Hotel couture

If regular people have regular problems, then rich people, as F. Scott Fitzgerald might say, have problems of a different sort—problems that they pay other people to worry about.

If private equity real estate firms have their way, one problem the well-heeled won't have is finding a nice hotel room. Though opportunistic investors continue to aggressively target the hospitality sector, the real action these days is in the ultra, high-end segment of the market, where investors can tap into the most lucrative of hotel guests: the rich, the famous or merely those with an expense account to act like it.

Earlier this year, Starwood Capital announced that it was launching a luxury hotel brand based on the world renowned Hotel de Crillon in Paris (see p. 46 for a more in-depth discussion). On the heels of Starwood's plans came the news that Colony Capital and Prince Alwaleed bin Talal had gained control of Fairmont Hotels with plans to merge that luxury chain with Raffles Hotels, the high-end Singapore hotel company Colony acquired last year. Not wanting to be left out of the party, Hilton Hotels revealed that it was also rolling out a chain of opulent hotels under the banner of the Waldorf-Astoria, the New York City landmark on Park Avenue. And just to keep things interesting, Horst Schulze, the former president of Ritz Carlton, last year unveiled his own plans for two new luxury hotel chains: Solis and Capella.

The world, it seems, is in desperate need of higher thread counts.

The world, it seems, is in desperate need of higher thread counts.

Or is it? Certainly, the hospitality market is rebounding, but is there really some unmet demand for $600 a night hotel rooms? A silent majority of jet setters and corporate travelers slumming their lives away in drab, four-star hotels? Their dreams of flat-screen TVs in every room and mini-bottles of French vodka interrupted by uncomfortable mattresses and pillows bereft of freshly plucked goose down?

Put another way, can all of these new luxury hotels survive? Looking at the statistics, the answer could be yes.

According to Jan Freitag of Smith Travel Research, there are just 240 luxury chain properties in the US, or only 0.5 percent of the total market. Part of the reason the luxury market outperformed the broader hotel sector last year—revenue per available room increased by 11.5 percent in the high-end versus 8.4 percent overall—was this limited supply of rooms in the crème de la crème.

The demand side of the equation provides further, though less concrete, evidence that the lap of hotel luxury could prove to be a good investment. After all, the world is getting richer every day—last year alone, the ranks of the world's billionaires swelled by more than $300 billion according to Forbes. Even among the hoipolloi who fly commercial, the aging of the baby boomer generation and the expansion of the global economy is leading to huge increases in standards of living around the world. All this wealth is being reflected in the growing size of people's homes, their preferences for luxury goods and, naturally, their taste in hotels—whereas high-end travel used to mean room service, today it means a complimentary bottle of Cristal served by a former runway model in a lounge designed by Phillipe Starck. “Twenty years ago you needed a swimming pool,” Schulze told the Financial Times. “Today, you need a spa.”

Of course how many spas the market can support is unclear. Part of what makes a luxury brand appealing is its exclusivity. Barry Sternlicht, the head of Starwood Capital, was able to take the boutique hotel concept to the masses with the W chain, but can he replicate that success with the most discriminating customers in the world?

Judging from afar, it's tough to bet against him. It's equally tough to bet against Barrack. And it's even tougher to bet against the near-universal desire for the finer things in life.

“There will absolutely be fallout and not all of [the luxury hotels] will make it,” says Freitag. “But in the top 15 international markets, there is still a lot of insensitivity to rate increases and a lot of room on the upper end for growth.”

Starwood closes two funds.
Greenwich, Connecticut-based private equity real estate firm Starwood Capital has closed two separate vehicles for a total of $2.5 billion (€2.1 billion). Starwood Global Opportunity Fund VII, the firm's seventh opportunistic vehicle, raised $1.5 billion; Starwood Hospitality Fund I, the firm's debut vehicle focused on the hotel market, closed on $900 million. The size of the current funds represents a step up for the private equity real estate firm founded by Barry Sternlicht: Starwood's previous two opportunistic funds raised slightly more than $1 billion combined. Since its inception in 1991, Starwood has acquired a diversified portfolio of assets totaling more than $14 billion.

CalSTRS becomes 2nd largest US pension fund
Following a strong performance in the real estate and private equity markets in 2005, the Sacramento-based California State Teachers' Retirement System (CalSTRS) has become the second largest public pension fund in the US with $137.1 billion (€113 billion) of assets under management, edging out the New York State Common Retirement Fund; only its cross-town rival, the California Public Employees' Retirement System, which oversees approximately $200 billion, is larger. Last month, CalSTRS announced that it had generated a return of 10.2 percent for calendar year 2005, fueled by returns in real estate and private equity, which generated gains of 36.5 percent and 34.3 percent, respectively.

HEI raises $425m hotel vehicle
Norwalk, Connecticut-based HEI Hospitality has held a final close for its second private equity real estate fund targeting hotel properties on $425 million (€358 million), surpassing its original target of $350 million. The size of the company's previous fund, which closed in May 2004, was $275 million. With leverage, HEI Hospitality Fund II is expected to acquire approximately $1.5 billion in assets over a three-year period, with average annual investments of $500 million. Led by chief executive officer Gary Mendell, HEI currently owns or operates 26 hotels in the US under the Marriott, Sheraton, Weston and Hilton brand names.

Phillips Edison closes $750m fund
Cincinnati, Ohio-based retail developer Phillips Edison & Company has held a final closing for its third valued-added retail fund on $750 million (€629 million). Phillips Edison Shopping Center Fund III has already acquired 12 centers comprising 1.6 million square feet of retail space. The company specializes in the acquisition and redevelopment of under-performing grocery-anchored shopping centers in the US. Founded in 1990 and led by chief executive officer Jeffrey Edison, Phillips Edison owns and operates more than 100 shopping centers in 26 states.