Trophy Hotel Investments - Psychic or Real?
By: Aalex Kyriakidis and Frank Croston - London, Summer 1996
After a hiatus of some years, the viability and desirability of owning trophy hotel assets once again command the limelight as Granada Group, the media and leisure giant, presents the Forte Exclusive portfolio to the market and awaits offers with interest. Buoyed by a strong hotel market, investment in trophy properties is on the rise with Sheraton's acquisition of Ciga and the recent sale of the Ritz in London for nearly 1 million per room. Acquisitions by high-profile hotel investors, Prince Al- Waleed bin Talal bin Abdul Aziz and Kwek Leng Beng, continue to fuel the market. The Plaza Hotel in New York, the Hotel Bel Air in Los Angeles and the Phoenician in Phoenix are all among hotels recently changing hands.
Pricing for these trophy properties on average, however, is substantially lower than acquisitions during the last decade when investors bid up the price of a number of the world's most luxurious hotels. Brunei's royal family last year, for example, purchased the Hotel Bel Air for $62 million, considerably less than the 110 million paid by a Japanese investor in 1988. In addition, the recent defence document published by Forte during the Granada bid process made it clear that the Exclusive portfolio was only yielding a 5 percent return on capital employed. This demonstrates the scale of the challenge.
The flurry of transactions in the marketplace once again raises a number of questions about the trophy hotel market. Is it at all possible to earn a satisfactory return on investment from such assets, despite conventional wisdom to the contrary? What are the chief motivations and rationale which underpin the desire to own trophy hotels? In this article, we assess whether these benefits are primarily "psychic" or "real" in terms of the returns trophy hotels can generate for this elite group of owners.
There are many hotels that aspire to trophy status, but relatively few which acquire the cachet necessary to fully justify the label. Trophy assets will normally meet the following criteria:
In addition to these criteria, however, trophy hotels all share a quality of timeless elegance, defined ultimately by the guests who choose the hotel and over time build its reputation by virtue of their loyalty to the "experience" the hotel provides. This is the key distinguishing factor, relative to other hotel assets, explaining why physically superior new hotels in many cities have been unable to displace their trophy competitors.
There are a wide variety of reasons which prompt the desire to acquire a trophy hotel, often a mixture of emotional, financial and status-driven motivations which are difficult to disentangle. Discussions with owners and investors during the course of preparing this article suggest that the following motivations are paramount:
Real Estate Value - All trophy investors are keenly aware of the unique real estate value which attaches to trophy properties. This does not preclude the assets from being subject to normal property value cycles. It would be unusual, however, for a trophy location/asset to lose value relative to other sites/assets in the same city. An example of the phenomenon is the New York Plaza, recently acquired from Donald Trump by Prince Al Walid and Kwek Leng Beng.
Brand Support - Many trophy assets are acquired as flagships to promote a wider chain of deluxe hotels, not all of which enjoy trophy status. In this context the trophy asset is partly a marketing device, intended to imbue the other assets within the chain with the same customer appeal. An example of this would be the Danieli in Venice, now part of the ITT Sheraton "Luxury Collection".
Synergistic Benefits -Some investors see trophy assets as an appropriate extension of their activities in other high-value consumer products, such as the linkage between Orient Express Hotels and the Venice-SimpIon Orient Express train operation, both owned by Sea Containers.
Prestige -It is an inescapable truth that many investors in trophy hotels aspire to be associated with the quality that a trophy asset provides. This desire can be reflected by both private and corporate investors, and is clearly a powerful driving force behind many transactions.
The debate would be incomplete without some consideration of the trophy hotel client base. Why do some well-heeled guests seek out these properties? Is the client base sustainable into the medium term?
Clearly, concerns arising in the early 1990s about the disappearance of the discerning guest willing to pay trophy rates of £250 and upwards per night ($375) have proved unfounded. These trophy rates have kept pace with their more demanding clientele, in regard to the facilities and service delivery they require, and are enjoying a resurgence in demand which appears set to continue based upon the recovery of the world's economies from the severe service sector recession of the early 1990s. Merger and acquisition activity, in particular, has rebounded strongly, and high-end leisure usage is more viable as the "feel-good" factor returns. These guests enjoy the prestige and status which their "address" provides, and are willing to pay appropriately. The good news is that the average age of the trophy hotel guest has fallen significantly during the last 10 years, thus providing comfort as to the longevity of market appeal. The average guest age of 55 to 65 years a decade ago has dropped to an average of 50 to 60 today. This reflects the trend towards younger senior business executives, and this average can be expected to continue to fall, according to interviews with trophy hotel operators.
Conclusion
The reality which appears to emerge from this review suggests that the new breed of trophy hotel owners are confident that they will be able to deliver acceptable levels of return on investment over time. They accept, however, that the investment needs to be viewed over an extended period of ownership, and that an element of their overall return will be locked into the capital appreciation of the asset, and only released on disposal.
Given the cyclical nature of hotel business economics, linked inextricably to the overall business cycle in any particular economy, it is unsurprising that investment at the luxury end of the market needs to be "patient." It can often take two peaks of operating performance over a 10-year period before the cumulative returns begin to justify the initial investment and deliver the returns.
The key influences which owners believe are required to deliver these higher levels of return include:
If you, as the reader, still consider the benefits of r trophy hotel ownership more "psychic" than "real," it is likely that you will remain in the majority for some time to come. There is a growing group of investors, however, who continue to regard the trophy hotel investment "risk-reward ratio" as attractive, and who will remain in ownership of prized assets on premium sites, while sacrificing higher initial yields. For these investors, the quality and reputation of the trophy itself is inseparable from the overall "return."
Alex Kyriakidis is the Worldwide Partner in charge of Arthur Andersen's Hospitality & Leisure Services. Frank Croston is Director of Hospitality Consulting Services for the London office
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