Garrison Barclay Estates said the award winning Mercure hotel at Chartist Tower might have to close if the local council doesn’t agree to a new ground lease deal
Chartist Tower.(Image: John Myers)
The developer behind the Chartist Tower regeneration project in the centre of Newport, anchored by an award-winning four-star hotel, said its scheme will be rendered commercially unviable unless the local council backs its proposals for a new ground lease agreement that fairly reflects post-Covid trading realities.
In a major vote of confidence in Newport as an investment location, Garrison Barclay Estates, having invested £11m of its own cash reserves, unveiled a 140-bedroom hotel in the building – once occupied by P&O – in 2022.
The scheme also provides around 25,000 sq ft of office space and 15,000 sq ft of retail space, of which 12,000 sq ft is let. This includes a revamped Barclays Bank branch in what was formerly the BHS department store on the ground floor.
While the hotel, which employs more than 40 people and is operated under a management contract by Mercure, has maintained strong occupancy levels since opening, profit margins have been eroded by inflationary pressures.
The scheme’s office element is currently empty after its only occupier, the Newport Argus, relocated, leaving the developer liable for empty business rates.
With Garrison Barclay Estates’ cash injection, bank debt, and £1.6m of grant and loan support from the Welsh Government, provided via Newport Council, the cost of the regeneration project has been around £21m..
The current relief on the long-term ground lease the company has with the council expires in December 2027. As it stands this will see the scheme incurring an annual ground lease payment of £315,000, compared with around £220,000 before Covid.
Cardiff-based Garrison Barclay Estates said that, despite multiple independent reports supporting a reduction in the ground rent, repeated representations to the council have failed to secure a new arrangement.
As an alternative, the company has proposed a revenue-sharing model under which the council’s ground rent would increase as a percentage of revenues as more tenants are secured for the office and retail space and the Ebitda the hotel improves, Under the plans the annual lease payment to the council could reach £220,000.
It said the proposed model would provide the council with full transparency through access to the scheme’s accounts.
Newport Council said the Chartist Tower project has received significant public sector funding. It added that while is was considering the proposals from Garrison Barclay Estates it had to be mindful of the best use of the public purse.
However, without an agreement, with a separate new ground lease deal the hotel, chief executive of Garrison Barclay Estates, Andrew McCarthy, said the hotel could have to close. He confirmed there is already interest from housing associations and added that local authorities across the UK have concluded they need to be more realistic over ground lease rents if they are to sustain and attract commercial investment.
He explained: “If you look back 20 years, councils could expect, for example a large department store, to pay around £1m a year from a ground lease. However, those days are gone.
“The ground rent structure for Chartist Tower was originally established when the building was occupied by a department store and office accommodation, and it no longer reflects the economic reality of operating a modern city-centre hotel.”
To support its case, the company has commissioned independent property and valuation advice, including work undertaken by Carter Jonas, one of the UK’s leading property consultancies with extensive experience in city-centre regeneration and hospitality assets, and BNP Paribas Real Estate.
Additionally, the chief executive said Rockingham Partners has offered specialist assistance to help the council understand how other local authorities have addressed similar issues surrounding high ground rents while promoting the sustainability and long-term viability of their city centres.
The hotel, including visitor spending, generates an economic impact of £10m annually for the city.
Garrison Barclay Estates has also raised its concerns with the new Plaid Cymru Welsh Government, asking it to intervene to help ensure the continuation of one of Newport’s most important city centre businesses.
The company has given the council until July 17 to reconsider its position. If there is no change, it said it would have no alternative but to consider putting the hotel up for sale.
Mr McCarthy said: “If we have to sell this asset, the most likely route for new owners to sustain the existing ground lease would be through securing a contract to accommodate asylum seekers or by converting the property to social housing.
“We believe either outcome could have significant implications for Newport city centre, including its economic vitality, visitor appeal and wider regeneration ambition. “
Mr McCarthy added: “Newport already has substantial levels of social accommodation within the city centre, and the loss of a successful hotel would damage the city’s ability to attract visitors, conferences, business events and private sector investment.
“This is no longer simply about ground rent, but about whether Newport wishes to protect one of its most successful regeneration projects or risk losing a key city-centre asset that has already delivered jobs, investment and economic growth.
“We invested in Newport on the back of council plans to bring further investment into the city, including a proposed knowledge quarter, but this has failed to materialise.
“The number of hotel visitors originally envisaged from delegates attending conferences at ICC Wales has yet to be achieved. While the hotel is award-winning and close to 100% occupancy, our revenue per room would be improved if more events and investment in the city, as promised, were realised.
“However, there is still significant potential for the city and, with a new approach from the council, we want to play our part as an active investor in helping Newport maximise that potential and position itself as a thriving commercial city..”
ICC Wales(Image: Richard Williams/WalesOnline)
When announcing its funding package for the project in 2019, the Welsh Government said: “The refurbishment of Chartist Tower is a pivotal development in the next phase of sustainable investment and regeneration for Newport, and is ideally placed to capitalise on business tourism associated with the opening of the new international convention centre ICC Wales.”
Last year, the hotel received the TripAdvisor Travellers’ Choice Award for the third consecutive year.
A spokesman for the council said: “Newport City Council has provided considerable financial support to the developer in relation to Chartist Tower. It is also owed significant sums of money as, to date, the developer has not paid the interest on the council-provided loan in line with the agreement.
“Over the last two years, the developer has approached us for even more financial support on more than one occasion. The council has consistently refused, despite ‘warnings’ that the hotel would be closed if it did not agree.
“The developer has recently approached us again with yet another proposal, and this is being considered.
“However, taxpayers’ money is precious, and we have a responsibility to ensure that we do not simply hand over public money unless there is a clear business case that provides a clear benefit to the city.
“At all stages, appropriate due diligence is undertaken. All the evidence shows that the hotel is thriving and attracting thousands of guests. New businesses have also opened in Chartist Tower (retail tenants) in the last 12 months.”
Mr McCarthy said the £1.6m of support from the Welsh Government, passed through the council, consisted of a £1m grant. He add that there was an agreement with the council that, at the point of refinancing next year, the remaining £600,000 loan element would be converted back into grant support.
He said the £1.6m was significantly less than the standard level of public sector support of 10% of overall development costs (£21m for Chartist Tower) for projects seeking to regenerate city centres.
In a statement responding to the council’s position, Garrison Barclay Estates said:“The council’s assertion that it provided ‘considerable financial support’ fails to reflect what actually occurred.
“During the development, Newport City Council required the project to proceed with approximately 40% less grant funding than was originally available. Furthermore, after construction had commenced, around £600,000 of grant funding was converted into a loan, fundamentally altering the agreed funding structure and increasing the financial burden on the project.
“It was understood that this loan would ultimately be converted back into grant, as is common practice on regeneration schemes of this nature. That conversion never took place.
“The council also refers to extending the commencement of the ground rent as evidence of its generosity. That is not an accurate characterisation. The extension occurred during the unprecedented disruption caused by the Covid-19 pandemic and the resulting economic downturn.
“It reflected the exceptional circumstances facing the hospitality sector rather than any extraordinary concession by the council. To be clear we have not asked Newport City Council for further public funding.
“Our position has remained consistent throughout: we have requested only that the historic ground rent be reviewed and brought into line with current market conditions so that the hotel can remain sustainable for the long term. This is a commercial lease issue, not a request for taxpayers to provide additional subsidy.
“The hotel itself has been an outstanding success. It has attracted thousands of visitors, created employment, generated significant economic activity and become an important part of Newport’s hospitality sector. It has achieved this despite the much slower pace of the wider city-centre regeneration that was envisaged when we invested in Chartist Tower.
“We committed to this development based on the council’s regeneration vision and the economic assumptions that underpinned it. While the hotel has consistently delivered, many of the wider regeneration ambitions that formed part of that vision have not materialised.”
“The council’s reliance on the hotel’s operational success misses the point entirely. A successful business can still be undermined by an unrealistic lease structure.
“If the council insists on charging a ground rent that exceeds what the property can reasonably sustain in today’s market, it risks damaging a successful business that continues to deliver benefits to Newport.
“The statement also creates an accurate impression of the commercial market within Chartist Tower Although businesses have opened within the building, recent lettings have been completed at rental levels significantly below those originally forecast. In several cases, space has been occupied at little or no rent to support local businesses, maintain activity and contribute to the vitality of the city centre. Those are the realities of the current market and they cannot simply be ignored.
“Moreover the council’s suggestion that there is no clear business case is incorrect. An independent report prepared by Carter Jonas provided a detailed professional assessment of market values, viability and the sustainability of the development. That evidence demonstrated why the existing ground rent requires review. Rather than engaging with those independent findings, the council chose to disregard them.
“This has never been about seeking additional public money. It is about securing a fair, market-based ground rent that reflects today’s commercial realities and protects the long-term future of one of Newport’s most successful regeneration projects.
“We remain willing to engage constructively with Newport City Council to achieve a fair and commercially realistic outcome.”
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