Better long-term returns found in luxury hotels

To look forward we can only look back at the most recent comparable market disrupter, the GFC.

Logic suggests that midscale hotels, which trade at lower nightly room rates, would benefit from lower falls in RevPAR because they come from a lower base. Corporate businesses would look to cut costs and direct staff to cheaper hotels, hence the recovery of midscale hotels would be quicker? Right? Wrong.

During the GFC, Australia benefitted from the resource boom and therefore meaningful data for the variance in RevPAR performance of midscale hotels and luxury hotels is more limited in comparison to other countries.

Looking back at Australian Bureau of Statistics (ABS) data for Sydney between FY2008 and FY2012 we can certainly see the RevPAR decline of luxury hotels was earlier and more severe, falling 9.2% ($17) FY2009 off the back of a fall of 3.4% ($7) the prior year.  Whereas midscale and upscale hotels RevPAR declines were initially slower and nearly 8% (down $6 and $10 respectively). However, the recovery in FY2010 was felt the quickest in the luxury segment, showing a RevPAR increase of 6% (up $10) on the prior year compared to minimal growth in the midscale and upscale segments.

The RevPAR recovery of the Sydney Luxury segment continued strongly thereafter and averaged 6.2% per annum between FY10 and FY2016, compared to 5.0% and 3.8% per annum in the midscale and upscale segments respectively.  Luxury hotels proved to be the best long-term investment.

We have also analysed data in the UK, where the economic impact the GFC was more pronounced in comparison to Australia.  

The hotel classifications from BDO Research in the UK differs slightly to the ABS, however the outcome is similar. In CY2009, the RevPAR decline across all segments was between 2.9% and 6.1%, with Superior Deluxe hotels predictably suffering the largest decline.  The recovery is more telling, with Superior Deluxe and Deluxe hotels RevPAR up 17.7% and 16.1% (up £33 and £25) respectively in CY2010. Cheaper Tourist hotels were still in decline in CY2010 and value driven Business Class hotels RevPAR growth was only 5.1% (£3).

UK Superior Deluxe hotels recorded an average annual RevPAR growth rate of 2.4% over the 10 years to CY2017, compared to 1.2% and 1.6% for hotels in the more affordable segments.  It appears more expensive hotels recovered the quickest and sustained good levels of growth beyond the GFC.

We anticipate a similar, if not more striking, pattern post COVID-19. During the GFC debt and availability of cash was a major issue. Whilst COVID-19 is a health induced economic decline rather than financial driven, it will still present major economic and cash flow issues going forward, hindering the recovery. But at the moment, banks are still willing to lend, investors are keen to invest, businesses want to get back to business and people want to meet people.

The dynamics differ to the GFC but we believe there is more money in the system now compared to the GFC, which points towards a stronger recovery in the luxury hotel segment this time round.  

The important caveat is that international travel and luxury hotels are intrinsically linked.  Luxury hotels are being severely impacted by international travel restrictions, which could remain for another 12 months unless a safe vaccine is found.  Midscale hotels will operate more efficiently surviving off domestic based business. Once COVID-19 becomes a distant, but horrid, memory we forecast a luxury hotel boom. Those who can afford to battle the storm over the next 12 to 24 months should come out the other side feeling extremely positive.