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London faces sharp spike in luxury hotel supply

In the quest for higher profits, it’s also interesting to note that a higher suite to room ratio is emerging in some properties. The Four Seasons on Park Lane has recently re-opened with fewer bedrooms and more suites – with a suite to room ratio of around 31% (around 192 bedrooms including 45 suites).

London is one of the most popular gateway destinations in the world with a wide range of demand streams. Investors are currently eager to enter the luxury sector in London, where the barriers to entry are high, trading has been strong and high quality assets are relatively scarce. London is a key gateway city and a ‘must be-in’ destination for many operators. Some have yet to get a foothold, others are keen to open a second or third hotel; for example Four Seasons has recently announced its Heron Plaza plans. Investors are attracted by the potential returns to be had as well as by the prestige of owning some trophy assets.

Liz Hall, head of hotel research at PwC, added:

"While absorbing the new rooms may not be too much of an issue in central London post Olympics, it may be more difficult for sites further out of the central tourist core and business districts. Luxury hotels are often the most volatile and cyclical of all hotel segments and the first to take a dive when times are bad due to a high cost base and high service levels. It’s difficult to reduce the cost base without devaluing the brand and status. On the other hand, they are susceptible to a very rapid recovery when times are good, as we have seen in the past and are starting to see now in London."

"Many of the hotel operators we have spoken to did not expect to see a significant negative impact on revenues as a result of the new supply opening, although some admitted a 27% increase will impact trading. However, some believed that the re-opening of iconic hotels such as the Savoy and the Four Seasons along with new (for London) names on the scene such as the Shangri-La, Bulgari, the Corinthia, the Rennaissance and W, are expected to provide a positive halo effect, ensuring London continues to compete with the other major cities in the world with top end hotels. Demand should strengthen as the Olympics near but hotels will have to be pro-active with their marketing."

In terms of revenue for hotels, room rate is king and this is particularly true for luxury hotels.

"London’s luxury room rates averaged at £254 in 2010, compared to £228 in the same period in 2009, which compared to an average of £127 for all London hotels.* However some hotels including those in the very elite ‘super-luxury league’ will have enjoyed much higher rates."

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