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(Updates with Dorchester earnings in 19th paragraph, 3,000- pound cigar in 20th.)
Dec. 16 (Bloomberg) -- It’s Friday night at Claridge’s Hotel in central London and harried-looking bartenders are rushing to serve customers piled three-deep at the bar. Property investors are lining up too, not for the 16-pound ($25) mojitos and 27-pound glasses of Laurent Perrier Brut Rose champagne, but for the luxury hotels that can command such prices during an economic slowdown.
A site on Leicester Square in the U.K. capital that already has planning permission for a 245-bedroom hotel has attracted more than 15 bidders, according to a person familiar with the matter. More than a dozen parties expressed interest in a W Hotel on the same square before a Qatari investor bought it in September. That month, the billionaire brothers David and Frederick Barclay purchased 800 million euros ($1.1 billion) of debt tied to Maybourne Hotels Group, the owner of Claridge’s.
London’s luxury hotel market is defying Europe’s sovereign debt crisis and Britain’s sputtering economy as wealthy visitors from abroad drive record sales and occupancy rates and boost values. A lack of supply, as well as the prestige of owning a name like the Ritz or the Connaught, is sparking construction and persuading investors to pay more than they would for other types of real estate.
The city has had “a pretty good ride, helped by the weakening pound and by its status as a world-class city and financial and business center,” said Konstanze Auernheimer, marketing and analysis director for researcher STR Global. “It’s attracting a great amount of leisure as well as business guests.”
Rebound from Crisis
Values of luxury and trophy hotels have rebounded by 5 percent to 10 percent after dropping about 15 percent to 20 percent in the financial crisis, said Sally Kendall, a senior analyst for hotels at property broker CBRE Group Inc. Most of the increase has come this year, she said. By contrast, some of the most expensive U.K. hotels outside the capital have fallen more than 50 percent since 2008 and are continuing to decline, said Jane Lees, a director at CBRE’s hotels division.
The Ritz Hotel, owned by the Barclay brothers, is worth more than 625 million pounds, or 4.6 million pounds per room, based on “several unsolicited approaches from prospective purchasers for the sale of the hotel,” the owners said in a statement filed to Companies House on Sept. 30. Last year, the Ritz had its highest-ever sales at 31.3 million pounds, according to the documents.
“In broad terms, if you were to put a really high-end hotel on the market in London you’d be looking to clear something like 2 million pounds a room,” said Russell Kett, managing director of the London office of hotel consultant HVS.
The 192-bedroom W Hotel on Leicester Square, which also includes the European flagship store of Mars Inc.’s M&M’s, was bought for about 200 million pounds by Qatar’s Sheikh Faisal Bin Qassim Al Thani’s Al Faisal Holding Company.
Ireland’s National Asset Management Agency is selling its Leicester Square site after it put previous owner Steamboat Developments Ltd. into receivership. As well as the hotel, there is planning permission for 33 apartments, four restaurants and a two-screen cinema on the site. The person who disclosed the bids for the asset asked not to be named because the information is private. NAMA spokesman Ray Gordon declined to comment.
The prices indicate that investors either expect a significant improvement in hotel income or they’re willing to settle for smaller returns than they would expect for any other type of property, CBRE’s Kendall said in an interview.
Total return, a combination of rental growth and rising values, was 12.4 percent for hotel buyers over the four years through 2010, compared with a 6.9 percent decline in U.K. commercial property values, according to London-based Investment Property Databank Ltd. It doesn’t report London hotels separately. Total return for all U.K. hotels was 14.9 percent last year, more than double the European average of 6.9 percent.
Revenue per available room, known as revpar, for luxury hotels in the capital rose to 205 pounds in the January through October, a 25 percent increase from the same period two years earlier, researcher STR Global said. Revpar increased for all London hotels by an average 22 percent.
High prices and returns are attracting buyers like the Barclay brothers, the Telegraph Media Group Ltd. owners who bought the Maybourne Group debt in September from NAMA. The pair plans to invest about 130 million pounds in the company, which also owns the Connaught and the Berkeley hotels, as they try to gain control, the London-based Times reported on Dec. 4.
“There were a number of parties interested in acquiring the loans and effectively the Barclay brothers made us an offer to acquire it, unexpectedly at par,” NAMA Chief Executive Officer Brendan McDonagh said in an interview in October. “Obviously they had their homework done.”
Paddy McKillen, who owns 36 percent of Maybourne, is suing the Barclays and related investment companies over the acquisition.
“Mr. McKillen has no intention of selling his stake in Maybourne,” said his spokeswoman, Breda Keena. “He is the largest shareholder and is actively seeking to increase his stake. The hotels are performing exceptionally well and exceeding targets.”
Revpar at Maybourne’s hotels rose 17.8 percent to 423 pounds last year “driven mainly by the continued ramp up of the Connaught’s performance and strong profitability driven primarily by average room rate growth at Claridge’s,” owner Coroin Ltd. said on Oct. 7.
Pay to Stay
A night in the basic rooms at the Dorchester or the Connaught on Dec. 20 costs 318 pounds including tax. On the same night, the Savoy is offering a third night free if guests book two nights in a suite. Prices start at 882 pounds per night including tax.
The Dorchester, owned by the Brunei Investment Agency, had record occupancy and room rates last year it said in accounts filed with Companies House on Oct. 5. After tax profit rose 37 percent to 15.9 million pounds, the highest ever.
A guest at The Lanesborough near Buckingham Palace recently paid 3,000 pounds for a Cohiba ‘Behike’ cigar made by the personal roller to former Cuban President Fidel Castro, said bar manager Giuseppe Ruo.
Very little of London’s luxury hotel property tends to come on the market in any year, boosting competition for what’s available. That may change over the next few years, when new developments will be completed.
Most of the current stock is owned by overseas families, many of whom are under no pressure to sell. A Kuwaiti investor bought the Sanderson and St. Martins Lane hotels for 192 million pounds from a joint venture between Morgans Hotel Group Co. and Walton Street Capital on Nov. 23.
Indian, German Owners
India’s Sahara Group, owner of assets from TV channels to real estate, bought the Grosvenor House hotel on Park Lane for 470 million pounds last year and is also looking at other deals, according to a person familiar with the matter. Last month, MWB Group Holdings sold its Malmaison hotel on Charterhouse Square close to the financial district to funds managed by DEKA Immobilien GmBH. The deal was part of a wider sale-and-leaseback of part of its hotel portfolio and the exact price paid for the Charterhouse Square hotel was not disclosed by DEKA in a statement in Nov. 21.
Those who can’t buy now are looking to build, said Mark Shea, a director at real-estate adviser Davis Langdon. There is little appetite for developing mid-market hotels in London because most of the growth is at the top and bottom ends, he said.
“New-build developments need the high-end luxury hotel offer to drive the required returns and values to make schemes viable,” he said. “The London hotel market is generally focused on extremes -- the high-end luxury and budget offers. Mid-scale hotel development is generally seen as difficult.”
The Shard, the highest tower in Western Europe, will include a Shangri-La hotel when it opens in 2013. Qatari Diar is one of the backers of the project on the south bank of the River Thames. The Firmdale Ham Yard Hotel in the Soho district is due to open next year as is a Knightsbridge hotel by retailer Bulgari, an affiliate of LVMH Moet Hennessy Louis Vuitton SA.
A Four Seasons Hotel will open in 2015, developed by Heron International Ltd., and Frogmore Property Group is building an 80-bedroom boutique hotel targeting the luxury market and due to open next year. Grosvenor Group Ltd., owned by the family trust of Britain’s Duke of Westminster, and Derwent London plan to develop a new luxury hotel as part of a development overlooking Hyde Park.
Others are expanding into neighboring buildings. The Westbury Hotel on Conduit Street in Mayfair received permission on Dec. 14 to add 31 bedrooms by converting part of a neighboring building.
No Room Glut
Though the developments and expansions will increase the number of high-end rooms available in the city, they may not be enough to hurt values or revenue.
“The trophy end of it is a fairly rarified end, but even so, it’s not a large number of rooms to put into that pot,” said Jonathan Langston, managing director at consultant Tri Hospitality. “I’ve not held with this fact that new luxury supply is going to dilute performance.”
The improvement for London luxury hotels goes against the trend for short-term accommodation to suffer disproportionately in an economic downturn, said Gerard Nolan of broker Gerard Nolan & Partners, who has been involved in the sale of more than 350 hotels in the city during his career.
Easy to Cut Back
“It’s a very easy commodity for us to cut back on, it’s easy for us to say that we haven’t got as much money as we had and we cut back on going on that extra holiday,” he said.
The luxury market was buoyed by the closure of the Four Seasons on Park Lane and the Savoy, managed by Fairmont Hotels & Resorts Inc., for refurbishment, said Auernheimer of STR Global. Both have now re-opened.
The Lanesborough opened a suite priced at 14,000 pounds a night in May and has had 45 percent occupancy at the full rate since then, general manager Geoffrey Gelardi said in an interview. Guests are mainly from North and South America, Russia and the Middle East, he said.
The Lanesborough, part of Starwood Hotels & Resorts Worldwide’s St. Regis brand, has seen revpar growth of 3-4 percent this year, compared with about 9 percent last year, Gelardi said. Asian visitors, particularly from China, now make up 10 to 11 percent of the hotel’s guests, up from 4 percent in 2007, while Americans have fallen to 45 percent from 60 percent, which is “definitely a Lehman Brothers effect,” he said.
“London is almost a different country as far as the hotel business is concerned,” said Kett. “You’ve got strong demand for the capital but you haven’t got that repeated around the country, so it’s not like the U.K. hotel industry has recovered to the same extent.”
--With additional reporting by Simon Packard in London. Editors: Ross Larsen, Jeff St.Onge.
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