Work has begun on a new £20m (US$29m, €26m) four-star hotel in Edinburgh’s Old Town, marking a milestone in hotel operator Carlton’s ambitions to provide more luxury accommodation in the city.

The 98-room boutique hotel has been designed by local studio JMArchitects and interior designers FG Stijl. It will transform a key under-used site on Market Street, located next to Craig’s Close, which has remained vacant for more than 50 years.

Due to open in Q1 2018, visitors to the hotel will have panoramic views of the city’s UNESCO World Heritage Old Town – from Princes Street Gardens to Calton Hill – from a top floor penthouse lounge and bar.

JMArchitects design director Rod Duncan said the appearance of the Old Town has been determined by many different factors throughout the life of the city, “generating an enormously complex urban condition.”

He said his studio have created a site-specific “biogeographical” response to these historic patterns and processes, which will ensure the hotel is non-invasive and respectful of its neighbouring buildings.

The hotel will be operated by the Carlton Hotel Collection and is being delivered in partnership with The EDI Group.

Councillor Gavin Barrie, chair at EDI, said: “Delivering an outstanding luxury hotel in the heart of Edinburgh’s Old Town is a significant moment for the city’s tourism and leisure industry. The design of the building carefully balances old and new to support the city’s heritage status and we’re delighted that a key under-used site for the city will be brought back into use for residents and visitors to enjoy.”

Construction services company ISG has been appointed as the main contractor for the project and has pledged to “set the standards for all future luxury hospitality developments in the city.”

The Carlton Hotel Collection, founded in 1985, is part of Hotel Management International, which owns, operates and manages ten four-star hotels in the Netherlands, Belgium, England and Scotland.