Hotel Online
News for the Hospitality Executive


advertisement
 
 

Are Design Hotels More Attractive Real Estate
Investments than Traditional Hotels?

DESIGN vs. TRADITIONAL



by Lukas Hochedlinger - July 29, 2010

Previous research for the UK and US markets suggested that design hotels perform better than traditional, “non-design” hotels. This is also one of the key findings of a recent survey conducted throughout Europe. Does this imply that design hotels are consequently more attractive real estate investments from an investor’s perspective? The answer is yes if one strictly follows certain guidelines.

The design hotel market is already booming, and the number of new design hotels and design brands are expected to grow continuously across Europe over the next years. The fact that essentially all large hotel chains including Starwood, InterContinental, Hyatt, Rezidor, etc. started creating their own design/lifestyle brands supports this notion and reflects the operators’ and investors’ increased interest in this hotel segment.

Definitions

There is no agreement about the definition of a design hotel and the current market size in Europe. And what are the differences between so-called design(er) hotels, boutique hotels and lifestyle hotels? In this survey, Hochedlinger investigated the different terms used for unique, individual and design focused hotels with a personalized service. One conclusion of this survey is that the above three terms are often used interchangeably and that all three hotel terms share more or less the same attributes with regard to size, design, location and management. However, most surveyed hotels in Europe consider themselves “design hotels”. 

The market

Since the development of the first design hotels in London in the early 1980s, the European market has grown to more than 300 design hotels across the continent. By far the largest number of design hotels can be found in the UK, followed by Italy, Germany, Spain and Austria. CEE countries contribute less than 5% of the total design hotel supply in Europe and are considered the least developed region in Europe.

Based on this study, almost three quarters of the European design hotel supply are individually operated properties. Compared to the US, where lifestyle developments in resorts are popular, the trend in Europe has been the development of boutique hotels in urban areas with 70% of all identified design hotels being located in cities.

Return vs. risk

Existing research on the performance of design hotels was limited to the US and the UK markets so far. These surveys confirmed the ability of design hotels to outperform non-design hotels with regard to occupancy and rate. In order to fill this data gap, Hochedlinger investigated the relative performance of all European design hotels and provided the following new benchmark figures:

  • 70 percent of all design hotels in Europe outperformed their non-design competitors with regard to occupancy, and 81 percent of hotels were able to charge higher average room rates
  • 55 percent of all design hotels in Europe achieved a higher occupancy as well as a higher average room rate than non-design hotels in their respective market
  • Design hotels in resort destinations as well as those hotels in the luxury segment recorded the best performance compared to non-design hotels
  • In contrast to previous data, 62 percent of all design hotels have similar or lower operating and maintenance costs compared to non-design hotels
In summary, it appears that design hotels are able to achieve a better bottom-line performance than non-design hotels. With regard to their risk, this study shows that design hotels in Europe have, on average, a similar or more stable operational income and hence a lower volatility in returns. However, potential limitations that were identified for some properties include a higher development risk (i.e. higher development costs, longer timing) as well as a higher obsolescence risk in case the design is not timeless.

Recommendations for investors

With changing demographics and values, the design/lifestyle/boutique segment in Europe is expected to further grow over the next few years. As a consequence, new hotels in this niche will be increasingly forced to differentiate themselves from their “peers”.
Design hotels in Europe have the possibility to achieve higher returns, but only if real estate developers and investors obey certain rules before making an investment. The following four guidelines, albeit obvious, should help developers and investors of design hotels in making a successful and viable investment:

  1. Assess the market thoroughly before starting the development of a design hotel. Who are the competitors and what are the needs in a given neighborhood? While it is quite easy to see what is present on the market, one has to identify what is lacking! In other words, a design hotel might be a good investment if one brings something new to the market that does not yet exist.
  2. Create something unique! Guests staying in design hotels have usually seen many other design hotels before. One has to offer them something unique, unusual and unexpected. This applies to interior and exterior design as well as to service design and other aspects. One has to create a feel-good atmosphere that makes it comfortable and enjoyable for guests to stay, and more importantly, to return to this hotel. Many design hotels have made the mistake to purely focus on chic design and staff.
  3. Focus on functionality! Sullivan’s phrase “form follows function” should be guiding architects and designers of any (design) hotel. Operational sequences, materials and technical appliances used can have a major impact on guests’ feel as well as operational and maintenance costs.
  4. Sustainability is key! Considering economic, environmental and social aspects during the development and operations of a hotel are not only a popular trend but will become an obligation to stay competitive in the field. This is particularly true for design hotels: the concept and design should be timeless and efficient in order to reduce energy costs and prolong renovation intervals, materials and operational sequences should be well considered with the aim of reducing daily costs.
Individuals or groups who consider investing their equity in an operating design hotel should check whether points #1-4 have been carefully considered by the developers under current market conditions.


About the Author:
Lukas Hochedlinger, MA, MSc performed the survey as part of a master thesis at the Danube University in Austria/Europe. He has extensive experience in the field of hotel advisory and valuations, particularly in Central and Eastern Europe. Starting September 2010, he will represent Europe’s leading hotel transaction advisory company Christie+Co in Vienna with a focus on the Austrian and Central and Eastern European markets. He can be reached at lukas.hochedlinger@gmail.com for any further questions or a free copy of the full report.
.
Contact: 

Lukas Hochedlinger
lukas.hochedlinger@gmail.com
 

.
.
 
Also See: Lifestyle Hotels: Gotta Have Soul / Daniel Edward Craig / July 2009
.

To search Hotel Online data base of News and Trends Go to Hotel.OnlineSearch
Home | Welcome| Hospitality News | Classifieds| One-on-One |
Viewpoint Forum | Industry Resources | Press Releases
Please contact Hotel.Onlinewith your comments and suggestions.