Tighter budgets for aspirational travellers could hit luxury market

After years of rising sales across all the luxury segments, some of the world’s leading fashion and jewellery brands have warned of a possible slowdown in 2024, with headwinds already buffeting the sector and British powerhouse brand Burberry among the global labels to provide a sales warning.

The overall luxury market is currently around 25 per cent above 2019 levels, with recent growth rates well above longer term averages for most companies, so arguably it would not be surprising if the market did not start to correct itself, paving the way for lower growth trends.

Another key driver is the decrease in aspirational shoppers, who typically purchase more affordable luxury products such as accessories, who have cut back this year, in the US particularly. This trend has a clear impact on luxury brands, as aspirational shoppers represent 40% of luxury consumers worldwide, according to RBC Capital Markets.

Saks CEO Marc Metrick says that this is being seen across the luxury segment, reflecting the impact of the diverse nature of luxury customers.

“People view the luxury consumer as a rich person, but who is filling the pipeline? You have your tried and true customers. We love those people. But we go after the full continuum - I hate the term aspirational, I call them ‘emerging customers’,” he says. “They have been impacted by the cost of living squeeze and it’s going to be a challenging year for that segment.”

End of the luxury cycle

All these factors contribute to the likelihood that this cycle of the luxury retail boom is coming to an end, but the question for the closely aligned travel sector is whether the same holds true for the luxury hotel and accommodation sector?

Encouragingly for the travel industry, according to a survey by the Financial Times and IPA, 64 per cent of luxury consumers believe that luxury experiences create more memories than luxury goods, suggesting that demands for all-encompassing experiences, from novel and fun to more meaningful, will dictate the shape of luxury spend.

In 2023, Grand View Research estimated the global luxury travel market to be worth $1.37 trillion – and it’s expected to continue to grow annually at 6.7 per cent from 2024 to 2030.

However, despite substantial development volume in the planning phases, the Americas was the only world region to show an increase in overall hotel pipeline activity according to year-end data from CoStar. In December 2023, in Europe the total number of under contract rooms was 461,189 (down 4.7 per cent compared with December 2022); in Asia Pacific that number was 888,571 (-0.3 per cent); in MENA 229,334 (-3.9 per cent) and in the Americas 860,042 (up by 16.7 per cent).

Luxury requirements evolving

Despite the overall pipeline slowdown, according to Bain & Co, Europe continued to benefit from the progressive pickup of tourism, which stimulated growth across all countries, with resort locations attracting high spenders alongside key luxury cities. Even if macroeconomic instability impacted local aspirational customers, the top customers maintained a positive momentum that fuelled market growth, the consultancy says.

Meanwhile, the Americas region decelerated throughout last year, posting an 8% drop from 2022 as widespread uncertainty put a dent in aspirational customers’ spending. Top customers remained confident but shifted their spending outside North America, as the US dollar remained strong against the euro and price differentials favoured overseas purchases.

In the rest of the world, Saudi Arabia accelerated, attracting investments from major luxury brands, and Australia showed opportunities for growth.

Bain & Co also points to a surge in the appetite for unique, personalised, and transformative experiences that foster a “disconnection” from normal life. High net worth and ultra-high net worth individuals have heightened experience expectations beyond traditional luxury amenities, the company says. Impact-consciousness, particularly among younger generations, favours more authentic and culturally immersive experiences and accelerates sustainable practices.

Hotel investment in 2024

Therefore, although the luxury market is certainly not in as robust a position as it was 12 months ago, it seems more likely that spending on hotel stays will polarise towards value and luxury. That is certainly the experience of UK adviser Christie & Co, which points to a squeezed midscale segment in Britain.

“As expected, 2024 is going to be a good vintage for hotel investments with already a number of large-scale transactions taking place including the Radisson Edwardian deal with Starwood Capital,” says Carine Bonnejean, Managing Director of Hotels at Christie & Co.

“The luxury and ultra-luxury segments in particular have already seen transactions of note including the Mandarin Oriental Paris being sold to Statuto Group and Atom Hoteles acquiring the La Florida and Miramar Hotels in Barcelona. Brands are on the hunt for established locations from city flagships, to seaside resorts and mountain retreats as well as identifying the destinations of the future,” she says.

Likewise, advisor JLL says that the two most appealing and liquid sectors for US hotel investors are what it calls ‘irreplaceable luxury’ assets and select-service and extended-stay hotels, according to Ophelia Makis, senior analyst, Americas Hotels Research, JLL Hotels & Hospitality Group.

“With global wealth continuing to rise over the long-term, as well as the growing appeal for unique travel experiences, luxury hotels are anticipated to remain the most favoured among investors in 2024, particularly those who are less reliant on leverage,” she says. “The increased demand for irreplaceable luxury assets has spurred a notable rise in luxury hotel liquidity post-pandemic. In 2023, the number of single-asset luxury hotel transactions reached the third highest level in the past seven years, totalling 39.”

That is certainly encouraging news for a sector which has, like a number of real estate asset classes, suffered from the gap between buyer and seller expectations, leading to a marked slowdown in deals.

The boom times post-pandemic may be cooling, especially among aspirational travellers who are more likely to feel the financial squeeze this year, which makes it likely that some luxury buyers may be more careful with their spending this year. However, a relatively slow expansion pipeline and the prioritisation of experience over things among the wealthy should help protect luxury travel property market during a tricky 2024.