Luxury has its limits. When too many brands start banking on one sector to deliver all their good news things don't go well.
Jitters about everything from the risk of terrorism to Britain’s membership of the European Union are battering London luxury hotels as the world’s wealthiest travelers stay away.
The city’s priciest hotels were only 65 percent occupied in the three months through March, according to data provider STR. That was the lowest for a first quarter since a global recession roiled the market in 2009 and down from 70 percent a year earlier. London’s top hotels include the Savoy and the recently reopened Lanesborough, where the Royal Suite with a complementary chauffeured Rolls-Royce costs about 25,000 pounds ($36,000) per night.
While demand for cheaper accommodation is falling too, luxury hotels are hardest hit because wealthy travelers and corporate clients are proving more sensitive to the political turmoil. The terrorist attacks in Brussels and Paris, the risk that the U.K. may vote to leave the EU and an economic slump in Russia have all contributed to the market’s deterioration, along with the uncertain outcome of the U.S. election.
“A lot of source markets are under pressure due to issues outside of London hoteliers’ control,” said Andreas Scriven, a hotel consultant at Christie & Co. More wealthy Russians are vacationing at home and Americans travel less during election years, he said.
Bob van den Oord, managing director at the Langham hotel on Regent Street, attributes its weaker-than-expected performance to security concerns in Europe. “There’s anxiety out there about terrorism,” he said. Rooms at the hotel start at 300 pounds per night.
There’s an excess of supply in the luxury segment, Scriven said. That’s after a new InterContinental hotel near the O2 Arena in north Greenwich and the refurbished Lanesborough hotel in the Knightsbridge district added more than 540 rooms in the past year.
Uncertainty ahead of the U.K. referendum on June 23 is causing business travelers to postpone investments, according to Russell Kett, chairman of hotel consultancy HVS’s London office. The U.K. had its worst quarter for deals since 2010, according to data compiled by Bloomberg. First-quarter M&A spending on and by companies in the country was down 39 percent from a year earlier, and the slowdown is poised to continue until June.
The drop in occupancy is hurting luxury hotels’ income, pushing revenue per available room down by 6.5 percent to the lowest for a first quarter in three years, according to STR. However, average daily room rates have held up because hoteliers would rather lose business than start a downward pricing spiral.
That’s yet to deter investors. London hotels valued at 4.1 billion pounds changed hands in 2015, about 250 percent more than a year earlier, and compares with the previous record of 2.1 billion pounds in 2006, according to data compiled by Knight Frank LLP. That’s pushed yields — which move in the opposite direction to prices — to less than 4 percent.
The largest hotel transaction last year was the purchase of a majority stake in Maybourne Group — which owns Claridges, the Berkeley and the Connaught — by Qatar’s Constellation Hotels Group for an estimated 2 billion pounds, according to Knight Frank.
Russia’s elite are spending more time in their own country, as a weak ruble hurts their spending power and President Vladimir Putin urges Russians to travel within the country and support the ailing economy. U.K. visas granted to Russians fell 38 percent last year.
“The decline in Russian visitors is just one of the issues facing London’s luxury hotels, Kett said. “If you add it all together, it becomes an issue.”
–With assistance from Manuel Baigorri and Jake Rudnitsky
©2016 Bloomberg L.P.
This article was written by Dalia Fahmy from Bloomberg and was legally licensed through the NewsCred publisher network.
Photo credit: The Lanesborough Hotel in the Knightsbridge section of London has seen lower occupancy this year. Lanesborough Hotel