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Rome: Why the eternal city could become the next hotspot for luxury hotels.
Monday, 9th February 2015
Source : Christof Bertschi and Sophie Perret

'Why should luxury travellers pay less for a hotel in Rome than in London, Paris or New York? We have the same guests here’, a General Manager of a luxury hotel in Rome asked me recently during an interview.

His remark poses an interesting question: why are luxury hotels in Rome not able to charge similar rates as those in London or Paris, when they supposedly attract a similar clientele? 

A comparison with other European gateway cities illustrates that the business mix of the hotels in Rome is actually slightly different to that of London and Paris. Whilst the latter are not only tourism hot spots but also global business hubs, Rome’s client mix is more leisure and government focused.

Although Rome is the political centre of Italy and benefits from demand generated from embassy and government-related events, Italy’s business powerhouse remains in the north in the area around Milan.

As a must-see destination for every leisure traveller, Rome enjoys high popularity, but the city does not have the same status and perception as a luxury shopping and lifestyle destination such as London, Paris, Milan, Venice or the French Riviera.

Additionally, supply related factors, such as underinvestment and a lower number of international luxury hotel brands, have so far prevented the Rome luxury hotel market from reaching comparable room rates with these other destinations.

Nevertheless, and despite several challenges, Rome remains attractive for investors and hotel operators and has the potential to become the next hot spot for luxury hotel development.

Rome â€" No Introduction Needed!

 

The city’s historical and cultural sites are numerous, well known and draw visitors from all over the world. Rome’s popularity is highlighted by its strong demand growth over the past several years. 

The return of US travellers to Europe has been noted in Italy and Rome is expected to benefit as it remains one of the most popular destinations for US travellers. The US dollar materially strengthened against the euro over the past year and is forecast to grow further during 2015, which underlines the strength of the US travel market.

Emerging markets such as Asian and Middle Eastern countries (as well as Russia, until recently) have also registered high growth in visitation and are expected to foster further demand for luxury accommodation in the coming years.

Visitation from the main European countries Germany, France, the UK and Spain has also demonstrated decent growth. Domestic demand has been resiliant and, with the anticipated pick up in the Italian economy, the outlook should remain positive.

 

Airport Demand

After two years of declines in total passenger movements at Rome’s main airport, Leonardo da Vinci International (FCO), year-to-November 2014 figures show a healthy pick up of 6.2% compared to the previous year, driven by both domestic and international arrivals.

Rome’s low-cost hub, Ciampino (CIA), which is some 15 km southeast of the city, also recorded good growth for year-to-November 2014 with an increase in total passenger numbers of 7.5% on the same period in 2013. 

Seasonality

Rome has a relatively broad seasonality, with the low season running from December to February and, to a lesser extent, in August.

Given its extensive leisure attractions and its status as an established weekend-break location and a sound economic hub, Rome’s seasonality is not pronounced, with market occupancies falling below 50% in January only.

During the peak months, market occupancies reach 85-90%, which supports Rome’s strength as a premier city within Europe â€" one that is capable of luring large numbers of visitors. 

The Economy and Luxury Fashion: The Difference between Rome and Milan

Milan’s luxury hotels are achieving higher rates than its counterparts in Rome, partially due to the fact that Milan has a broader range of international luxury hotels than Rome.

Furthermore, Milan has always been seen as the economic centre of Italy. Milan not only hosts the country’s stock exchange, it also serves as the centre of the industrial northern part of Italy and is famous worldwide for fashion and luxury goods.

Milan will be getting a lot of attention this year as it hosts the next world fair (Expo Milano 2015) from 1 May to 31 October, and the city aims to attract some 20 million visitors during this time. It is hoped that the Expo will increase awareness of Milan as a leisure destination.

Whilst Rome generally has sufficient leisure tourism, Milan’s luxury hotels sometimes struggle to attract leisure demand on weekends and during the low season. Milan also has some potential oversupply concerns with several new high-end luxury hotels opening over the next few years.

Three hotels alone are scheduled to become operational before the beginning of the Expo: the 104-room Mandarin Oriental, the 240-room Excelsior Hotel Gallia, a Luxury Collection Hotel and the 139-room ME by Meliá. Additionally, a W Hotel has also been announced for a 2016 opening.

Luxury Hotel Performance Benchmark â€" Why Are Rates in London and Paris Higher?

The following analysis of the top luxury assets in Rome, London and Paris shows that Rome lags significantly behind Paris and London when it comes to average rate. 

There are several reasons for this:

  • Rome lacks the prestigious ‘Palace Hotels’ of Paris, which owing to their heritage and status can command average rates of above €1,000. London has more international luxury hotel brands (after the recent addition of Shangri-La and Rosewood only a few are missing to complete the collection);
  • Several hotels in Rome suffer from underinvestment because capital expenditure has been deferred for too long. Some hotels are even in need of a complete renovation and therefore do not offer the same overall quality as assets in Paris and London;
  • Average room rates are also influenced by suite sales. However, the quality and number of suites in Rome’s luxury hotels is generally inferior compared to high-end properties in London and Paris;
  • The area of Rome that houses many of the existing luxury hotels is no longer a prime luxury area. The focus of high-end travellers has shifted from the Dolce Vita area in Via Veneto to the high-end shopping and tourism quarter of Piazza di Spagna and Via Condotti.

Lack of Luxury Supply â€" Why are there no Four Seasons, Mandarin Oriental, Peninsula or Rosewood Hotels in Rome?

Several international luxury hotel brands have managed to establish a presence in Rome but many others have not (yet) found the right opportunity to enter the Italian capital. Not because of a lack of interest, but more due an absence of the right location, partners and projects.

Developing a luxury hotel in Rome appears to be challenging because of a shortage of available sites (many buildings are either protected or owned by the church or families), tough planning legislation and a high development risk. ‘It is quite likely that you find some ancient bone when digging two storeys underground, which could stall your development for a signficant time’, commented one general manager.

Nevertheless, opportunities exist with the right partner, location and project as the city is currenlty lacking high-profile luxury developments in prime locations, and there are currently some noteworthy developments in the pipeline with the potential to change the luxury hotel landscape and enable the city to push for higher rates.

Location â€" Luxury Moved from Via Venetto to Via Condotti and Piazza di Spagna

Via Venetto used to be associated with the famous Dolce Vita and the area hosts a number of luxury hotels. However, the luxury retail industry has since moved to the more pedestrian-friendly area around the Piazza di Spagna and Via Condotti, which attracts higher footfall.

The map below shows that high-end fashion shops and luxury brands such as Tiffany & Co, Louis Vuitton, Cartier, Prada, and so forth can all be found in this area. Streets with the highest retail rents are Piazza di Spagna, Piazza San Lorenzo and Via Condotti. On the other hand, with the exception of the Hotel D’Inghilterra, there are no luxury hotels in the immediate area.

The Rocco Forte de Russie and the Hotel Hassler enjoy the best strategic locations and are also said to be rate leaders in the city. It should be noted, however, that location alone does not guarantee high room rates â€" both of these hotels have great reputations and the Rocco Forte de Russie also benefits from a stunning courtyard and well-designed facilities and suites.

Location of Luxury Retail stores compared to Luxury Hotels

Underinvestment 

Another reason why Rome’s luxury segment achieves lower average rates than other prime European gateway cities is the underinvestment of certain assets.

Several independent and internationally branded ‘luxury’ or upscale hotels suffer from underinvestment and are in need of capital expenditure in order to properly meet the demands of luxury clientele.

Whilst this underinvestment currently limits the city’s average rate growth, it also underlines the potential once certain hotels are properly renovated and repositioned.

Opportunities & Pipeline

There are signs that the luxury landscape is about to change:

  • The Eden Hotel is expected to undergo an extensive renovation and repositioning following its takeover by the Dorchester Collection during 2013. The hotel has a great history, reputation and good location in proximity to the main luxury shopping area and leisure demand generators such as the Spanish Steps, Villa Borghese and Via Veneto. The hotel has the potential to compete with the Rocco Forte Hotel de Russie for the leadership position in the market;

Impression of the Roman Penthouse at the Regina Hotel Baglioni - Source: Baglioni Hotels (www.romanpenthouse.baglionihotels.com)

  • Although nothing has been publicly announced at this stage, it is likely that the recently sold St. Regis, InterContinental De La Ville, Boscolo Aleph and Boscolo Palace hotels will undergo signficant renovations over the coming years. Middle Eastern owners generally have a long-term investment view and are therefore normally keen to preserve real estate assets at high standards; 
  • Following its aquisition by Mayola for Investments (a Qatari-owned investment vehicle), the Baglioni Hotel Regina with its ‘Roman Penthouse’ set a new precedent for luxury suites in Rome. The stunning suite can be separated into various rooms, has its own roof terrace and offers magnificent 360 degree views over Rome;
  • Shangri-La is said to be adding another asset to its European portfolio with plans to open a hotel opposite the Westin on Via Veneto. However, there is currenlty no offical information regarding this project;
  • A project involving a luxury lifestyle hotel brand is also in the planning stage but is confidential at the moment. The hotel is expected to become operational in the next two to three years;
  • The Aldrovani Hotel, albeit behind Villa Borghese in an ‘out of the way’ location, is an interesting asset with 122 rooms, pleasant courtyard gardens, a two-Michelin star restaurant by Oliver Glowing and branding potential in combination with an overall upgrade of the rooms and facilities. It would not be a surprise if an operator decided to partner with the current owner for this asset in the coming years;
  • Four Seasons has been associated with a project at the State Mint and Polygraphic Institute, the stunning building at Piazza Verdi. No official update is available at this stage, but the development is expected to include a 200-room hotel and several luxury apartments, some of which will be branded. The project is not in a prime hotel location, which indicates that the focus might be on the residential component.

Hotel Investment Market

Rome has always been an interesting market in which to invest, with prime real estate always in high demand. Figure 8 shows recent transactions in Rome.

Foreign investment, particularly from the Middle East, has dominated luxury hotel purchases in the recent years. The Hotel Eden, which was aquired by the Brunei Investment Agency (owner of the Dorchester Collection) for reported €105 million is one of the exceptions.

An interesting case is the InterContinental de La Ville, which has transacted several times during the past eight years. The hotel was always sold as part of a portfolio.

At the peak of the market, Morgan Stanley originally purchased seven InterContinental hotels (Amsterdam, Madrid, Vienna, Rome, Budapest, Cannes, Frankfurt) from InterContinental Hotels Group in 2006 for a reported €634 million. Toufic Aboukhater, a Lebanese high-net-worth individual, aquired the portfolio in 2011 for €450 million, a signficant discount which reflected the hotel transaction market in the aftermath of the financial crisis.

Toufic Aboukhater sold the portfolio again in 2012 (after taking out the Vienna property) for an undsiclosed price to GSSG, a Qatari holding company which then resold the portfolio to Katara Hospitality in 2014 for an undisclosed sum.  

Overall, the potential to drive returns for investors is good, as bottom-line returns are decent with gross operating profit margins for luxury hotels typically ranging from 25-35% (for well managed hotels).

Managing staff, unions and costs can be challenging but is essential for driving profitability in rooms and food and beverage departments. Also, taxation can be an issue. Creative concepts are needed for hotel food and beverage outlets as competition from independent restaurants is strong.

Potential to drive rate premiums lies in the high-end suites business and the ability to attract luxury guests. Strong hotel brands may aid the luxury perception and positioning.

Outlook

Rome will always remain an attractive leisure destination. With the Italian economy anticipated to improve and with growing demand from the USA, the Far East and the Middle East, the city is well positioned for futher growth. Limited new supply in the luxury segment and renovations of existing hotels are expected to drive rate and demand for luxury accommodation.

Investors from all backgrounds are expected to remain keen on acquiring (hotel) real estate in Rome. Hotel operators will continue to scout opportunities and, owing to the development challenges, may potentially be inclinded to be more flexible with management contract negotiations.

About HVS
HVS is the world’s leading consulting and services organisation focused on the hotel, mixed-use, shared ownership, gaming, and leisure industries. Established in 1980, the company performs 4,500+ assignments each year for hotel and real estate owners, operators, and developers worldwide. HVS principals are regarded as the leading experts in their respective regions of the globe. Through a network of more than 35 offices and 450 professionals, HVS provides an unparalleled range of complementary services for the hospitality industry. www.hvs.com 

Superior Results through Unrivalled Hospitality Intelligence. Everywhere.                             

Christof Bertschi is a Senior Associate with HVS London. He joined the company in 2012 after completing his Bachelor of Science in International Hospitality Management at the École hôtelière de Lausanne, Switzerland.

Prior to HVS, Christof worked in Switzerland and the UAE. Since joining the London office, he has worked on valuations, feasibility studies and consulting mandates ranging from budget accommodation to luxury hotels in the UK, Italy, France, Germany, Spain, Switzerland, the Czech Republic, Poland, Belgium, Croatia, Montenegro and Burundi.

Sophie Perret is a director at the HVS London office. She joined HVS in 2003, following ten years’ operational experience in the hospitality industry in South America and Europe.

Originally from Buenos Aires, Argentina, Sophie holds a degree in Hotel Management from Ateneo de Estudios Terciarios, and an MBA from IMHI (Essec Business School, France and Cornell University, USA).

Since joining HVS, she has advised on hotel investment projects and related assignments throughout the EMEA region, and is responsible for the development of HVS’s business in France and the French-speaking countries, as well as Africa. Sophie is currently pursuing an MSc in Real Estate Investment and Finance at Reading University.

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