Why luxury hotel growth could be bad for London

As London’s hotel supply grows, and threatens overall performance of existing properties, Qatari Diar has awarded the management contract for the U.S. Embassy building in London to Rosewood Hotels.

The hotel will be Rosewood’s second in the city, and will join a number of luxury properties in the pipeline for London, including Raffles at the Old War Office and Victory House, an M Gallery by Sofitel.

According to CBRE Hotels, 871 new luxury, five-star guestrooms have entered the Central London market since the start of 2016. Looking forward, the city has 2,032 five-star guestrooms in the development pipeline with a confirmed opening date between now and year-end 2019. This will represent a 12 percent increase in London’s five-star guestroom stock.

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Last week, PwC released its forecasts for 2018, with the company commenting that the current pace of London's hotel performance growth was not sustainable through the second half of the year and into 2018.

“Some London hotels recently reported weaker weekend domestic demand and some luxury operators stated having seen a softening in demand from Middle Eastern markets," the report claimed. "Looking to 2018, the biennial Farnborough International Air Show returns, it’s one of the largest events in the aerospace calendar and will help provide an uplift for hotels in London and the south east.”

PwC forecast year-on-year London occupancy growth of 0.2 percent in 2018, taking occupancy to 83 percent. ADR growth was forecast to increase by 2.2 percent in 2018, taking ADR to £148. The RevPAR gain will be less than 2017, a further 2.4 percent in 2018, reaching £123 in 2018.

“Luxury hotel are of course the jewels in the crown of the hotel sector and with other luxury goods they have traditionally been a bit of a battleground for consumers’ wealth,” Liz Hall, hospitality & leisure head of research, PwC, told HOTEL MANAGEMENT. “But definitions of luxury change, or at least blur, or stretch, so as more people can afford luxury today, it's getting the product right for today that's important.

“Luxury hotels do very well in the good times but the opposite in bad times. They are often the first to take a dive when times are bad, yet consumers still expect the best even in hard times.

“Room rates are key and there used to be a figure about luxury getting 75 percent of revenue from rooms and in excess of 50 percent profits, but this varied by location and type. There’s a lot at stake, but they do also benefit from ancillary facilities, such as spas. It's expensive for existing luxury hotels to keep up appearances and incorporate all the modern things we want, so the new ones have an advantage. For a while.”

Construction on the upcoming Rosewood is due to start later this year, when embassy staff have moved to their new property in Nine Elms, with no final opening date confirmed. With Brexit looming in 2019, it is likely that the hotel will open in a city that is no longer part of the EU. As PwC reports a fall in business travel to the UK, eyes are currently on the government to ensure that Brexit negotiations do not see the country slip out of the sphere of global business, forcing hotels to lean further on the frugal leisure consumer.

Katherine Doggrell is an editor at Hotel Analyst, the U.K.-based news analysis service for hotel investors.