Deloitte: Why London is seeing an influx of luxury investment

This week, Deloitte released results of a survey of senior hospitality industry figures who shared their insights on the future of Europe's hospitality scene. The respondents declared London to be Europe’s most attractive hotel investment destination, with nearly a third (31 percent) ranking the U.K.’s capital ahead of Spain's Barcelona and Madrid (both 27 percent) and Amsterdam (26 percent). 

This ranking is especially notable because more than half of respondents (57 percent) called the city “overvalued.” But while some may see it that way, investors perceive the nation’s capital as a safe haven for financial capital.

“A lot of the capital coming in is attracted to the fact that it’s in a country where rule of law and safety and security are paramount,” Nick van Marken, global head of hospitality at Deloitte, told Hotel Management. Another appealing factor for high-end investors, he added, is the fact that London’s luxury segment has seen little “marked decline” in values in recent years. “As a result, the reality is that if you put your money into five-star hotels in London, you’re almost guaranteed to see an improvement in capital value.”

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Long-term luxury investments 
Many of the buyers and holders of luxury hotels in London are not traders, van Marken noted. “They are not the types of individuals who have bought hotels for a quick buck. They made their fortunes elsewhere, and they believe that holding high-profile assets is a sound financial strategy. They are not seeking a short-term exit.” Private equity investors, he noted, would expect a three- to five-year hold and then trade the asset or extract their investment. “The type of buyers you have at the top of London’s market are not seeking that,” van Marken emphasized. “They are seeking to preserve their wealth, and London is a safe haven.” With that in mind, he said, Deloitte expects capital flows to remain strong. 

These investments reflect the view that hotels are not only good business, but deliver good capital returns. “These types of buyers can buy assets outright in cash,” van Marken said, acknowledging that while they may refinance later, these are not leveraged transactions from a private equity buyer. “The owners of these assets want to own outright, and they have an aversion to debt. 

“The hotel industry has entered into an interesting phase, where holding hotel assets is institutionally acceptable,” van Marken said. “It has come of age. At the top end, looking at the buyers and owners of luxury hotels, it is a unique group of individuals.” These investors are often Middle Eastern and Asian professionals who have made their fortunes in other industries. Luxury hotels add prestige to their portfolios—disproportionately so, he said, to owning office buildings. “It gives them a halo effect. People are impressed when you say you own a hotel that they have heard about.” 

These hotels, he said, are almost always branded properties with international reputations. Asian hotel brands like Mandarin Oriental, Shangri-La, Peninsula and Raffles have achieved significant penetration in European cities. An estimated 2,500 luxury hotel rooms are expected to open by 2021, with an investment value Deloitte calculates as more than £3 billion. Many of these, van Marken said, will be attached to a deluxe brand. 

Survey finds optimism and concerns 
Half of the survey’s respondents expect the primary source of investment into Europe to continue to originate in China (51 percent) and North America (49 percent) in the next 12 months, largely driven by a weaker euro, attractive yields, favorable interest rates and economic recovery. “Investment into Europe continues at pace, with the U.K. leading the way in terms of volume, and private equity remains very active. Germany has seen a sustained period of both strong performance and investment. Attention now seems to be focused on Southern Europe, particularly Spain.”

Despite the optimism, senior hospitality figures also highlighted several risks facing the industry in 2016. More than half (54 percent) identified geopolitical instability in parts of Europe as a key risk, with the same proportion concerned by the threat of deflation and sluggish economic growth on the continent. A third (34 percent) feel the slowing Chinese economy is a concern.

Significantly, the majority of respondents (54 percent) believe that the European hotel industry is less than 18 months away from reaching the peak of the current investment cycle, which could indicate a changing investment landscape for 2017 and beyond.

More than half (53 percent) of respondents believe that the rise in labor costs will be an issue for regional U.K. hoteliers in the next 12 months. New hotel supply (42 percent) and the possibility of an interest rate rise (33 percent) were also cited as potential threats to the U.K. regional market.

“No one believes that the current situation in terms of close-to-zero rate rises is something they can expect to last forever,” van Marken said. Financial experts expect that the U.K.’s interest rates will rise, but as opposed to the crisis in the 1980s, these rates will rise slowly so that the market can adjust to any reactions. “There’s a recognition that regulators and treasury bodies will act very cautiously,” he said. “That’s why investors are confident. The financial authorities understand that they must manage the situation carefully.” Interest rate rises, he said, are not likely to slow investment.

Labor costs, meanwhile, have been expected to rise since the introduction of the living wage was announced for April of next year—a plan that came as a surprise to some (“Something no one likes as an investor is a surprise”), and that will have a direct cost implication on business, with owners having to increase pensions contributions through auto-enrollment. “It’s happened, it is what it is and there’s nothing we can do,” van Marken said, noting that some businesses will pass the extra costs onto consumers or will implement technology to reduce the overall need for labor. “The reality is that everyone knows they will have to deal with it.” 

Despite this, more than a third (34 percent) of industry leaders expect to see price multiples of 12 times or more in the U.K. regions, further supporting the view that the health of the regional U.K. hotel industry is currently very strong.

Regional U.K. hotel recovery ahead of Europe

Outside London, Scottish cities ranked as two out of the top three regional U.K. investment destinations. For the second year in succession, respondents named Edinburgh, Scotland, (47 percent) as the most attractive investment destination in the regions, followed by a resurgent Manchester, England, (40 percent) and Glasgow, Scotland (23 percent).

Two-thirds (64 percent) of industry leaders expect regional revenue per available room to grow in the region of 3 percent to 5 percent in 2016. The survey also found that recently arrived U.K. hotel investors are expected to focus on rebranding and repositioning (55 percent). “Optimism over hotel investment in the U.K. regions remains strong,” van Marken said. “Although RevPAR growth in 2016 appears likely to slow, confidence in the regional U.K. remains high.”

Resorts are also in favor, with Spain and Portugal leading Europe’s resort market in terms of investment activity.