbishments. There is a former police station transformed into a 5* hotel in Strasbourg, a tax centre transformed into a Novotel, 3 office buildings transformed into Kimptons, and the last one in Lille is a former Galerie Lafayette transformed into offices with a hotel on top.

We are actually more involved in rehabilitation than in new projects, and the real difficulty is that today rehabilitation is more expensive than new construction. We are fully convinced that the future of development lies in rehabilitation and not in the further expansion of the urban sprawl as has been the case over the last 10 years.

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