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[#PAFh19] "The main risk is in the lack of coordination"

By Jean-Luc Guermonprez, Director of the Hotels division, Vinci Immobilier, and Alain Tayar, Deputy Managing Director, Bouygues Bâtiment, Île-de-France Rénovation Privée, at the Paris Asset Forum >hospitality.

Jean-Luc Guermonprez (JLG): Our job is to deliver a fully finished hotel, a turnkey hotel. So, we need to know what cost we're talking about. Are we talking about construction costs? Which is the cost that we - real estate developers - negotiate with a general contractor or companies, or are we talking about cost prices or room costs? i.e. a construction cost to which we add a whole set of technical fees, it can vary from 12 to 15% (architect, design office, decorator, specialized consultant...), plus fees margins and contingencies, and all this before talking about the cost of land, which for us, property developers, really makes the difference in the investment cost or the cost of a hotel room.

We have very large disparities. We can treat a classic 4-star room in terms of work costs today at around 2000 € per msq, and when we work on the major renovation of a 5-star project in Paris, we are rather around 5000 € per msq. The price per msq varies according to the range; for the price per room, the greatest impact is the land. Land in the Paris region or in Paris intramural can represent nearly 70% of the investment cost. For example, a building on rue de Bassano that has been completely restructured to make a hotel, our real estate development contract cost, which is the guarantee of turnkey delivery (including “FFN”), is around €5,000 per msq, which is almost €300,000 per room, while the acquisition cost has been almost 3 times that price. To take the example of St-Etienne, or Bordeaux or Lille, we manage to treat land between 50 and 300 € per msq, there the construction cost is about 2 000 € per msq for a four-star hotel.

On the palace side, what are the pitfalls to avoid?

Alain Tayar (AT): Indeed, a variable part of the key is the construction cost, it varies enormously. In renovation it varies in part by the adaptation to the existing. But the main risk is in the lack of files coordination. We are seeing more and more records that are poorly maintained or rushed when they are put on the construction market. The object is therefore not very clearly finished, which leaves a lot of space for contractors to interpret, who can create discrepancies between the client and his company on the real value of the construction cost. So, one of the first pitfalls to avoid is to ensure that the files that are designed coordinate their files in an absolute way. We see that by stacking the layers through “AMOs”, advice of all kinds, to guarantee this result, quality is eroded because the more we multiply the interlocutors, and the more we multiply the risks. I invite you to be extremely vigilant about what you design.

What value creation lever can you offer to an owner? And how can you respond to the issues you have raised?

JLG: Answering these problems for an investor, whether a fund or a franchisee, our daily job as a real estate developer is to coordinate a set of advice, and in the end, there must be someone who pays. Within the framework of a "sales before completion" (VEFA), it is the property developer who guarantees any gaps in services, the hazards of worksites, on time... and there are more and more in Paris, because as you know, worksites are a privileged target for yellow vests. Beyond the impact on the hotel industry, the developer must guarantee this envelope. A few months ago we delivered a 185-room Italian style ibis door-to-door, the Accor franchisee, owner of this hotel and about ten others, told me that this was the first time he had spent nothing more than the purchase price, since everything that was uncertain was covered by the developer.

Is it an insurance product? What is it exactly?

JLG: It is the know-how of the dedicated hotel team: knowing the product, the people involved, the limits of services, and being able to guarantee all this contractually. Yes, it is an element of value creation, but the first element of value creation for a real estate developer is his ability to find a location that is a prime location and for which we are able to be innovative, that fits into his market and that allows us to create value in the short term, and for the future investor-operator to create value in the long term.

You mentioned the coordination issues before, but with whom? Operators, owners, third parties? And what are the real difficulties?

AT: In terms of construction costs, coordination is exclusively linked to design: how do you fit a magnificent structure into a volume that must accommodate it? It is a coordination that combines technology, decoration, interior design, “FFNI”, uses... At Bouygues, we make sure that our customers do not pay any modifications or have any cost changes when they have not requested any changes. A legitimate fear of the profession is that costs will skyrocket, even though we have not asked for any extra service, object or modification. It requires experience, you have to know how to anticipate, you have to know the product, you have to know how to detect traps, risk areas, so that you can absorb them from the beginning in the construction cost, and as one of the market leaders, you have to integrate them into our cost so that our customers, hotel professionals, or hotel investment professionals, and not real estate professionals, do not have to suffer these coordination defects.

How is investor demand evolving? What are the evolutions and expectations of investors on hotel renovation or creation projects?

JLG: Beyond the fundamentals for investors, which are to become the owner of a hotel that is a business model that allows them to achieve their performance, today if we take a classic 4-star hotel in the Paris region as we understand it compared to what we did ten years ago, the requirements have increased enormously. As Sylvie Bergeret said, everything is sustainable development. For Vinci Immobilier, it is now impossible to develop a hotel without looking at the sustainable development aspect, and this is a reflection that goes beyond certification. It is a global reflection, starting with a reflection on sustainable development, environmental integration and carbon footprint. For us, these are elements that are an obligation and a request from investors, in addition to the overall cost and coordination issues. A second example, a little more technical and which will interest investors, is the “BIM”, the digital model. Today, we do not carry out an operation without an “AMO BIM”, in order to try to guarantee, we are not going to simplify the construction part, but to have a computer tool that is a management tool for the future operation of the building. These are two examples that are requests from investors and that we are working on every day.

Can you give some examples of equipment, services or recommendations in terms of sustainable development?

JLG: In terms of sustainable development, the easiest way is always to insulate the building. When you do a building that is insulated from the outside and inside, you have done 80% of the work. For the digital model, it is still in progress, but the ideal would be for this “BIM” model to allow the technical management of a hotel to press a button and have the reference, the price and the supplier of a door handle, a kitchen element, a curtain... every time they have to change something. 

AT: I would like to add two more themes: the circular economy, which is a key phenomenon in the act of building, since it aims to improve the management of our waste - let us remember that the construction industry is responsible for 70% of the world's waste, and we have a zero waste objective in our projects with the three leaders in French construction; and the CSR-circular economy impact is major in the guarantee of deadlines, because it has an immediate lever on everything that is logistical since more and more prefabrication, deconstruction, the construction model of classic schemes is done off-site, so we have zero empty trucks, so we contribute to an improvement in the rate and emissions of carbon, we have less incoming waste and therefore less outgoing waste. Finally, the superposition of tasks really allows us to reduce the time and guarantee it since the risks outside are still much less numerous than inside a site.

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