Although the results of individual markets and region results vary, the overall luxury segment has seen RevPAR decline on a global scale.
HENDERSONVILLE, Tennessee—The global economic situation in the fall of 2019 is characterized by slower growth and—depending on the world region—by prolonged times of uncertainty.
Despite these trends, the global luxury hotel industry continues to show resilience and—again depending on the market—healthy demand growth rates. But it also needs to clearly be stated that the luxury hotel industry is not immune to shocks from outside the industry that curtail travel and spending on the upper end.
The annualized chart of room demand for the global industry shows only one trend: more growth. All combined, the industry is selling around 280 million roomnights per year, a number that keeps growing each year. Even the global financial crisis has, as shown in the chart, only affected luxury room demand for a short period of time.
The steady increase in room demand then caused myriad developers to give the industry their undivided attention, and our supply growth data is proof of the continued influx of development funds into the industry.
That said, demand growth has slowed over the last few quarters while the supply growth rate has remained somewhat stable. It is interesting to observe that the global luxury hotel demand slowed in late 2016 and early 2017, but it never dropped below a 2% annual pace. This is probably a good indicator pointing at the somewhat resilient demand by global high-end consumers and business travelers alike.
But since the supply and demand growth number are basically in equilibrium, albeit at a strong level greater than 2.5%, it implies that occupancy growth is flattening out and starting to decline. Indeed, the annualized occupancy change through Q3 stands at a 0.3% decline. And as always in that scenario, the main question is around the impact on pricing. Despite the healthy increase in average daily rate through 2018—which peaked at around 4% (in U.S. dollars)—the more current data hints at a correction. So far in 2019, ADR has declined 0.3% as well.
The combined revenue-per-available-room chart reveals that the latest monthly data can indeed be interpreted as being cause for concern.
Global luxury RevPAR has declined in eight of the last nine months, and the trajectory of the annualized change points one way: down. It will be important to observe demand and supply patterns going forward to understand how local hoteliers price their product given that the luxury room demand numbers continue to grow at a healthy clip.
The old adage of “your mileage may vary” is never truer than when talking about a global trend. The subcontinent data is a clear indicator of this:
It is worth pointing out a few markets’ RevPAR changes that skew the area performance. Hong Kong (-16.5%) and Sri Lanka (-18.4%) were clearly impacted by unrest and terror events and the accompanying global media attention that affected leisure and business travelers alike. The 2018 FIFA World Cup in Russia had a tremendous positive impact on the luxury hotels in that country, but the reverse is now true. Moscow (-38.6%) and St. Petersburg (-9.1%) benefited last year and now face tough comparisons. What’s also noteworthy is that the luxury hotel performance in the historically strong luxury bellwether markets of London (+0.5%), Paris (-12%) and New York City (-3.7%) is uninspiring.
The Middle Eastern performance is, was and will be affected by the tremendous influx of new supply going forward. Our pipeline counts shows a drastic number of new rooms being added, which will undoubtedly impact RevPAR performance in the future. Of course, China with more than 21,000 luxury rooms in construction continues to dominate the global luxury pipeline.
Luxury GOP performance
Through our P&L program, we are able to collect data for the full income statement from a wide variety of branded and independent high-end hotels. The following charts show the makeup of the total revenue line, broken out by room revenue and other non-rooms revenues, such as F&B, meetings, golf, etc. We can collect this data by country, and interestingly the ratio of rooms revenue to total revenue varies by country, from roughly two out of three dollars in Germany to just under half of the revenue in Japan.
It stands to reason that the larger reliance on room revenue should help to boost gross operating profit (GOP) as a percent of total revenue. But our data does not seem to bear that out.
While luxury hotels are often able to let over 30% of revenue fall to the bottom line, there does not seem to be a strong relationship between room revenue percentage and GOP percentage. This seems like a topic that warrants further study.
Overall, we expect that with the rise of the global middle class and continued macroeconomic growth, luxury hotels are poised for more room demand than ever before. But since developers are always adding new rooms, the interplay of occupancy and ADR growth will need careful attention. Market-specific events and demand drivers will always shape the local performance, but overall the mood of the participants in the global luxury hotel industry can probably be characterized as cautiously optimistic.
Jan Freitag is the SVP of lodging insights at STR.
This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.