Discover the latest insights from IHIF 2024 in our exclusive interview with Kenneth Hatton, Managing Director, and Head of Hotels for Europe at CBRE. Kenneth delves into the thriving luxury hotel market, highlighting how the pandemic has underscored the resilience and performance of luxury and resort hotels, making them more attractive to investors. Learn about the surge in domestic leisure spending and the increasing demand for high-end leisure products, driven by a growing middle class, particularly in Asia. This session reveals how brands have segmented the luxury market, catering to diverse preferences, and enhancing investor interest. Gain valuable perspectives on long-term demand-supply dynamics and the strategic considerations for luxury hotel acquisitions in 2024.
Patrick Whyte:
Kenneth Hatton of CBRE, thanks for joining us. The luxury market is evolving and changing, can you give us an overview from a hotel investment perspective?
Kenneth Hatton:
Sure. It's really evolved over the last several years from being if you went all the way back 20 years ago to being an area for very specialist type of investors being much more mainstream. I think one of the things we saw coming through the pandemic was an interest in where luxury hotels can perform. I think both luxury and resort has been an area where people have been seeing there's actually less volatility in performance than you've seen in some of the other asset classes. So in that sense, how people think about that segment of the hotel landscape is something that is far more interesting from them, and longer term capital is able to step in and take a look at luxury. I think one of the things we see coming out of the pandemic is looking at all of the various different segments and how quickly they have been to return to 2019s level of performance.
And if you look at where the leisure spend has been, that has been far outpacing where the corporate or the business spend has been. So in terms of overall numbers, on the domestic leisure market you've seen domestic leisure in 2023 up at a level of 118% of 2019. Now, long haul and international leisure, that's still not back. Last year it was only 95%. It's closer to 100% because there were a greater number of US investors, but it is still short because the Asian travelers have not yet been back. But what you see as people coming back and looking to stay, there's probably that shortage of supply that makes it a little bit interesting where the proven demand and the shortage of supply makes it quite interesting.
And in that sense, what happened during the pandemic has really informed a little bit where we're at. And what happened during the pandemic was that you had a proof of what happened over the previous 10 years, you saw an expansion of the global middle class and you saw a glut of domestic savings. So the combination of those effectively showed you that there was a far deeper pool of demand for leisure product, and as you moved up the scale there was less and less product that could actually service the true luxury end of that. And so investors, when they think about it, they see burgeoning demand in that space and less supply coming through, which actually makes it a very interesting segment as we move forward for the next five years.
Patrick Whyte:
Yeah, it's interesting what you're saying there, but it's been quite a short period of time since 20 years ago there was not much investment interest in it or not as much as there is today. What has helped shift that dial do you think in terms of appetite or luxury?
Kenneth Hatton:
I think if you look at the European sector as a whole, we went back 20 years ago you had 70% of the European estate unbranded, it's still less than 50% is branded today, I think brands have played a particularly strong role in that, in helping people feel a little bit more comfortable with what the risk of that investment is because they feel that there is a greater degree of stability as to how do you sell luxury product, how do you reach a global audience, how do you actually manage this, because it is a slightly different model as to how you sell it compared to some of the other segments. So I think the brands have gotten better at that. One of the developments you would see over the last five years I would say is the definition of the luxury teams, the luxury commercial teams in the brands and then the other segments.
And so there's an understanding now I would say in the last few years whereby the brands understand they have to have specialists, they have to be able to reach the luxury guest in a different way to how they're reaching their first class or their economy or their mid-scale guest, and brands have been investing in that. And their ability to deliver better performance, better ADR, better occupancy to the luxury segment gives the more institutional type investor a little bit more confidence around it.
So one of the things that people have been learning in all of that is that they understand that in most other segments it doesn't make sense to work with specialist travel agents. Travel agents are seen as a taboo commission area. If you move into true luxury, if you move into when you're getting up into selling over 2000 a night, the use of those specialists true luxury travel agents, they can actually make a meaningful difference. And they're not necessarily considered taboo, and so there's a better understanding as to how you sell. So that has basically allowed people to have a better understanding of how it operates, what are the risks they need to manage, and how they can ultimately drive better returns.
Patrick Whyte:
The brands, I'd say they also done a better job of segmenting and adding brands in the luxury market. And there's more brands there for even ultra luxury. Do you see that from a perspective of the brands have done a better job of doing that?
Kenneth Hatton:
I think the brands, as you see them moving out of their brand portfolios, it makes very much sense for them as they develop far more useful data capability not to be losing the value of that data so they can move into the other white space of the various different segments. You've seen a growth in these soft brands, the collection brands, which makes a lot of sense in luxury. When you think about the luxury experience that the guest is looking for, they're for the most part not looking for a cookie cutter design. They're looking for something that plugs them into the local area. And so the collection brand allows that identity of the area, of the property to come to life. And it makes sense that you can grow your rooms count as the major, but still be able to tap into this luxury market. And I think the brands have been quite adept at that, they've done quite a good job at evolving their positioning in the collection space.
What you could also see is in terms of the more hard brand, true luxury hard brand, I think there is an understanding that for the true luxury brands there is no desire to be in 150, 200 locations. So if you are at the very apex of true luxury, where you're likely to want to be is in 10, 15, 20, 25, these are small numbers, and you're going after the truly elite global luxury traveler, and those kind of brands can occupy that kind of space. And I think the brands have evolved their understanding of this space very much over the last 10 years, and I would say accelerated that understanding since COVID.
Patrick Whyte:
So let's put ourselves in the shoes of the investor, what are the kind of things they should be looking at when they evaluate a potential luxury acquisition?
Kenneth Hatton:
I think the long-term demand supply dynamic is something that all investors look at across the hotel sector. If they look at luxury, they'll be looking at the similar dynamic here, which is what are the barriers to entry? If I acquire this luxury asset, can somebody else come along, put another asset close to mine and start to eat some of my lunch if I get there? One of the attractions of the luxury segment as a segment of interest for investors is that it's usually pretty high barrier to entry markets where they operate. So if you're acquiring the trophy, it's a trophy because of its location or its history. There is only one hotel in Portofino that can ever expect to be able to control the Portofino market, and you can't create another Splendido tomorrow. It is what it is, it occupies that location. So I think luxury developers or luxury investors will think what are the barriers to entry?
And I think they will get a great comfort from looking at where that demand is going, projected to be from all of the economists who are projecting hotel demand, overnight demand, and where the supply is. So in the core markets where most of the transactions took place last year, France, Spain, Italy were over 50% of the investment market in 2023. If you look at the average growth in rooms across all segments, it was 1.3% over the last 20 years in Europe.
In those markets, Italy had a growth of 0.4%, or has that projected for the next five years in terms of CAGR of rooms growth. Spain is not 0.5% rooms growth, way below its historical average. And France, only not 0.3% of its current room stock is projected to come on every year for the next five. So if you think about what's there to meet the demand, I think investors will feel comfortable around that, but that's an asset by asset, investment by investment assessment as to whether this asset can withstand the vagaries of the industry as it comes down. But I think the supply demand dynamic is one that's quite interesting for a lot of luxury investors.
Patrick Whyte:
Just finally, we can touch on that because you talked a bit about the growing middle class and countries in Asia especially, and the potential there. Is that something that trend is only going to grow over the next 10, 15 years?
Kenneth Hatton:
A projection from the consultancies who look at this, whether that's the Bain or wider econometrics projections as to where the middle class is projected to get to. It's expanding, it was up 400 million and growing, and the Bain and Altagamma report suggests that spend and travel is an increasing component of that spend, and it is likely to just be an increasing component of overall spend over the next five to six years. And so I think the expectation is that there is plenty of room to grow in this luxury space, luxury segment for investors to be able to tap into it. At the end of the day, it's part of their strategy. There are not many investors, there are some who are purely luxury, but for most investors there's a view on let's take a piece of luxury.
Now that has grown over the last... I would say if we went back 20 years ago, luxury as a component of overall hotel investment was probably 5%, sub-5% outsized by dint of the size of the individual transactions, that has grown. Over the last five years that has expanded and expanded. And now over the last three years, on average, 30% of all investment has been in the luxury space. The pandemic has driven that a lot more, but that as a component is not expected to dim.
We did an investor intention survey just recently across all asset classes, and we had a deep dive in hotels and of all of the segments of hotel industry where people want to be investing in 2024, we have seen investors step forward and say that the luxury space is the most in-demand luxury and upper upscale, but in fact preponderance towards luxury is the segment where they want to be spending more in 2024. And we've seen that, of all of our respondents to the survey, a full 90% of investors want to either maintain or increase their allocation in 2024, 70% saying they want to increase their allocation. So we see it as a space that people are looking to lean more heavily into as we move forward.
Patrick Whyte:
Kenneth Hatton, thanks so much for your time today.
Kenneth Hatton:
Thank you.