London's glitziest hotels draw investors

It’s Friday night at Claridge’s Hotel in central London and harried-looking bartenders are rushing to serve customers piled three-deep at the bar. Property investors are lining up too, not for the £16 ($25) mojitos and £27 glasses of Laurent Perrier Brut Rose champagne, but for the luxury hotels that can command such prices during an economic slowdown.

A site on Leicester Square in the UK capital that already has planning permission for a 245-bedroom hotel has attracted more than 15 bidders, according to a person familiar with the matter. More than a dozen parties expressed interest in a W Hotel on the same square before a Qatari investor bought it in September. That month, the billionaire brothers David and Frederick Barclay purchased ¤800 million ($1.1 billion) of debt tied to Maybourne Hotels Group, the owner of Claridge’s.

London’s luxury hotel market is defying Europe’s sovereign debt crisis and Britain’s sputtering economy as wealthy visitors from abroad drive record sales and occupancy rates and boost values. A lack of supply, as well as the prestige of owning a name like the Ritz or the Connaught, is sparking construction and persuading investors to pay more than they would for other types of real estate.

The city has had “a pretty good ride, helped by the weakening pound and by its status as a world-class city and financial and business center,” said Konstanze Auernheimer, marketing and analysis director for researcher STR Global. “It’s attracting a great amount of leisure as well as business guests.”

Rebound from crisis Values of luxury and trophy hotels have rebounded by five per cent to 10 per cent after dropping about 15 per cent to 20 per cent in the financial crisis, said Sally Kendall, a senior analyst for hotels at property broker CBRE Group Inc. Most of the increase has come this year, she said. By contrast, some of the most expensive UK hotels outside the capital have fallen more than 50 per cent since 2008 and are continuing to decline, said Jane Lees, a director at CBRE’s hotels division.

The Ritz Hotel, owned by the Barclay brothers, is worth more than £625 million, or £4.6 million per room, based on “several unsolicited approaches from prospective purchasers for the sale of the hotel,” the owners said in a statement filed to Companies House on September 30. Last year, the Ritz had its highest-ever sales at £31.3 million, according to the documents.

“In broad terms, if you were to put a really high-end hotel on the market in London you’d be looking to clear something like £2 million a room,” said Russell Kett, managing director of the London office of hotel consultant HVS.

Leicester Square
The 192-bedroom W Hotel on Leicester Square, which also includes the European flagship store of Mars Inc’s M&M’s, was bought for about £200 million by Qatar’s Sheikh Faisal Bin Qassim Al Thani’s Al Faisal Holding Company.

Ireland’s National Asset Management Agency is selling its Leicester Square site after it put previous owner Steamboat Developments Ltd into receivership. As well as the hotel, there is planning permission for 33 apartments, four restaurants and a two-screen cinema on the site. The person who disclosed the bids for the asset asked not to be named because the information is private. NAMA spokesman Ray Gordon declined to comment.

The prices indicate that investors either expect a significant improvement in hotel income or they’re willing to settle for smaller returns than they would expect for any other type of property, CBRE’s Kendall said in an interview.

Growing returns
Total return, a combination of rental growth and rising values, was 12.4 per cent for hotel buyers over the four years through 2010, compared with a 6.9 per cent decline in UK commercial property values, according to London-based Investment Property Databank Ltd. It doesn’t report London hotels separately. Total return for all UK hotels was 14.9 per cent last year, more than double the European average of 6.9 per cent.

Revenue per available room, known as revpar, for luxury hotels in the capital rose to £205 in the January through October, a 25 per cent increase from the same period two years earlier, researcher STR Global said. Revpar increased for all London hotels by an average 22 per cent.

High prices and returns are attracting buyers like the Barclay brothers, the Telegraph Media Group Ltd owners who bought the Maybourne Group debt in September from NAMA. The pair plans to invest about £130 million in the company, which also owns the Connaught and the Berkeley hotels, as they try to gain control, the London-based Times reported on December 4.

Buying debt
“There were a number of parties interested in acquiring the loans and effectively the Barclay brothers made us an offer to acquire it, unexpectedly at par,” NAMA Chief Executive Officer Brendan McDonagh said in an interview in October. “Obviously they had their homework done.”

Paddy McKillen, who owns 36 per cent of Maybourne, is suing the Barclays and related investment companies over the acquisition.

“Mr McKillen has no intention of selling his stake in Maybourne,” said his spokeswoman, Breda Keena. “He is the largest shareholder and is actively seeking to increase his stake. The hotels are performing exceptionally well and exceeding targets.”

Revpar at Maybourne’s hotels rose 17.8 per cent to £423 last year “driven mainly by the continued ramp up of the Connaught’s performance and strong profitability driven primarily by average room rate growth at Claridge’s,” owner Coroin Ltd. said on October 7.

Pay to stay
A night in the basic rooms at the Dorchester or the Connaught on December 20 costs £318 including tax. On the same night, the Savoy is offering a third night free if guests book two nights in a suite. Prices start at £882 per night including tax.

The Dorchester, owned by the Brunei Investment Agency, had record occupancy and room rates last year it said in accounts filed with Companies House on October 5. After tax profit rose 37 per cent to £15.9 million, the highest ever.

A guest at The Lanesborough near Buckingham Palace recently paid 3,000 pounds for a Cohiba ‘Behike’ cigar made by the personal roller to former Cuban President Fidel Castro, said bar manager Giuseppe Ruo.

Very little of London’s luxury hotel property tends to come on the market in any year, boosting competition for what’s available. That may change over the next few years, when new developments will be completed.

Most of the current stock is owned by overseas families, many of whom are under no pressure to sell. A Kuwaiti investor bought the Sanderson and St. Martins Lane hotels for 192 million pounds from a joint venture between Morgans Hotel Group Co. (MHGC) and Walton Street Capital on Nov. 23.

Indian, German Owners
India’s Sahara Group, owner of assets from TV channels to real estate, bought the Grosvenor House hotel on Park Lane for 470 million pounds last year and is also looking at other deals, according to a person familiar with the matter. Last month, MWB Group Holdings (MWB) sold its Malmaison hotel on Charterhouse Square close to the financial district to funds managed by DEKA Immobilien GmBH. The deal was part of a wider sale-and-leaseback of part of its hotel portfolio and the exact price paid for the Charterhouse Square hotel was not disclosed by DEKA in a statement in Nov. 21.

Those who can’t buy now are looking to build, said Mark Shea, a director at real-estate adviser Davis Langdon. There is little appetite for developing mid-market hotels in London because most of the growth is at the top and bottom ends, he said.