Ultra-high-net worth wealth fuels European hotel development

As reported in our recent “Evolution of Global Luxury Hospitality” research paper, we are witnessing a rise in global wealth. Not only from HNWIs who contribute 70% of luxury travel spend worldwide, but also from the rising UHNWI population – those with a net worth of at least $30 million. Four fifths of UHNWIs either own their own business or are C-Suite executives so travel is rarely, if ever, solely for vacation. As such, time is often the largest constraint and therefore travel experiences that cater to privacy and connectivity are in high demand. The hotels that cater for this segment of the population fall into the “ultra-luxury” category, offering extraordinarily personalized service and amenities and many are renowned globally. As a result, they command significantly higher room rates relative to the luxury sector overall and are located in highly sought-after iconic destinations such as New York, London, Paris and some of the most sought after leisure and resort destinations. While luxury average rates across Europe reached c. €450 during 2022, ultra-luxury hotels in cities such as London and Paris command average rates of more than €1,000 a night and some ultra-luxury resorts, although on a seasonal basis have average rates as high as €2,500.

Up until the turn of the century, the ultra-luxury landscape in Europe was dominated by historic hotels, many dating from the early 20^th century, which, until recently, struggled with the limitations imposed by the constraints of the buildings which were constructed when the requirements of luxury travelers were very different. But in the last two decades, with new ownership and changing guest demands, the ultra-luxury landscape in many European cities has evolved, with new build hotels opening and existing historic properties undergoing significant transformations. The top performing cities in Europe have seen perhaps the most significant changes. London is currently in the midst of a dramatic evolution in the ultra-luxury segment, whilst Paris’s transformation is, for now, largely complete and Rome appears to be the next big luxury destination with around €1.3 billion transacted in the last four years for the acquisition of assets that will be converted into new hotels, many at the luxury plus end.

Italy has historically been an exclusive holiday destination for the international aristocracy and the jet set. The trend started in the 18^th century with the wealthy European aristocracy attracted to the main art cities of Rome, Florence, and Venice. Italy continued to attract a flow of affluent travelers during the years of La Dolce Vita when Rome was described as “Hollywood on the Tiber” river and the reputation as one of the most exclusive holiday destinations was reinforced by the rise in popularity of the Amalfi coast, Capri and the Costa Smeralda.

Although average rates achieved by a sample of ultra-luxury hotels in Italy during 2022 rose 45% compared to pre-Covid levels, in the next few years we expect to see further jumps in average rates as many of the country’s top luxury hotels are undergoing repositionings to remain aligned with the demand of their exclusive guests. Renovation plans have recently been announced for leading assets in Venice, Portofino, and Costa Smeralda, where the iconic Pitrizza and Romazzino hotels will be rebranded as Cheval Blanc and Belmond respectively. In Rome, which has seen a significant volume of luxury hotels traded in the last four years as well as investment totaling more than €1.3bn, more than 1,000 new ultra-luxury hotel rooms have or will open between 2023 and 2025, with brands such as Four Seasons, Mandarin Oriental and Rosewood making their debut in a city that has historically lacked luxury brands.

Whilst Italy is gearing up to an influx of new luxury hotels and brands, in another key stop on the European tour, luxury supply could finally be stabilising after a period of profound disruption.

In the past decade, the Parisian Palace market has witnessed a shock of new supply in both quantity and quality, with an array of new openings, extensions, and renovations, which have impacted occupancy in this decade. Coupled with the adverse effects of the terrorist attacks in 2016/17, yellow vest strikes in 2019 and then Covid, it has indeed been a challenging time for Parisian Palaces.

Since 2010, the Palace market has grown by more than 80% to reach 2,200 rooms and suites, with the newest hotels, the 72-room Le Cheval Blanc and the 76-room Bvlgari, opening in 2021 and marking the end of the latest development cycle in the city. These latest editions, along with the 72-room Samaritaine and 40-room La Réserve have generally been of superior quality, offering larger rooms and more suites. Much of the old stock was refurbished, including the Ritz, Hôtel de Crillon, the Lutetia and Plaza Athénée which all had multi-million Euro investments to reposition them to the top of the market.

Despite the considerable supply increase over the past decade and impact of Covid, 2022 was a record year of performance for Paris’ Palaces. However, with the new supply fully integrated into the market, the question remains how sustainable these high average rates can be. Occupancy should ramp up further as the new supply continues to be absorbed and with Asian guests starting to travel again there is still room for further optimism. In addition, 2023 and 2024 are expected to be dynamic years in Paris thanks to the Rugby World Cup and Olympic Games.

For the time being, the Paris palace market seems to have a reached a point of stability in terms of development, but across the Channel in London, the ultra-luxury market continues to expand and evolve.

Appetite for ultra-luxury assets in London remains strong, with traditional overseas and domestic investors keen to secure a piece of luxury in one of Europe’s most robust cities. Several ultra-luxury hotels are currently undergoing extensive renovations and developments including iconic hotels such as Claridge’s and The Dorchester. In the last two years alone, our research shows almost £4 billion has been invested into ultra-luxury hotels in the capital. But how has this segment of the market evolved and what does this mean for today’s traveler?

Rewind to 2006, the ultra-luxury hotel segment in London consisted of just over 1,000 rooms and close to 400 suites, representing c. 12% of the total luxury market in London. Many of these historic hotels were built prior to the advent of en-suite bathrooms, making it necessary to shoehorn en-suite bathrooms into the already small room sizes. Over the next 16 years, the market welcomed new entrants including the Corinthia and Bvlgari, while room configuration changes were made to existing hotels through refurbishments and extensions, leading to an overall uplift in ultra-luxury room supply of 26%. The average size of ultra-luxury hotel bedrooms grew by a third, driven by an increase in standard room sizes, particularly in the new hotels, but also within existing hotels, which combined smaller rooms to eliminate the most challenged room stock.

The Connaught was the first hotel to undergo a £70 million refurbishment in 2007 – just before the global financial crisis. While the renovation included 25 new rooms and suites, an additional wing and ballroom, the average room size remained on the smaller size, relative to the new suites that opened over the following years. When the Bvlgari opened in 2013, it was the first new build hotel in the ultra-luxury segment and immediately became the market leader thanks to its large average room and suite sizes of 43 sqm and 107 sqm, respectively. However, unlike some of the newer or newly refurbished properties, it does not offer the enormous feature suites.

Around the same time that the Bvlgari opened, the Peninsula on Hyde Park Corner and what we now know to be the Rosewood Chancery on Grosvenor Square were announced, each expected to offer exceptionally large average room and suites. These new announcements led to the Mandarin Oriental partially closing for a refurbishment, reducing the overall number of suites, yet increasing them in size, ready to compete with the new entrants.

One of the most significant developments to date in an existing hotel has been at Claridge’s. Taking seven years, the build has added a 5-level, hand dug basement to house a luxury spa, and swimming pool in addition to a 4-storey roof extension to house an additional 72 rooms and suites. While the build completed in 2021, and the spa is now open to the guests, the final phase of new rooms are due to open later this year.

The transformation of the ultra-luxury market in London is unlikely to slow down any time soon, with The Ritz and The Dorchester also undergoing extensive refurbishment works. While a decade ago, hotels underwent refurbishments to keep up with their competitors, now the developments and the huge amount of capex invested in the assets is about catering to the UHNWI demand coming to the capital. Middle Eastern travelers visit London not only with their families, but with their staff and entourage and can often take over entire floors within a hotel. They are seeking to replicate what they have at home when travelling abroad and have the disposable income to do so.

What impact has all this investment had on the ultra-luxury hotel market in London? Performance amongst the top hotels has soared in the last 10 years. Average rates for a set of stable hotels – not undergoing refurbishment, extension, or renovation – have grown by 94%. However, the transformation of hotels that have undertaken works has been even more significant, up almost 150% compared to 2011. The London market as a whole saw significant uplift in 2022, with the impact of pent-up demand following the pandemic, as well as a reduced volume of lower rated corporate and group business. Despite this, looking at growth between 2011 and 2019, average rates amongst the refurbished hotels were still some 65% higher compared to the stable hotels at 40%.

The ultra-luxury segment in London will welcome some new entrants in the coming years, including the much anticipated 189-room The Peninsula London overlooking Hyde Park Corner and Wellington Arch, the 50-room The Mandarin Oriental Mayfair on Hanover Square and the 139-room Rosewood Chancery on Grosvenor Square whilst Raffles Hotels & Resorts will open its first UK hotel this year, the Raffles London at The OWO. With all these new products entering the market, luxury travelers coming to London will be spoilt for choice, and each new opening will no doubt continue to push the bar even higher, offering state of the art spa facilities, roof top terraces and palatial suites. We suspect the next question might be for how long can rates be maintained at the levels they are today? Or will it be a case of “if we build it, they will come”?