A report by Trowers & Hamlinson trends in the UK hotel sectorAttainable luxury: saving to spend in an age of austerity

current hotel investment and innovation. In ayear that will be remembered for spendingcuts, in 2010 our research has identified astring of new luxury hotel openings in the UKand the resurgence of affordable upmarkethigh street brands such as Waitrose andApple after a temporary recessionary blip.Clearly, neither luxury brands nor high networth individuals are entirely immune from theeffects of the recession and both havesuffered, but the commercial performance ofthe UK's leading hotels has shown that luxurystill has its place in the modern marketplace,albeit redefined.

This new strain of 'attainable luxury' does notmean spending beyond your means, butrather spending more meaningfully. While onthe one hand consumers are looking to drivedown the costs of everyday living, on theother they are increasingly keen to maximise

ForewordThe last five years have been amongst themost turbulent for the UK hotels sector.As well as having a worldwide economiccrisis to contend with, today's hotelowners have also had to face the impactof issues affecting the travel sectorincluding airline strikes, security alerts,volatile foreign currency markets and acloud of volcanic ash. Room rates,occupancy and yield have all beenaffected, as has overall profitability in thesector – and all against a backdrop ofrising domestic unemployment andunprecedented public spending cuts.

But in the midst of the general malaisesurrounding the health of UK plc, it is luxury,not economy, that has become the keywatchword within the British hotels sector. Farfrom becoming a victim of the recession,austerity has in fact prompted a crucialreappraisal of luxury that has seenconsumers increasingly look for quality overquantity when spending on travel and leisure.

This report looks at the current and futureinvestment habits of the UK's leading hotelgroups. The Hotel and Leisure Group withinTrowers & Hamlins reviewed the financialperformance of several leading hotel firmsover the last five years, analysing both theirprevious investment activity and statements offuture intent. Using this and an assessment ofits own transaction data and legal trendsinsight, the report identifies the commoncommercial drivers influencing the sector andareas of potential future growth.

'Attainable' luxuryThe analysis identified the emergence of'attainable luxury' as the dominant force in

Attainable luxury: saving to spend in an age of austerity

istockphoto

1

www.trowers.com 2

the value and impact of any 'treat'expenditure. Price still matters, but quality isincreasingly important with tighter budgetsbreeding higher expectations. Rather thanspend little on lots, consumers are nowconcentrating what disposable income theyhave on fewer and better purchases and areseeking premium experiences to offset theirday-to-day economising.

There is no doubt that this mini-boom in hotelluxury owes as much to the sector's long-termdevelopment lag and the unique micro-climate of London as it does to the wider'saving to spend' trend amongst consumers.But whether accidental, temporary or fitful,the move towards attainable luxury is a realand powerful one that will have majorimplications – and potentially createsignificant opportunities – for hotel brandsnow and in the next five years to come.

Trowers & Hamlins is an internationaland City law firm with 125 partnersand over 650 staff. The firm has threeoffices across the UK and five officesin the Middle East (Abu Dhabi,Bahrain, Dubai, Cairo and Oman) aswell as a co-operation agreement withtwo offices in Saudi Arabia andassociations with firms in Syria andJordan.

The firm's hotel and leisure groupadvises private investors, developers,national banks, as well as some ofthe biggest names in the industry.Recent projects include advising onacquisitions in a range of leisuresectors in the UK and acting innegotiations for renowned hotels inthe Middle East.

The current contextFrom crunch to coalitionOn 30 August 2008, UK Chancellor of theExchequer Alistair Darling, in an interviewwith The Guardian newspaper, warnedthat the economy is facing its worst crisisfor 60 years.

By then, consumers had already witnessedan effective run on a bank, Northern Rock,and the consignment to history of the 100per cent mortgage.

On 1 December 2008 the National Bureau ofEconomic Research officially declared theUnited States of America to have been inrecession since December 2007. The followingmonth, January 2009, the UK was also officiallydeclared to be in recession for the first timesince 1991 after two consecutive quarters ofnegative economic growth at the end of 2008.

In its attempts to deal with the economicslump, the Bank of England cut interest ratesto historic lows. At the time of writing,interest rates have remained at 0.5 per centfor 20 consecutive months.

While the UK emerged from recession inJanuary 2010, the recovery has been slowand remains fragile. Subsequent monthswitnessed political upheaval and theemergence of the first peace-time coalitionGovernment, between the Conservatives andthe Liberal Democrats, since the 1930s.

The first major economic programme of thatnew Government was outlined by newChancellor of the Exchequer George Osborneon 20 October 2010 in a Spending Reviewdesigned dramatically to reduce Governmentspending to tackle the UK's deficit.

3

Cautious confidenceThe Spending Review was popularlyconsidered to have opened the door to anew 'Age of Austerity' in the UK. In truth,globally, the ramifications of the economicturmoil over the previous three years hadalready created a crisis of consumerconfidence.

The GfK NOP Consumer ConfidenceBarometer recorded confidence plungingbetween May 2007 and July 2008 to as lowas (-39) from around (-2). Since then thetrend has been of confidence cautiouslyreturning. However it remains far fromrecovered and at October 2010 stood at (-19).

The impact of this economic turbulence wasfelt in every market across much of theworld. The hospitality industry was notimmune, as an analysis of the results ofsome of the major players makes clear.

In 2009, Intercontinental, for example,revealed double digit declines in revenue peravailable room. Millenium & CopthorneHotels plc reported a decline in profit beforetax from £125.9 million in 2008 to £81.9million in 2009.

These are not isolated cases. Fuller, Smith &Turner PLC reported a decline in profitsbefore tax from £23.8 million in 2007/08 to£14.4 million in 2008/09. Peel Hotels sawprofits fall from £664,429 in 2008/09 to a lossof £74,106 in 2009/10.

The hotel industry has been buffeted initiallyby the economic slump and subsequently bythe lack of confidence this has engenderedamongst consumers. The most recent crop ofresults from within the industry, as well as the

Attainable luxury: saving to spend in an age of austerity

national economic data available to analyse,are confused as to the pace of recovery –however there are increasingly growing signsof confidence from the larger operators.Intercontinental's recent quarterly results to30 September 2010 revealed a return to rategrowth for the first time since early 2009, aclear sign that the recovery is gatheringpace. Whitbread plc's first half results for thisyear also revealed a secured pipeline ofapprox 11,000 rooms for Premier Inn whichwould deliver 25% growth in its UK estate.

What are the implications of this uncertainty– best characterised at present as 'cautiousconfidence' – to the hotel industry and howbest can it adapt?

istockphoto

www.trowers.com 4

A reappraisalof luxuryAttainability versus austerityTo analyse the threats and opportunitiesfacing hotel operators in an Age of Austerity,likely characterised by fragile economicrecovery, it is necessary to understandwhich parts of the hotel industry areperforming best and whether this successcan be leveraged.

Our analysis of the relative strengths andweaknesses in the sector, combined with thestatements of intent made by the largerplayers in the industry, throws up anintriguing trend.

Namely, as we embark on an Age ofAusterity, the major players of the hospitalityindustry in the UK and globally haveidentified and are investing in luxury.

Moreover, this new emphasis on luxury inareas where it is already in place does seemto be resonating with consumers and isperforming relatively better than theindustry's mid market.

This is interesting not just in itself, but in theconsequences for the rest of the industry. Ifthe recession and immediate post-recessionyears have witnessed the emergence of anew set of 'luxury-leaders' in the hotelindustry, then how should other hoteloperators adapt?

Before this question can be considered, amore detailed analysis of hospitality operatorshelps to identify this new attainable luxury.

Fuller, Smith & Turner has recently identified'quality' as the key to financial success anda strategy of fitting all new and refurbishedrooms to exacting boutique standards.

Park Plaza Hotels has a plan to grow itspresence into the 'affordable luxury' market.Elsewhere, some luxury brands actuallyflourished over the period of economicuncertainty. MWB Group Holdings reportedthat revenues from its boutique hotelsMalmaison and Hotel du Vin were virtuallyunchanged in the first 6 months of 2010 asagainst the comparable period last yearwhile EBITDA exceeded budgeted levelsand increased by 13 per cent to £11.8 million.

Mid-market squeezeAnother interesting development can bewitnessed by examining Whitbread. Itsoverall performance has been boosted bythe relatively strong performance of itsbudget, Premier Inn brand, with plans havingbeen announced for increased expansion.

So emerges a pattern in the hotel industry ofa 'squeezed mid-market'.

Luxury brands appear to be doing relativelywell. So too budget brands. Both, theevidence suggests, are performing well bycannibalising customers from the mid-markethotel industry.

The question hotel owners that currentlyexist on the fringes of the luxury market mustask themselves, is whether a cautiousapproach to spending money in the comingyears will inadvertently leave their assets inthe mid-market range, from where they arelikely to lose custom to competitors with aperceived luxury offering.

5

Attainable luxury: saving to spend in an age of austerity

2010's luxury leadersThe SavoyThe legendary Savoy Hotel has recentlyundergone the most expensive hotelrefurbishment of all time, coming in at£220m. In a city with several five star hotelsknown worldwide (Claridge's, The Ritz, TheBerkeley), the renovation has pushed itonce again to the top of the luxury list.

Soho House Group (Shoreditch House,Dean Street Townhouse)The Soho House Group is known for itscollection of members' clubs. However,bedrooms opened at Shoreditch House inJanuary 2010 and have proved a greatsuccess, so much so that the grouprecently opened the Dean StreetTownhouse, a hotel around the cornerfrom the original Soho House.

Hotel Missoni, EdinburghMissoni is an Italian fashion house based inVarese. It is famous for its unique knitwear,made from a variety of fabrics in colourfulpatterns. In summer 2009, it opened a hotelin Edinburgh, which was seen as a brave(and bizarre) move. Channelling Italianfashion amid Edinburgh's grey grandeur,Hotel Missoni has been a runawaysuccess, so much so that Missoni isopening a second hotel in Kuwait Cityearly next year.

Willis Insurance Headquarters, LondonSingapore's Kop Group is expected tocomplete the acquisition of the former Willisinsurance headquarters in the City ofLondon. The group is widely expected to beplanning a redevelopment of the existingbuilding into a luxury hotel.

The London EditionMarriott International recently acquired thehistoric Berners Hotel in London and willspend two years renovating it into TheLondon Edition. The new boutique Editionbrand was conceived in partnership withMarriott by Ian Schrager, co-founder of NewYork nightclub Studio 54 and founder of theMorgans Hotel Group.

BelgravesThompson's first UK hotel aims to forge a"new Britannia" feel. This involves mixingBritish design with traditional hospitalityspread across 85 rooms. Opening inBelgravia summer 2011.

Jumeirah No. 1 BlackfriarsThis 52-storey glass tower will comprise261 rooms, several restaurants and bars,a spa, fitness centre, ballroom andconference facilities. Due to open byBlackfriars Bridge in early 2012.

InterContinental WestminsterBuilt on the site of an 18th-century hospitalthat now houses offices and shops, thehotel is due to open in March 2011, a shortwalk from Big Ben and St James's Park.

45 Park LaneWhen this hotel opens in 2011, it will begreen in two senses. Eco-friendly"aluminium fins" in its facade will mean lesspower is required for the air-conditioning,while each of the 45 rooms will have viewsof Hyde Park.

Keeping up with competitors, in terms ofperceived luxury, has emerged as anessential survival strategy.

As competitors announce strategicrefurbishments or investment in luxury, andnew hotel offerings emerge in the luxury

www.trowers.com 6

market, many hotel owners may findthemselves in a 'sink or swim' investmentsituation. True, some of these more recentdevelopments will be the result of aconstruction 'lag' – investment announcedand budgeted for before the economicdownturn. However the impact oncompetitors remains the same, while ouranalysis has demonstrated a clear moveeven since the recession towards the luxuryend of the market.

From HNW to 'FLASH' consumptionIt is worth examining the changes inconsumer attitudes that have bolstered theluxury market in the hotel industry over thepast three years.

Even in the midst of a recession oreconomic slump there will always be HighNet Worth Individuals (HNWIs). The UK hasseen a resurgence of these individuals tothe market in recent years, however. In 2008,according to the World Wealth Report 2010compiled by Cap Gemini, the UK had362,100 HNWIs. In 2009 this figure rose 23.8per cent to 448,100.

This compares to percentage rises ofHNWIs of 16.5 per cent in the USA and 6.4per cent in Germany. Emerging marketssuch as China and India have largerpercentage increases in HNWIs.

While it is likely HNWIs will demand luxuryand that an increase in HNWIs will thereforelead to an increase in demand for luxury,these figures could not be the sole causalfactor in the emergence of the new luxuryidentified above.

One additional trend identified early in therecession was the 'staycation' or Britonschoosing to spend their holiday in the UK.

As an example, figures from enjoyEngland,quoted in ABTA's Travel Trends Report 2010suggest that the number of trips taken inBritain by Britons was 32 per cent higher inJuly 2009 than July 2008.

The 'staycation' demonstrates how a loweroverall spend can still result in a paradoxicalincrease in luxury demand. A couple thatdecides they cannot afford a week in a mid-market resort in Egypt and chooses to stayat home instead may cushion that sacrificewith a cheaper weekend away in a luxuryspa closer to home.

Incidentally this trend is not limited to thehotel industry. In the six months to 31 July2010 Waitrose recorded an 11.3 per cent

istockphoto

7

Attainable luxury: saving to spend in an age of austerity

The choice forhotel ownersOur analysis of the hotel industrysuggests that in the short- to medium-term UK hotels are likely to seefragmented success, driven by post-recession spending habits that will seethe mid-market squeezed on both sidesby 'attainable' luxury and budget hotelbrands.

This situation creates a pressing conundrumfor those hotels straddling the divisionbetween luxury and mid-market. Namely, ifthe mid-market is likely to see customer-leach in both directions then is now the timefor structural and branding investment toensure competitiveness in the luxury market?

Our analysis suggests that it is. Aside fromthe above, there are a number of reasonswhy now is a good time to make thechanges necessary to compete in a luxurymarket.

increase in gross sales and a 6.2 per centrise in operating profit. This trend is in partlikely to reflect consumers looking for higherquality when they eat in, to cushion thesacrifice of eating out less.

There is also the principle of 'bunched'spending. Consumers who previously mayhave spent a large amount of money onseveral hotel stays over the course of theyear are, we believe, restricting themselvesto one or two stays. However to compensatefor the fact that they are holidaying less, theywill spend more per individual stay. Bunchedspending creates the seemingly paradoxicaloutcomes that overall spend is reduced,however spend on luxury is increased, againto the detriment of the mid-market.

These are the consumers our analysis hasidentified as 'FLASH' consumers. These areconsumers who are 'feeling low andspending high'. The high spending is relative– in actual fact their overall spend on hotelstays or travel is likely to be reduced – butthe impact of these consumers on the hotelindustry in recent years is considerable.

FLASH consumers: a snapshotAge 40s & 50s – couples close to retirement or affluent singles

Occupation Middle to senior management or manager-owners

Region Metropolitan North and rural South East

Brand heroes Waitrose, House of Fraser, Marks & Spencer, Apple, Jaeger, Mulberry, Audi

Holiday habits Domestic and European getaways (Cotswolds, Cornwall, Lake District,Bruges, Prague, Edinburgh) and one luxury long haul (South East Asia and Caribbean)

www.trowers.com 8

Low interest ratesFor the past 20 months interest rates havebeen held at the historically low level of 0.5per cent. This rate is likely to remain in placefor at least the first six months of 2011. Forhotel owners, this means that money held inthe bank is not making as much money as itwould have done in years past, or could doin future. The opportunity cost of using thatmoney for investment is therefore less than itwould be at other times.

Low construction costsThe cost of construction and, therefore, thecost of strategic refurbishment are at ahistoric low. Simply speaking, this creates asituation where investment (which is anecessity at some stage for all hotel owners)is relatively less expensive than it may havebeen previously. As the economic situationimproves it is inevitable that the constructionsector will recover and that prices will beginto rise. This suggests that moving quickly toinvest in a new luxury offering will delivergreater value to hotel owners in the longerterm.

A wider pool of operating companiesIn our experience in the hotel sector, manyhotel operator management contracts werenegotiated and signed at a time when thenumber of relevant operators was relativelylow. This market has since developed andmatured in recent years and should createan improved standard of service – and value– for hotel owners. Many owners, however,are not fully taking advantage of thissituation. A period of investment orrefurbishment inevitably creates a review ofhotel operators and their contracts, togetherwith careful scrutiny of the standard of

service being offered in a growingcompetitive market. Operators must becapable of delivering the move towardsluxury demanded by consumers and, asoutlined above, critical to success over theshort to medium term.

Luxury franchisingFor luxury hotels, or those hotels aiming forluxury, now is a good time to explore arelationship with franchising. This can workin two directions. Firstly, hotels can benefitthrough association with a celebrity franchiseor a big name opening within their premises– for example Dinner by Heston Blumenthal,due to open in London's Mandarin OrientalHyde Park Hotel in January 2011.Alternatively, more established luxury hotelscan consider leveraging their brand intoother areas, for example toiletries.

The Olympic factor and Royal WeddingThe London Olympics in 2012 will have aknock-on effect on the hotel industry, largelyby exacerbating the move towards a'squeezed mid-market' outlined above.For hotel owners at the fringes of luxury,it should serve as a warning when, forexample, Accor announced five new hotelsare to be built in London in time for theOlympics under the Ibis, Novotel, Mercureand All Seasons brands. This resurgence inthe market should underline the need forhotels to invest to meet the requirements ofthe consumer, as well as outline the likelyincrease in demand for accommodation inLondon for the Olympics period. Similarly,the announcement of the engagement ofPrince William to Kate Middleton is widelyexpected to lead to a boom in the touristindustry in 2011 and beyond.

9

Attainable luxury: saving to spend in an age of austerity

For hotels that find themselves in thissituation, our analysis suggests thefollowing:

Strategic investmentFailure to invest in developing andmaintaining your business to an upgradedstandard of quality will alienate a new brandof post-recession spender – the FLASHconsumer identified above. Hotel ownersshould explore the wider cost impact of astrategy of investment in luxury. Our analysissuggests that current market conditions arereceptive to delivering value in refurbishmentas a result of low construction costs and lowinflation rates.

Operational reviewAt the same time, in beginning this processhotel owners will necessarily find themselvesreviewing their hotel operator managementcontracts. In many cases the alternativesand choice in this industry will haveincreased since the original contract wassigned. This increased competition is likelyto create an opportunity for cost savings forhotel owners in conjunction with increasedservice standards.

Conclusions andrecommendationsAs a result of our analysis of the UK hotelindustry and our experience workingwithin it, we have reached the followingconclusions:

Resilient luxuryFirstly, while the hotel industry in the UK andglobally has inevitably suffered as a result ofthe economic difficulties of the past fiveyears, luxury hotel offerings have faredbetter (or less badly) than mid-marketofferings. This is due in large part tochanging consumer expectations andpriorities in relation to quality and self-rewardwithin a tough economic climate. Moreover,this trend of 'attainable luxury' has beenrecognised within the industry and has led tothe emergence of 'luxury-leaders' in themarket who are committing to investing inluxury in coming years.

Vulnerable mid-marketThe recent results of Whitbread suggest thatwell-run budget offerings – in this casePremier Inn – have also done well. Thissituation has resulted in mid-marketcustomer base being land-grabbed fromboth sides. Potentially the most dangerousplace to be in this situation is at the fringesof luxury, where middle-ground offerings willface being left behind by the luxury-leadersand so relegated to the mid-market.

www.trowers.com 10

istockphoto

Lookingto 2011Throughout 2011, we would expect, andindeed recommend, more hotels toconduct comprehensive reviews of theircurrent investment strategy and anticipateseveral hotel groups to announce a movetowards improved quality, attainableluxury and boutique investment.

It is likely that 2011 will remain the year ofthe FLASH consumer, as the full impact ofGeorge Osborne's Spending Review beginsto be felt. It is also likely that the drive forausterity will continue to pervade the UK, feltby society in general even in households inwhich income is not affected.

FLASH consumers will react to this bycontinuing to 'bunch' their spending andchoose trips which provide a feeling ofluxury despite a reduction in overall travelinvestment.

More interesting will be the effect on thehotel industry of economic recovery. WillFLASH consumers revert to their oldspending ways and abandon the luxurydomestic market to return to mid-marketforeign travel? And will their absence befilled by a resurgence of foreign travellerscoming to Britain?

Our analysis suggests that to an extent it will,coupled with a move by luxury brands from'attainable' into 'affordable luxury' – mirroringsimilar moves on the high street byleveraging their reputation and brand intomore affordable offerings. This in turn couldlead to a revitalised mid-market.

Contact:

Michael PattinsonSceptre Court40 Tower HillLondon EC3N 4DX

t +44 (0)20 7423 8000f +44 (0)20 7423 8001e mpattinson@trowers.com

For further information, see contact details belowor visit our website at www.trowers.com

L O N D O N M A N C H E S T E R E X E T E R A B U D H A B I B A H R A I N C A I R O D U B A I O M A N S A U D I A R A B I A

If you would like more information on our privacy policy please contact the marketing team, Trowers & Hamlins LLP, Sceptre Court,40 Tower Hill, London, EC3N 4DX or visit our website www.trowers.com.

© Trowers & Hamlins LLP December 2010

Produced by Trowers & Hamlins LLP, Sceptre Court, 40 Tower Hill, London EC3N 4DX.

Front cover image: istockphoto

Trowers & Hamlins LLP is a limited liability partnership registered in England and Wales with registered number OC337852 whoseregistered office is at Sceptre Court, 40 Tower Hill, London, EC3N 4DX. Trowers & Hamlins LLP is regulated by the SolicitorsRegulation Authority. The word "partner" is used to refer to a member of Trowers & Hamlins LLP or an employee or consultant withequivalent standing and qualifications or an individual with equivalent status in one of Trowers & Hamlins LLP’s affiliatedundertakings. A list of the members of Trowers & Hamlins LLP together with those non-members who are designated as partners isopen to inspection at the registered office.

Trowers & Hamlins LLP has taken all reasonable precautions to ensure that information contained in this document is accurate, butstresses that the content is not intended to be legally comprehensive. Trowers & Hamlins LLP recommends that no action be taken onmatters covered in this document without taking full legal advice. Trowers & Hamlins LLP holds the copyright for Trowers & Hamlins’Attainable luxury: saving to spend in an age of austerity which is sent to you on the basis that it should not be used or reproduced inany material or other medium produced by you or passed to any third parties without the prior consent of Trowers & Hamlins LLP.

Trowers & Hamlins voted legal firm of the year by Finance DirectorsTrowers & Hamlins has been voted “Legal Firm of theYear” in this year’s FDs’ Excellence Awards in associationwith the ICAEW (Institute of Chartered Accountants inEngland and Wales).

The award, supported by the CBI and by Real BusinessMagazine, is based on the results of a survey of 1,000Finance Directors across the UK.

Finance Directors polled commended Trowers & Hamlinsfor their “high quality” and “supportive” service.