New York—Luxury hotels exist in a unique world unto themselves, and leaders in the segment said during the 30th Anniversary NYU International Hospitality Industry Investment Conference last week that as the cost of building continues to rise, higher cost-per-key developments aren’t giving developers sticker shock just yet.
“Cost per key is not as critical as [internal rate of return],” said Homi Vazifdar, managing director and CEO of Canyon Equity LLC, which owns, develops and asset manages properties around the world..
Vazifdar’s company focuses on small ultra luxury properties, usually with about 50 guestrooms. It makes its deals work by having a residential product for sale within the development.
“At the end of the day you have to look at the operator,” he said. “We find a site then fit the site with an operator, always keeping profitability in mind.”
Vazifdar was blunt about the dog-eat-dog world of luxury hotels.
“If you don’t have the stomach for it, don’t do it,” he said. “The operator is sacred. The demographics of that place are sacred. It doesn’t matter whether it’s a private or public company, at the end of the day you are using the operator’s brand a springboard for IRR.”
Tom Storey, president of Fairmont Hotels & Resorts, said luxury hotel ownership ultimately is about the value of the asset over time. Fairmont has more than 50 properties in its portfolio, most of which are management contracts.
“IRRs are exit driven, IRRs are not cash driven, so you have to maintain the position of the asset not only to keep the economics right but to make sure you get a [competitive] cap rate,” Storey said. “There’s short term tension with some of our owners, but long-term we all understand what the game is.”
Terry Stinson, development director and president of the Americas for Mandarin Oriental Hotel Group, agreed with Storey.
“The game is long-term asset value,” Stinson said. “We have for a long time been about building iconic hotels. Fifty years from now I want our hotels to still be thriving and recognized as luxury hotels.
“In time, recurrent returns will be sufficient, but in the long run, it’s the value of the asset [that counts],” he said. “Sometimes you flip in five years, but if you go in with that expectation you will be greatly disappointed.”
Mandarin Oriental owns and operates about 40 hotels comprising more than 10,000 guestrooms.
When asked by audience member Tim Hanson of Kingdom Hotels what the brands are doing to protect the integrity of the bottom line, the executives had plenty to say.
“Using yield management systems and IT to access and personalize experience to our customers,” said Gerald Lawless, executive chairman of Jumeirah Group.
“Everybody needs to do a much better job of energy management. It’s one area we all have kind of left on the backburner,” Storey said. “Second, recognizing that we as an industry have a tendency to keep layering things on, in tough times you have to go back to what you stand for.”
Fairmont is ranking its amenities and the impact they have on guests, Storey said. The plan is to eliminate from the bottom of the list to create an experience that pleases guests.
As self-proclaimed six-, seven-, and even eight-star luxury hotels and resorts are popping up around the world, the panelists said “star creep” is only a concern if the properties aren’t living up to expectations.
“One man’s bling is another man’s understated elegance,” Lawless said.
Among the properties Jumeirah has developed is the Burj Al Arab, a property in Dubai that is considered by many to be the world’s most luxurious hotel.
Lawless said the company never claimed the Burj Al Arab was more than a five-star hotel; it was labeled that way by others.
The way to get that label is to provide out-of-this-world service, according to Tom Storey, president of Fairmont Hotels & Resorts.
“At the end of the day, what defines true luxury is service,” he said. “Not just the physical items, it’s the way the staff interacts with the guests.”
As luxury hotels become more enticing to own, existing brands have had a battle to maintain control of their turf.
Raymond Bickson, managing director and CEO of Taj Hotels, Resorts and Palaces, said his company has had to take an aggressive expansion approach after other brands started targeting its backyard in Asia.
“We have been a strong regional brand,” he said. “Part of the reason for our global reach today is our market share in India is under attack. The inventory needs to go to half a million rooms to meet the demand (there are 90,000 hotel rooms in India now). … To effectively protect our brand from the larger companies coming into our market, we need to pick those 20 to 25 international destinations that give you recognition.”
Taj has 76 properties in 12 countries.
Lawless said having properties in “25 to 30 letterhead cities plus significant resort areas” is important.
“Reach is extremely important to us and to the owners who invest in our hotels,” he said, adding that having market diversification helps balance Jumeirah’s portfolio during uncertain economic times.