The luxury travel market has been booming this year, as unfettered travellers make the most of their recently-acquired freedoms to not only travel, but to treat themselves.
Upscale resorts, premium and luxurious hotels and all things luxury have been the chief beneficiaries as customers have prioritised not only experiences but also upgrading their budgets.
But there may be a warning for the West from the luxury retail sector that the good times may not last indefinitely and that the axis might shift east, as Asian high net worth individuals stay closer to home.
The first warning of a change in the mood music came recently when high-flying luxury retail stocks crashed down to earth mid-May, with spooked investors offloading shares amid fears over the impact of a softening US economy and lower spending from the wealthy, dubbed a richcession.
With growing concerns about how long it will take for China to rebound fully, and at least a six-month delay until most wealthy Chinese travellers can visit Europe and the US because of visa and passport delays, over €30 billion was wiped from the European luxury sector in a sharp jolt.
While the fall in share prices of groups including LVMH, Hermes International and Richemont stabilised and needs to be viewed in the context of a very long bull run, they have gently tailed off again.
US economy prompts stock falls
Why? Well US consumers are undoubtedly starting to pull in their belts and that is a major concern as Chinese spending has so far remained focused on domestic locations, or popular nearby destinations such as Macau and Hong Kong. A backlog in processing visas and passports, plus growing enthusiasm for domestic and regional tourism, means that many travel analysts don’t believe international Chinese visitors will be back in force until 2024.
Rising interest rates, squeezed consumer spending, and a looming recession mean the macroeconomic outlook for the US appears bleak and although a shift in consumer spending towards experiences should soften the blow to hotels, recovery is already slowing.
And while high net worth individuals may seem impervious to economic headwinds, history shows that even the luxury market is susceptible to decline. During the global financial crisis, the personal luxury market slipped nearly 10 per cent from $172 billion in 2007 to bottom out at $157 billion in 2009, according to Bain.
This time round, travel continues to be one of the fastest-growing areas year-over-year, up 6 per cent even when adjusted for inflation, and is one of the top categories — especially among older and higher-income consumers —according to Boston-based McKinsey & Co partner Tamara Charm.In the consultancy’s latest report on US consumer sentiment she says that the mixed indicators from the US economy are mirrored in conflicting consumer behaviours.
“According to the results of our latest US Consumer Pulse Survey, they’re [consumers] worried about rising prices and job security, yet they’re optimistic and still spending. They’re switching to less expensive brands to save money, but they’re also willing to splurge on certain goods and services,” she says.
HNWIs look east for travel
Just as in the luxury retail market, the US upscale hotel offer has, in recent years, capitalised on a balance between domestic and international demand but while Chinese residents remain keen to travel, so far their horizons have stayed closer to home, boosting domestic and regional travel.
Japan has been one of the big winners, witnessing a boom in its luxury hotel business since the Olympic and Paralympic Games, held in 2021. Research from MSCI Real Assets revealed that international investors have been pouring money into Japanese hotels at rate not seen since 2014.
Tetsuya Kaneko, managing director of Savills Japan, predicts that the value of inbound tourists visiting Japan in the post-pandemic years will be significantly above the pre-pandemic average.
“The ADRs of resorts and high-end ryokans have significantly recovered and surpassed 2019 levels, and the improving occupancy rates have also allowed RevPAR to steadily grow. Resorts and high-end ryokans have performed strongly as their target demographic of wealthy tourists has generally been less impacted by the pandemic,” says Kaneko.
“Many current inbound tourists into Japan are also on the relatively higher end of the income spectrum, and they have further propped up demand for resorts and higher-end accommodation,” he adds.
Spending big in Japan
Recent upscale deals include private equity firm BentallGreenOak acquiring Osaka’s Rihga Royal Hotel, Singapore’s sovereign wealth fund GIC purchasing a portfolio of hotel and leisure assets from Seibu Holdings, plus KKR and Hong Kong-based Gaw Capital finalising an agreement to acquire Hyatt Regency Tokyo from Odakyu Electric Railway.
Bulgari Hotels & Resorts debuted in Tokyo earlier this year and in 2025 Capella Hotels and Resorts will follow suit when it opens Capella Kyoto, while 2028 will see the Dorchester Collection arrive in Asia with the launch of a hotel near Tokyo Station within The Torch Tower.
Luxury travellers may not be feeling the heat in quite the same way as luxury retail brands, but for now the spending compass looks to be pointing firmly east.