Investment Profile: In the Lap of Luxury

Buyers continue to book high-end hospitality assets.

It’s hard to find an unhappy hotel owner, developer, or investor at any level this year. Global travel and tourism topped $6 trillion in 2005, growing 5.7 percent, and 4.2 percent annual growth is forecast for the next 10 years, according to the World Travel and Tourism Council. Business travel also has returned to levels unseen since Sept. 11, 2001, and is expected to grow by 2 percent, according to Marcus & Millichap.

For luxury properties the outlook is especially strong. Just three years ago, PricewaterhouseCoopers forecast 1 percent growth in luxury revenue per available room. In 2005, its estimate jumped to 12.8 percent. While PWC moderates luxury RevPAR growth for 2006 and 2007 to 9.4 and 8.9 percent respectively, those forecasts are among the highest for all hospitality segments. Luxury occupancy is expected to gain 70 basis points to 71.4 percent, according to Marcus & Millichap’s Spring 2006 Hospitality Research Report, which also forecasts a 7.6 percent increase in average daily rates for luxury properties.

These strong fundamentals are reflected in transaction activity. U.S. luxury and upscale hotel sales totaled $9.1 billion by November 2005, compared with $5.1 billion for all of 2004, almost an 80 percent increase, according to Real Capital Analytics. Jones Lang LaSalle Hotels reports 218 hotel transactions in excess of $10 million in 2005, with an average price of $146,000 per key. That is double the median overall industry price per room of $70,000, which rose 32 percent last year.

Big names in luxury hotels are divesting themselves of bricks and mortar to concentrate on brand development and operations. Since its 2003 restructuring, InterContinental Hotels Group has sold 140 hotels worth $4 billion, but continues to operate most of them through long-term management contracts. Similarly, Starwood Hotels & Resorts sold $500 million worth of hotels in 2005 and in April completed the $4 billion sale of 28 upscale and luxury properties to real estate investment trust Host Marriott. It also continues to operate properties while it beefs up its timeshare activity and repositions itself as a lifestyle brand.

While REITs have been active participants in luxury hotel transactions, they are not the only buyers waiting in the reception area. Private equity groups have no reservations about funding hotel acquisitions, having raised more than $100 billion for hospitality sales last year, according to Ernst & Young. Strong fundamentals ensure their continued interest in luxury properties. (See sidebar.)

While the prices seem high, the barriers to entry for luxury properties are even higher. Skyrocketing construction costs and little available land in major markets keep acquisition costs cheaper than new development. And in markets such as New York, Washington, D.C., and Los Angeles, residential conversion of venerable luxury properties such as the Plaza in New York, the Watergate in Washington, and the St. Regis in Los Angeles are decreasing the supply of upscale rooms while demand continues to grow.

While new supply of U.S. luxury units is only expected to increase by less than 1,300 this year, new luxury brands are proliferating through the renovation and repositioning of existing properties. Hilton Hotels Corp. has created the Waldorf-Astoria Collection that includes the New York namesake as well as the Grand Wailea Resort on the island of Maui in Hawaii, Arizona Biltmore in Phoenix, and California’s La Quinta Resort. Starwood Capital Group, headed by Barry Sternlicht, the former Starwood Resorts chief executive officer, has raised $2.4 billion to launch the Crillon brand headed by its acquisition of the Paris Hotel de Crillon. Another industry veteran, Horst Schultz, the former Ritz-Carlton president and now head of West Places Hotel Group, is creating Solis Hotels and Resorts, positioned as an ultra-luxury chain, which is scheduled to open a combination of new and existing properties in Chicago, Phoenix, Alpharetta, Ga., Orlando, Fla., San Antonio, Texas, and Frankfurt, Germany, in the next three years.

Such competition at the high end ups the ante for all properties, according to Bjorn Hanson, head of PWC’s hospitality and leisure group. Many industry participants believe there is a market for facilities and services above today’s five-star level, he says. The industry as a whole is forecast to invest $5 billion in upgrades for such items as branded furniture and bedding, in-room technology entertainment, and design enhancements, raising the standards at all levels, PWC reports.


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