London’s luxury segment keeps shining
London’s luxury segment keeps shining
07 OCTOBER 2013 7:30 AM

London continues to absorb new entrants at the high-end of its hotel market.

LONDON—Continued buoyancy is still apparent in London’s luxury hotel market despite an almost constant growth in capacity.

London now matches Hong Kong as the top destination worldwide with the greatest concentration of 5-star properties in the more than 150 markets rated and inspected by Forbes Travel Guide. Recent 5-star openings include ME London; Corinthia Hotel London; and the West End’s Café Royal. Imminent additions are 10 Trinity Square; the Shangri-La, at The Shard; and Four Season’s Heron Plaza.

There is stiff competition for the limited real estate available, both in existing hotels and potential conversions. 
“One of the big issues going into this year was the capacity that was added last year ahead of the Olympics, and there was the fear or something of an overhang in excess of supply. I think those fears have been put to bed as actually the London market has been doing very well, and we’ve seen particular strong growth, particularly with inbound tourism,” said Wyn Ellis, travel and leisure analyst for Numis Securities.

“There are little real signs that the economic uncertainty in the eurozone has had an impact at all on the luxury sector. If you look at the data for the London market, it is quite extraordinary how resilient it has been. It pretty much shrugged off 2009 quite quickly, and we’ve had continued very high occupancy rates and great (revenue-per-available-room) performance. It’s been very encouraging.”

When reported in British pounds, year-to-date August, luxury hotels in greater London saw a 4.8% decrease in average daily rate attributable to 2012's Olympic premium rates, according to data from STR Global, sister company of Hotel News Now. Meanwhile, occupancy flatlined, with an insignificant 0.3% decrease showing demand is keeping in line with supply growth.

Looming luxury supply
Year-to-date August, greater London has 81 luxury hotels comprising 11,514 rooms open, according to STR Global, with an additional three luxury hotels comprising 453 rooms under construction.

“There are many luxury brands that have identified London as one of the greatest cities in the world and an important location to have a presence,” said Darren Gearing, executive VP and GM of Shangri-La Hotel, At The Shard, London, which does not have a confirmed open date.

“London has always been in the global spotlight, and following the successful hosting of the London 2012 Olympic and Paralympic Games its position was further established,” Gearing said. “London continues to welcome visitors from all over the world, and key markets such as China and the Middle East have supported substantial growth in the luxury sector.”

However, it’s not just overseas visitors who drive London’s high-end success, Gearing said.

“London’s luxury market itself is a key part to the success of luxury hotels in the city, whether it’s business, a weekend leisure break or simply enjoying the tradition of afternoon tea,” he said.
Although initially due to open this past spring, the £40-million ($64-million) project has been hindered due to delays in construction, including the recent replacement of the contractor, which have been attributed to restricted access to London’s first elevated hotel, rather than concerns with developing in the luxury market in general.
Investors making waves
Currently making waves in the London market is investment management company Prime Investors Capital Limited with the planned conversion of one of London’s most iconic Grade I listed buildings. The 99-year lease of Admiralty Arch was bought from the government for £60 million ($96 million) with plans to turn it into a 100-room luxury hotel.

PIC founder and CEO Rafael Serrano told Hotel News Now that London “has outperformed compared to other investment asset classes” and that he strongly believes it’s a question of supply and demand.

“Prime London is definitely one of the strongest markets in the world. We believe that this will remain the case as long as the very simple formula of supply and demand continues. We do not see any competition for Prime London in Europe, and we think that demand will continue to grow as uncertainty remains in other markets,” he said.
Serrano was the developer for the “super-luxury” Bulgari Hotel in Knightsbridge, which opened in 2012, and he has his eye on several more projects in London as well as New York.
The oversupply obstacle
The inevitable question of potential oversupply does not appear to concern investors.

Ellis at Numis Securities cautioned that although London is unique, no market is immune from unforeseen circumstances.

“London is a truly extraordinary market. The contrast in the U.K. between the regions and London has been stark since the financial meltdown, and this just shows how attractive London is as a market. The problem is things don’t go in a straight line forever, and one fears slightly that at some point the additional supply will have a detrimental impact,” he said.

“We’ve had three or four years of quite high supply, which has been pretty much absorbed in a very buoyant market, but for whatever reason if London’s tourism goes down I think there’s going to be a bit of a problem,” Ellis continued. “There are quite a lot more luxury rooms coming on to the market, and I think this could potentially be a concern. But at the moment everything seems to be going along pretty well.”
Continued growth in the luxury segment coupled with an influx of supply at the opposite end of the spectrum in the budget sector could create pressure in the mid-market, Ellis added.

“The budget operators have until recently been relatively underrepresented in the capital, but they have now—with Premier Inn and Travelodge in particular—been adding a lot of capacity, and they seem to be doing quite well in that market. With the luxury segment doing reasonably as well I think there might be a danger of something of a squeezed middle.”

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