CAFE ROYAL HOTEL

Transcription

CAFE ROYAL HOTEL

CAFE ROYAL HOTEL
Prepared for
Alrov Property & Lodging
31st December 2015
Strictly Confidential – For Addressee Only
The Directors
Alrov Property and Lodging
The Alrov Tower
46 Rothschild Boulevard
66883 Tel-Aviv, Israel
For the attention of:
CUSHMAN & WAKEFIELD LLP
43/45 Portman Square
London
W1A 3BG
Tel
020 7935 5000
Fax 020 7152 5360
www.cushmanwakefield.com
Roni Greenbaum
17 March 2016
Dear Sir
Property – Café Royal, 68 Regent Street, London, W1B 4DY
Instructions
We are pleased to submit our valuation report which has been prepared for financial reporting purposes.
The property and interests valued are detailed in this report.
The valuation has been carried out in accordance with your instructions. The extent of our professional
liability to you is outlined within our terms and conditions attached to this report. We confirm that we
have sufficient knowledge, skills and understanding to undertake the valuation competently.
We have included as Appendix B a letter of consent permitting you to use our valuation as part of your
annual accounts submission for the year ending 31 December 2015.
We confirm that the fees we receive for undertaking the subject valuations are not more than 15% of
C&W profit for the year 2015.
Conflict of Interest
We confirm that we do not have any conflict of interest in respect of this instruction. We can confirm
that we have valued the subject property for annual accounts since 2011.
Background to the Valuation
You have indicated that the valuation report is required for financial reporting purposes and that these
financial statements are being prepared in accordance with IFRS.
Bases of Valuation
The valuation and report has been prepared in accordance with the IVS 300 – Valuations for Financial
Reporting.
Bases
Properties classified as occupied by the Entity for the purpose of its business have been valued on
the basis of:
Cushman & Wakefield LLP is a limited liability partnership registered in England & Wales with registration number OC328588. The term partner is used to refer to a member
of Cushman & Wakefield LLP or an employee or consultant with equivalent standing and qualifications. A list of members of the LLP is open to inspection at our registered
office at 43/45 Portman Square, London, W1A 3BG. Regulated by RICS
Café Royal
31 December 2015
•
Café Royal London | 2
Fair Value as a fully-equipped operational entity, having regard to trading potential
Definitions
Our principal terms of appointment as valuers (within appendix A) contain full definitions of the red book
valuation bases.
Scope of Valuation
The scope of this valuation required collecting primary and secondary data relative to the subject
property. The depth of the analysis is intended to be appropriate in relation to the significance of the
valuation issues as presented herein. The data has been analysed and confirmed with sources believed
to be reliable, in the normal course of business, leading to the value conclusions set forth in this report.
This valuation involved thorough collection, checking, and analysis of economic data, sales data,
competitive market data and other information required in the valuation process. The valuation
considered the three standard approaches to value: Income Capitalisation (Discounted Cash Flow DCF), Sales Comparison, and Cost. Because hotel facilities are income-producing properties that are
normally bought and sold on the basis of capitalisation of their anticipated stabilised earning power, the
greatest weight is given to the value indicated by the income capitalisation approach. We find that most
hotel investors employ a similar procedure in formulating their purchase decisions, and thus the Income
Capitalisation Approach most closely reflects the rationale of typical buyers. When appropriate the
Sales Comparison and Cost Approaches are used to test the reasonableness of the results indicated
by the income capitalisation approach.
In this analysis, we have relied on the Income Capitalisation Approach (DCF) to value and utilised the
Sales Comparison Approach as a test of reasonableness.
Assumptions, Departures and Reservations
We have prepared our valuation on the basis of the assumptions within our instructions detailed in
appendix A of this report.
We have made no departures from the red book.
Inspection
We inspected the property on 21 January 2016. The property was inspected internally and externally
from ground level. The inspection was undertaken by Ian Thompson MRICS and Chris Mieczkowski.
John O’Neill (Partner) carried out the retail valuation.
We have attached Ian Thompson and John O’Neill’s CV’s as Appendix C.
We can confirm the date of this valuation is the 31st December 2015.
Sources of Information
In addition to information established by us, we have relied on the information obtained from you and
others.
Cushman & Wakefield
Café Royal
31 December 2015
General Comment
We take no responsibility for any events, conditions, or circumstances affecting the market that exists
subsequent to the date of our valuation.
The value opinion in this report is qualified by certain assumptions, limiting conditions, certifications,
and definitions. We particularly call your attention to the extraordinary assumptions and hypothetical
conditions listed below.
Valuations under IFRS
Currently there is a lack of clarity in the International Financial Reporting Standards (IFRS) as to the
assumptions that have to be made when valuing assets for different purposes. It is uncertain whether
the valuer should assume that the asset can be removed from its operational setting and sold in
isolation, or whether it should be valued as part of the continuing enterprise. These alternative
assumptions could increase or decrease value.
We have agreed with you that our valuations are on the assumption that the/each property is sold as
part of the continuing enterprise in occupation.
Where we have identified a material difference between the value of an asset for an alternative use and
its value as part of the continuing business, we have provided an additional opinion of value on the
alternative assumption.
Property Rights Valued
The interest valued is the long leasehold estate, including the contributory value of the furniture, fixtures
and equipment. The valuers assume that the hotel will be, and shall remain, open and operational.
Operational Assumptions
For the purposes of this report, we assumed that the subject will be operated as a 5 Star full service
hotel with a supporting reservation system. We further assumed that the subject will be operated by
competent and experienced management familiar with the operation of hotels in Central London.
Valuation for a Regulated Purpose
This valuation is classified by the Red Book as a Regulated Purpose Valuation and we are therefore
required to disclose the following information.
The valuation was prepared by Ian Thompson MRICS, John O’Neill MRICS and Richard HaywoodFarmer
Cushman & Wakefield LLP has no other material relationship with you.
Confidentiality
Our valuation is confidential to you, for your sole use and for the specific purpose stated. We will not
accept responsibility to any third party in respect of its contents.
Cushman & Wakefield
Café Royal
31 December 2015
Disclosure & Publication
You must not disclose the contents of this valuation report to a third party in any way without first
obtaining our written approval to the form and context of the proposed disclosure. You must obtain our
consent, even if we are not referred to by name or our valuation report is to be combined with others.
We will not approve any disclosure that does not refer sufficiently to any Special Assumptions or
Departures that we have made.
Draft Reference for Publication (under IFRS)
The entity's freehold property was valued as at 31 December 2015 by Cushman & Wakefield LLP,
acting as External Valuer. The valuation was in accordance with the requirements of the RICS Valuation
Standards and the International Valuation Standards. The valuation of the property was on the basis of
Market Value, subject to the following assumptions:
Owner Occupied Property: that the property would be sold as part of the continuing business.
The valuer's opinion of Market Value was primarily derived using an estimate of the future potential net
income generated by use of the property, because its specialized nature means that there is no market
based evidence available.
Cushman & Wakefield LLP has no other material relationship with you.
Signed for and on behalf of Cushman & Wakefield LLP
Ian M Thompson, MRICS
Partner
[email protected]
Cushman & Wakefield
John O’Neill, MRICS
Partner
[email protected]
31 December 2015
Café Royal, London | 1
Executive Summary
The following is an executive summary of the information that we present in more detail in the report.
Location
The subject property is located in the heart of central London’s West End, overlooking Regent Street and
Piccadilly Circus. This is a premier location for a luxury hotel, being within walking distance to a substantial
number of attractions including galleries, museums, theatres, restaurants and high class office and retail
occupiers. The location for retail is also excellent, as the lower end of Regent Street improves with high class
retailers taking up space.
Property Description
The subject property comprises a five-star, full service luxury hotel, containing 159 guestrooms plus a range of
ancillary facilities and four retail units.
Tenure
Long leasehold.
Hotel Operating Market
There has been a reversal in fortune for the UK market in 2015 as London has showed signs of softening while
the UK provinces continue an impressive run of growth. However it has to be borne in mind that London is
already operating at a high level and so the fact that it is able to continue to show positive growth is a major
factor. The overall 2016 outlook for both London and the provinces is for growth to continue albeit at a slower
pace than 2015.
The chart below shows occupancy, ADR and RevPAR performance over the last three decades with the stability
of the current performance clear to see in contrast to the troughs that appear during each recessionary period
(1990’s, 2000’s and the market shocks as a result of the New York 9/11 attack.
Source PWC, Hotstats, STR, ONS
As we move into 2016 it is anticipated that UK consumer spending and business investment will be the main
growth drivers. Consumer spending is expected to be stronger than GDP, with consumers benefitting from low
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31 December 2015
oil and food prices and positive real earnings growth. It also looks increasingly likely that interest rates will
remain low for the foreseeable future.
A weak Euro has been a particular challenge for hoteliers in London, although the strong dollar has attracted
more US business.
Hotel Investment Market
There is a strong correlation between the operating and investment market and following robust operating
growth in the UK provinces, investment activity has picked up significantly over the last 12 to 24 months. In
2014, total UK hotel investment equated to approximately £5.5 billion, which was only marginally behind the
2006 peak. In 2015 we have seen this investment activity continue and the year-end forecasts indicate that a
total investment volume of £10 billion is likely to be achieved. There are a number of portfolio transactions still
to complete by the end of the year in order to validate this number such as Atlas Hotels which Eastdil Secured
are currently marketing on behalf of Lone Star. Please refer to the chart below:
As shown in the chart above, approximately £5billion has been transacted from portfolio transactions in 2015,
which surpassed the peak years of both 2006 and 2007.
The Business
The historic Café Royal Hotel reopened on 5 December 2012 after a four-year renovation that infused a new
contemporary spirit into the legendary landmark establishment. The hotel has 159 rooms, including six historic
suites, and several outlets for dining and drinks. Since the hotel opened, management have been unable to
properly extract the potential afforded by both the quality of product and location. This is in our opinion, in part
due to lacking a globally recognised brand, and in part due to under performance by current hotel management.
This is evidenced by the general manager having left the hotel recently with a full time replacement still to be
determined. There has also been inconsistency in terms of F&B and the Club at first floor level has posted
departmental losses.
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31 December 2015
Historical trading performance
Please find below a summary of the hotels performance in respect of 2014 and 2015 (budget):-
Cushman & Wakefield Trading Projections
Please find below a summary of our five year trading projections:-
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31 December 2015
C&W Projections
Year
Number of Rooms
Occupancy Rate
Average Room Rate
Revenue Per Available Room (RevPAR)
Yr 1
Yr 2
Yr 3
Yr 4
Yr 5
159
70.00%
460.00
322.00
159
76.00%
506.00
384.56
159
78.00%
541.42
422.31
159
80.00%
563.08
450.46
159
80.00%
577.15
461.72
TOTAL SALES
31,667,270
36,397,440
39,190,109
41,275,862
42,253,522
BEDROOMS
Sales
Departmental Profit
18,687,270
14,087,270
22,317,940
17,507,654
24,508,622
19,564,154
26,142,530
21,061,139
26,796,093
21,613,074
FOOD & BEVERAGE
Food & Beverage Sales
Departmental Profit
9,000,000
2,500,000
10,000,000
3,337,500
10,500,000
3,584,325
10,847,308
3,739,058
11,064,254
3,813,839
OTHER
Sales
Departmental Profit
3,980,000
1,135,000
4,079,500
1,163,375
4,181,488
1,192,459
4,286,025
1,222,271
4,393,175
1,252,828
17,722,270
22,008,529
24,340,939
26,022,467
26,679,741
LESS EXPENDITURE
UNDISTRIBUTED COSTS
6,950,000
7,301,785
7,539,237
7,745,963
7,900,882
GROSS OPERATING PROFIT
10,772,270
14,706,744
16,801,702
18,276,505
18,778,859
LESS FIXED COSTS
FIXED COSTS
4,531,099
5,408,762
5,740,448
6,000,138
6,097,316
NET OPERATING PROFIT
6,241,171
9,297,982
11,061,254
12,276,367
12,681,543
GROSS OPERATING INCOME
We consider that the current trading performance is not representative of the results that could be achieved by
another operator, particularly if they were operating the subject hotel with the benefit of an international brand,
which would allow the hotel to be significantly more competitive in the global market.
Investment Considerations
A desirable Central London location (Positive)
Finished to a very high specification (Positive)
Close to multiple transport links (Positive)
Lack of brand and consumer awareness when compared to other five-star competitors (Negative)
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31 December 2015
SWOT Analysis
SWOT ANALYSIS
The SWOT or Strengths, Weaknesses, Opportunities, Threats, analysis provides general and specific
insight relative to a particular asset or entity; in this case, the subject property. The Strengths and
Weaknesses components of a SWOT analysis typically reflect good and bad attributes internal or specific
to the subject, while the Opportunities and Threats are generally external or economic considerations
that influence the subject positively and negatively. The chart below outlines our conclusions.
Strength
 Very desirable central London location along
Regent Street;

Iconic building with historical ties

High quality finish throughout the premises;

Ample ancillary facilities coupled
distinctive historic guest suites;

Unique events space located throughout the
hotel able to accommodate a variety of
requirements;

with
Supplementary income generated from club
memberships;

Excellent transportation links

High suite ratio and large room sizes
We akn es s
 Raising brand awareness among the
targeted consumer base is an ongoing
process and penetrating that segment has
been prolonged;

The hotel does not benefit from a global
brand;

Lack of reward programme may deter
corporate guests

High end competition from London’s well
established luxury brands

Limited visibility from Regent Street
O pp ort un it ie s
 Capture additional market share in the five-star
segment through increased marketing and
effort;
T hr eat s
 Continued new supply entering London in
the 5 star segment;

London visitor numbers decrease;

Capture a high proportion of London’s media
and creative industries


Limited brand standards, therefore able to
undertake imaginative marketing selling
opportunities
Economic and/or political events may
reduce demand at certain points in the
future;
Market Valuation
Hotel
In our opinion, the Market Value of the long leasehold interest in the hotel, as at 31 December 2015, is:
£250,000,000
(Two Hundred and Fifty Million Pounds)
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31 December 2015
Retail
Our valuation calculations are shown in further detail within the Appendices.
In our opinion, the Market Value of the long leasehold interest in the Four Retail Units is:
£91,500,000
(Ninety One Million Five Hundred Thousand Pounds)
This reflects an equivalent yield of 3.5%. It also equates to £55,811 per sq m (5,815 per sq ft).
Comment
The above valuation is £26.5million higher than the figure we reported as at 31 December 2013. The difference
in our two respective valuations is as a result of yield and rental growth in respect of the retail units at the subject
property. The hotel element of the valuation remains the same.
We have previously valued the Café Royal (hotel only – excluding retail) at £250,000,000 as at 31 December
2012, £250,000,000 as at 31 December 2013 and £250,000,000 as at 31 December 2015.
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31 December 2015
Property Photographs
Entry from Regent Street (View from Mezzanine)
Oscar Wilde Bar
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The Studio
Queensberry Event Room
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Portland Guest Room
Typical Guest Room Bathroom
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View of Piccadilly Circus from Dome Suite Terrace
View of Celestine Suite
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Tabl e of Contents
EXECUTIVE SUMMARY ---------------------------------------------------------------------------------------------------------------------SWOT ANALYSIS------------------------------------------------------------------------------------------------------------------------------MARKET VALUATION -----------------------------------------------------------------------------------------------------------------------PROPERTY PHOTOGRAPHS ---------------------------------------------------------------------------------------------------------------
1
5
5
7
TABLE OF CONTENTS ---------------------------------------------------------------------------------------------- 11
LOCATION ANALYSIS ----------------------------------------------------------------------------------------------- 12
INTRODUCTION-------------------------------------------------------------------------------------------------------------------------------- 12
LOCATION --------------------------------------------------------------------------------------------------------------------------------------- 12
RETAIL PERSPECTIVE ---------------------------------------------------------------------------------------------------------------------- 15
COMMUNICATIONS -------------------------------------------------------------------------------------------------------------------------- 16
DEMOGRAPHIC INFORMATION ---------------------------------------------------------------------------------------------------------- 17
KEY OBSERVATIONS ----------------------------------------------------------------------------------------------------------------------- 18
PROPERTY ANALYSIS ---------------------------------------------------------------------------------------------- 18
GENERAL DESCRIPTION------------------------------------------------------------------------------------------------------------------- 18
HOTEL ACCOMMODATION ---------------------------------------------------------------------------------------------------------------- 19
CONDITION & CAPITAL EXPENDITURE ----------------------------------------------------------------------------------------------- 34
PROPERTY TAX ------------------------------------------------------------------------------------------------------------------------------- 35
ENVIRONMENTAL CONSIDERATIONS ------------------------------------------------------------------------------------------------ 35
PLANNING CONSIDERATIONS ----------------------------------------------------------------------------------------------------------- 36
STATUTORY CONSIDERATIONS -------------------------------------------------------------------------------------------------------- 36
TENURE AND OPERATING STRUCTURE --------------------------------------------------------------------- 38
TENURE ------------------------------------------------------------------------------------------------------------------------------------------ 38
TENANCIES ------------------------------------------------------------------------------------------------------------------------------------- 38
OPERATING STRUCTURE ----------------------------------------------------------------------------------------------------------------- 38
HOTEL OPERATOR/BRAND --------------------------------------------------------------------------------------------------------------- 38
LONDON HOTEL OVERVIEW -------------------------------------------------------------------------------------- 39
ECONOMY --------------------------------------------------------------------------------------------------------------------------------------- 39
HOTEL MARKET SUPPLY AND DEMAND ANALYSIS ----------------------------------------------------- 55
SUPPLY ANALYSIS-EXISTING COMPETITIVE SUPPLY-------------------------------------------------------------------------- 55
RECENT OPENINGS AND PROPOSED NEW HOTELS---------------------------------------------------------------------------- 60
BUSINESS OVERVIEW ---------------------------------------------------------------------------------------------- 64
INTRODUCTION-------------------------------------------------------------------------------------------------------------------------------- 64
TRIPADVISOR COMMENTS ---------------------------------------------------------------------------------------------------------------- 65
SALES & MARKETING----------------------------------------------------------------------------------------------------------------------- 65
GUEST DEMAND ANALYSIS -------------------------------------------------------------------------------------------------------------- 65
COMMERCIAL DEMAND -------------------------------------------------------------------------------------------------------------------- 66
MEETING AND GROUP DEMAND -------------------------------------------------------------------------------------------------------- 66
LEISURE DEMAND---------------------------------------------------------------------------------------------------------------------------- 66
NATIONALITY MIX ---------------------------------------------------------------------------------------------------------------------------- 67
REVIEW OF FINANCIAL OPERATING STATEMENTS ----------------------------------------------------------------------------- 67
INVESTMENT CONSIDERATIONS ------------------------------------------------------------------------------- 74
INVESTMENT CONSIDERATIONS ------------------------------------------------------------------------------------------------------- 74
VALUATION ------------------------------------------------------------------------------------------------------------- 77
METHODOLOGY ------------------------------------------------------------------------------------------------------------------------------- 77
VALUATION INPUTS ------------------------------------------------------------------------------------------------------------------------- 79
DISCOUNTED CASH FLOW MODEL ---------------------------------------------------------------------------------------------------- 79
RETAIL VALUATION ------------------------------------------------------------------------------------------------------------------------- 81
MARKET VALUATION ----------------------------------------------------------------------------------------------------------------------- 82
GLOSSARY OF TERMS AND DEFINITIONS ------------------------------------------------------------------ 83
APPENDIX CONTENTS ---------------------------------------------------------------------------------------------- 85
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31 December 2015
Location Analysis
Introduction
The short and long-term value of real estate is influenced by a variety of factors and forces that interact within
a given region. Regional analysis serves to identify those forces that affect property value and the role they play
within the region.
The intent of the regional analysis is to review all relevant historical and projected demographic data to
determine whether the subject market area is likely to experience economic growth, stability, or decline in the
future. These trends are correlated based on their propensity to reflect accommodation demand variations.
Location
The subject hotel is located in the heart of England’s capital, London. London is global city providing leading
trends in the arts, fashion, commerce, entertainment, development, professional services and finance. The city
is regarded as the world’s largest financial centre alongside New York City.
COUN TR Y MAP
Standing on the River Thames, London has been a major settlement for two millennia, its history going back to
its founding by the Romans. Today, London is a leading global city with strengths in the arts, commerce,
education, entertainment, fashion, finance, healthcare, media, professional services, research and
development, tourism and transport, all contributing to its prominence. It is one of the world’s leading financial
centres. It is the world’s most visited city as measured by international arrivals and has the world’s largest city
airport system measured by passenger traffic as well as the oldest underground railway network in the world.
With 43 universities it has the largest concentration of higher education establishments in Europe and in 2012
became the first city to host the modern Summer Olympic Games three times.
London has a diverse range of people and cultures and more than 300 languages are spoken within Greater
London. Every year millions of tourists visit its World heritage Sites (the Tower of London, Kew Gardens, Palace
of Westminster/Westminster Abbey and St Margaret’s Church) and its various other landmarks (Buckingham
Palace, London Eye, Piccadilly Circus, St Paul’s Cathedral, Tower Bridge or Trafalgar Square among others).
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31 December 2015
London has a temperate oceanic climate, similar to much of southern Britain. Despite its reputation as being a
rainy city, London receives less precipitation than Rome, Toulouse and Naples. Summers are generally warm
and sometimes hot, the heat being boosted by the urban heat island effect making the centre of London at
times 5° C warmer than the suburbs and outskirts. London’s average July high is 24° C. Rain generally occurs
on around two out of 10 summer days. Spring and autumn are mixed seasons and can be pleasant.
Climate data for London 1981-2010
Greater London encompasses a total area of 1,583 square kilometres, Modern London stands on the Thames,
its primary geographical feature a navigable river which crosses the city from the south-west to the east. Since
the Victorian era the Thames has been extensively embanked and many of its London tributaries now flow
underground. The Thames is a tidal river and London is vulnerable to flooding; with the Thames Barrier built in
1974 this threat has become less imminent tough.
Greater London has been divided into 32 boroughs in addition to the ancient City of London in 1965.
Nevertheless, a set of district names such as Bloomsbury, Mayfair or Marylebone are still used which often
reflect the names of villages that have been absorbed by the sprawl. While the City of London is the main
financial district, the City of Westminster is London’s main entertainment and shopping district.
The subject property is located in the heart of central London within the area referred to as midtown. Please
refer to the location map below which shows the position of the hotel within central London.
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31 December 2015
C IT Y MA P
AR EA MA P
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31 December 2015
A ER IAL MA P
The subject property itself is situated on Regent Street, to the east side, at the junction with Air Street and
approximately 25 yards from the junction with Piccadilly Circus. This is an exceptional location being in the heart
of London’s West End. Regent Street is one of the major shopping streets in London's West End, well known
to tourists and Londoners alike, and famous for its Christmas illuminations. It is named after the Prince Regent
(later George IV), and is commonly associated with the architect John Nash, whose street layout survives today.
The street was completed in 1825 and was an early example of town planning in England, cutting through the
17th and 18th century street pattern through which it passes. It runs from the Regent's residence at Carlton
House in St James's at the southern end, through Piccadilly Circus and Oxford Circus, to All Souls Church.
From there Langham Place and Portland Place continue the route to Regent's Park.
Every building in Regent Street is protected as a Listed Building, at least Grade II status, and together they form
the Regent Street Conservation Area.
To the west of the property are the upmarket residences and boutiques of Mayfair. To the east is Soho, an area
which has undergone a dramatic transformation and now offers a world of culture, fashion, leading restaurants
and bars as well as being the media hub for London.
Also within the immediate vicinity are the famous shopping districts of Bond Street, Mount Street and Jermyn
Street. South of Piccadilly Circus are the exclusive clubs and art galleries of historic St James’ with Westminster
and Buckingham Palace just beyond.
The Royal Academy, the British Museum and the National Gallery are all within walking distance, as well as
Covent Garden and the capital’s great theatres, the National Portrait Gallery, opera house and art galleries.
Retail Perspective
The retail units sit below the highly prominent Café Royal hotel, located in close proximity to the junction of
Regent Street and Piccadilly Circus. At over a mile long, Regent Street was developed in the 1820’s by the
Prince Regent as a ceremonial route linking Carlton House with Regents Park. The Crown Estate has
historically owned the entire freehold of the street
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31 December 2015
Along with Bond Street and Oxford Street, Regent Street is one of the top three shopping streets in London. In
terms of its retail mix it sits between the exclusive luxury brands of Bond Street, such as Prada and Gucci and
the High Street brands of Oxford Street such as Topshop and H&M.
Since 2002, The Crown Estate has spent in excess of £750 million to improve Regent Street with various
initiatives, the most significant being the Quadrant Scheme. This is adjacent to the subject units and comprises
a mixed use development of office, retail and residential with the southern part of Glasshouse Street
pedestrianised to further appeal to shoppers. The scheme has managed to attract Whole Foods, an American
food retailer with a turnover in excess of $9bn USD, along with other international fashion brands.
In addition, Regent Street has successfully obtained ten planning consents for major developments and
improvements. This has all contributed to the influx of high quality retailers with a tenant mix that now includes
Burberry, Hugo Boss, Hermes, Ralph Lauren, Hamley’s, Louis Vuitton and Apple.
Communications
The subject property has the following communication characteristics:
Road:
By road, the capital is served by a comprehensive public highway network, including the orbital
motorway M25, the M1 (gateway to the north), the M4, M40 and M3. There tends to be local
congestion throughout the day but particularly during peak movements in the morning and
evenings. Regent Street is also served by a number of bus routes connecting the area with the
surrounding districts.
Rail:
Piccadilly Circus Underground Station (Bakerloo and Piccadilly lines) is approximately 25 yards
to the south east. Oxford Circus Underground Station (Victoria, Central and Bakerloo lines) is
also within close proximity, being approximately 1 km to the north.
Air:
Heathrow Airport (LHR) is located 27 km to the west of the subject property. This is London’s
largest international airport. Using public transportation it is accessible via the Piccadilly Line or
the Heathrow Express from Paddington Railway station.
Gatwick Airport (LGW) is located 58 km to the south of the subject property. Using public
transportation it is accessible via several railway lines but more conveniently via the Gatwick
Express from Victoria Railway station.
London City Airport (LCY) is located 19 km to the east of the subject property. This airport
operates mainly flights within Europe. Using public transportation it is accessible via London’s
Tube and DLR network.
Other London Airports such as Luton, Stansted and Southend, are however considerably further
away from the subject property.
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31 December 2015
Demographic Information
London currently has a population of 8,416,535. Its population peaked at 8,615,245 in 1939 immediately before
the outbreak of the Second World War, but had declined to 7,192,091 at the 2001 Census. However, the
population then grew by just over a million between the 2001 and 2011 Censuses, to reach 8,173,941 in the
latter enumeration. It is the second most populous city in Europe.
5%
1%
Ethnic Group
Religion
2%
2%
White
13%
Asian
Black
Mixed
19%
60%
Christian
0%
2%
10%
No Religion
Muslim
5%
Hindu
48%
12%
Jewish
Arab
Sikh
Other
Budddhist
21%
Other
Crossrail
Crossrail is a new 118km (73-mile) west-east railway line that is under construction in Greater London,
connecting Reading in the east and Shenfield in the west. Work on the central part of the line, a tunnel
through Central London, and connections to existing lines that will become part of Crossrail began in 2009 after
several decades of proposals. It is due to begin partial operation in May 2017 and full operation in December
2019. It is one of Europe's largest railway and infrastructure construction projects.
Crossrail in blue: overground, Crossrail in pink: underground
The new connection will significantly cut journey times across London and will also relieve passenger numbers
on the tube lines, especially on the Central line. The closest stations to the subject property will be at Hanover
Square, just to the south of Oxford Street and Tottenham Court Road.
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31 December 2015
Key Observations
The following bullet points summarise some of our general observations relating to the subject property’s
location:
Location – As previously mentioned, the property is well positioned in an affluent and renowned section
of central London with convenient access to a variety of retail and luxury outlets.

Strengths – A main strength of the property is its location in a desirable and popular tourist destination
in close proximity to a wide range of central London attractions including bars, restaurants, and theatres.
The property specifications coupled with its services platform coincide with the demands of a five-star
hotel and published reviews of the hotel tend to be very favorable.

Weaknesses – The primary weakness of the hotel relates to brand recognition among its targeted
demographic. The absence of a global brand typically requires a substantial marketing and sales effort
relative to counterparts.
Property Analysis
General Description
The hotel has 159 rooms, including six suites, and several outlets for dining and drinks. The hotel is arranged
over two lower levels, ground and seven upper floors. The Grill and Domino rooms, once frequented by Oscar
Wilde and Virginia Woolf, have been restored, and the Ten Room provides an all-day brassiere-style eatery.
The hotel also houses the Akasha Holistic Wellbeing Center, which provides a lap pool, a hammam, a yoga
studio, spa treatments, and an organic bar. The property is directly operated by Set Hotels, a newly formed
luxury collection of hotels in Amsterdam and Paris.
The main entrance is situated centrally from Regent Street. To the northern elevation, the property oversails
the access-way that leads to Glasshouse Street (via Air Street). There is an additional entrance from Air Street
which serves Ten Room restaurant.
The surrounding occupiers include a range of retail and office premises.
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Main Entrance from Regent Street
Hotel Accommodation
The subject hotel is accessed from Regent Street, via a revolving doorway leading into an internal lobby. The
lobby area has marble flooring and decorative finishes to the walls and ceilings. Beyond the lobby area, to
one side, is a centralised staircase with decorative iron balustrades, providing access to the upper floors, as
well as the guest reception area.
The guest reception area comprises an enclosed rectangular area, with stone flooring and wood effect panel
walls. The reception desk has timber elevations and is presented in a clean and minimal way. Beyond the
reception area is the concierge desk, which is finished to a similar high quality, yet minimal standard.
From our inspection and information supplied we set out below a summary table of the hotel facilities.
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Accommodation
Number of Keys
Area (m²)
Portland Rooms
19
30
Mansard Rooms
27
30
Portland Deluxe
49
37
9
36
30
51
Westminster Suite
7
61
Glasshouse Suite
5
65
Regent Suite
7
90
Marquis
1
81
Club
1
105
Tudor
1
106
Celestine
1
178
Empire
1
212
Dome
1
121
Total
159
7,232
Mansard Deluxe Rooms
Junior Suite
Restaurant Facilities
Covers
Grill & Domino Rooms
95
Ten Room
100
Green Bar
55
Cafe 1865 at Cafe Royal
40
Cafe Royal Club*
174
* includes private dining area, screening room, members restaurant
Total
290
Meeting & Conference
Capacity
Usable Area (m²)
Nash
14
26
Mayfair
40
58
Nicols
14
32
Soho
42
59
Queensberry
170
141
Pompadour
170
176
40
16
490
508
The Studio (screening room)
Total
Car Parking:
20 car parking spaces
Spa:
Akasha Holistic - Lounge,
Watsu pool, hammanm, gym
Business Centre
1 PC terminal & 1 printer
Elevators:
10 lifts (inc staff)
Retail:
4 retail units
Source: Hotel Management & Café Royal website
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Guestrooms
The property provides 14 room categories varying in size from 30 m² to 212 m². A large proportion of these
are suites and account for almost 35% of the total room mix. This suite ratio, from our research is as expected
for a leading luxury hotel within London.
Furthermore, the subject hotel offers some of the largest standard rooms and signature rooms within the
London market. These statistics are advantageous as a high suite ratio will assist in driving average room rate
and will appeal to guests from the high spending Middle Eastern and BRIC economies.
Portland Room
From the sample of guestrooms we inspected, we confirm that the rooms are finished to the highest of
specifications; incorporating solid oak flooring, plastered walls, part finished in a Portland stone effect and
plastered and painted ceilings.
All the guestrooms have a large lobby area incorporating a range of fitted wardrobes.
All rooms include the following details:

Leading design by David Chipperfield

Complimentary high speed wireless internet

Flat-screen TV and HD entertainment, digital cable and movies on demand

Mirror TV in all guest bathrooms

Mini-bar

Nespresso Coffee machine, incorporating tea making facilities provided only to the hotel

24 hour room & butler service
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
Micro cotton towels and Floris toiletries

Personal concierge service
The guest bathrooms are fully tiled in solid white carrara marble, including the door interiors and incorporate
a deep soaking marble bathtub, formed from a solid block of marble and separate shower room with rain head
shower.
Typical Bathroom
The property also provides a range of contemporary and historic suites which are also finished to an identical
standard except they provide a separate seating area and an additional swivel flat screen TV.
At the time of our inspection we were unable to gain access to all floors, however the public corridors we were
able to gain access to had a mix of stone and timber flooring, with timber lined walls, solid painted ceiling and
spot lighting.
Fitness Centre & Spa
The Akasha Holistic Spa is located at lower floor level, accessed either via the customer lifts or stairway from
the lobby. The spa is finished in a contemporary style, providing approximately 1,200 sq m of leisure space.
The area is split into four key areas, which we understand represent the four elements – earth, water, air and
fire.
Earth incorporates the lounge area, which provides a relaxation area for guests and serves organic light
snacks and fresh juices. Water is represented by the main spa, featuring sound, music and aroma therapies,
an exclusive Watsu pool and special hammam treatments. Fire represents the gym, fitted with up to date
equipment including Life Fitness® equipment and a Kinesis Personal from TechnoGym; ‘Air’ is a calming,
peaceful space for Pilates, yoga and tai-chi.
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LA P PO OL
The lap pool measures 19m in length.
FITNESS CENTER
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Food and Beverage Outlets
We summarise below the principle food and beverage outlets available at the hotel:
Ten Room: The Ten room benefits from a separate access from Air Street as well as from the
reception/concierge area. The restaurant is rectangular in shape and is shielded from Air Street access via a
series of marble columns. The restaurant area is completed in an ‘art deco’ style with stone flooring and
plastered and painted walls. The ceiling is double height, providing an atrium to the above first floor level,
which is surrounded by a balcony on all sides. Customer seating on the ground floor is for approximately 100,
at a mix of leather covered chairs and banquette seating. Lighting is provided by a variety of ceiling mounted
lights. Ten Room provides an all-day brassiere-style restaurant.
T EN R OOM
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Green Bar: Adjoining Ten Room, and benefiting from frontages to both Air Street and Glasshouse Street is
The Bar. The Bar is triangular in shape and finished in a contemporary style, with stone flooring, plastered
and painted walls and ceiling. Customer seating is for approximately 55 at a mix of leather covered chairs and
banquette style seats. To the centre is dramatic metal clad bar servery which provides an extensive range of
cocktails, wines and spirits as well as light snacks.
Lighting is provided by hanging pendants, strip lights and ceiling mounted spot lights as well as benefiting
from ample levels of natural daylight from the two street frontages.
GR EEN BAR
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The Oscar Wilde: Located at ground floor and accessed via the hotel lobby area is the champagne bar - The
Grill Room. The accommodation is rectangular and provides seating for approximately 35 covers. The room
is listed and is finished to the highest of standards with timber flooring and the walls are a mix of gold-leaf
gilted mirrors and intricate detailed plasterwork. The detailing follows onto the ceiling, which incorporates
numerous historic decorative features in gold leaf mounts. Customer seating is at a mix of leather covered
chairs, in different styles.
TH E GR ILL R OO M
The Domino Room: At first floor level and situated above The Grill Room is the hotel’s guests and club
member’s signature restaurant, ‘The Domino Room’. The accommodation is finished to a high standard,
retaining all the original features including decorative plaster work to the walls and ceilings. Customer seating
is at a mix of leather and material covered chairs for approximately 60 guests. The restaurant, we understand
from the hotel’s management, serves modern Italian food and is open for dinner only.
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TH E D OM INO R OOM
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Café Royal Club: Located on the first floor, the member’s club comprises a lounge area overlooking the Ten
Room (seating for 40), a Gentleman’s bar (seating for 40), a private dining area (seating for 14) and a board
room which can be converted into a private screening room (seating for 80).
All areas are finished to the highest of standards and within a similar style to the remainder of the hotel.
CA FÉ R OYAL C LUB
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Meeting and Conference Space
The meeting and event space provides a total of seven rooms and is situated at first and second floor level
and provides modern accommodation.
Pompadour Ballroom: 250 maximum capacity in a reception setting
Queensberry Suite: 180 maximum capacity in a reception setting
Soho: 60 maximum capacity in a reception setting
Mayfair: 60 maximum capacity in a reception setting
Nicols: 30 maximum capacity in a reception setting
Nash: 11 maximum capacity in a boardroom setting
The Studio: 40 maximum capacity in a screening setting
The Queensberry Suite, which fronts Regent Street, has fumed oak wall and ceiling panels with concealed,
state-of-the-art technology equipment. The room provides a maximum capacity of 180 in reception style.
Q U E EN SB E R R Y S U IT E
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Other
Other facilities at the hotel include:
24 Hour room service

Valet and concierge
Back of House Accommodation
The back of house accommodation is mostly arranged at basement level and occupies a vast space with
storage, offices, staff changing, plant areas and kitchens.
We have assumed that the subject hotel is connected to mains electricity, gas, water and drainage. We further
assume that the necessary plant/transformers (as well as back-up diesel generators) are in place to serve the
power needs of the occupier.
The building has the following items of major plant:

10 Passenger and service Lifts

Hot water and heating is provided by local utilities

Air conditioning throughout the public and guestroom areas
Retail Units
The ground floor and basement of the subject building provides access and reception for the hotel, whilst the
remainder provides three retail units as numbered below. In addition, we have been requested to include in
our valuation the corner unit marked as “Hotel Tea-Room” as retail accommodation; this presently operates
as part of the hotel and is known as Café 1865, which we will refer to as Unit 4.
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Unit 1
This is let to Nespresso UK Limited and comprises a large ground floor unit with a frontage to both Regent
Street and Glasshouse Street. The tenant has fitted out the accommodation to a very high standard including
air conditioning. The sales area has been left largely open plan, whilst staff facilities are partitioned behind. In
addition, there is basement storage which has its own access from Glasshouse Street.
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Unit 2
This is let to Lotus Cars Limited and comprises a slightly smaller area than Unit 1 but also has a frontage to
both Regent Street and Glasshouse Street. The sales layout is more cellular with different rooms being created
in addition to changing areas. The standard of fit out is again of the highest order including air conditioning.
The space is double height at the Regent Street frontage but towards the rear (Glasshouse Street) is single
height as a mezzanine has been installed above which provides staff offices and facilities. In addition, there
is a small area of basement storage.
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Unit 3
This is let to high class lingerie retailer Wolford London Ltd and comprises a small “lock-up” shop on ground
floor only with a frontage to Regent Street. It has been fitted out by the tenant to a high standard including air
conditioning. There is no on site storage.
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Unit 4
The fourth retail unit is part of the hotel and branded as “Café 1865 at Café Royal”. The unit has a long frontage
to Regent Street and return frontage to Air Street giving good visibility from the north in particular. The area is
rectangular and finished in yellow marble floor and wall cladding. It provides a high quality pastry and coffee
house with seating for approximately 40 guests.
Condition & capital expenditure
For the purpose of the valuation, in the absence of a structural survey, we have assumed that the Hotel is in
good structural condition. We did not notice any obvious signs of defect during the course of our inspection. We
assume that the Hotel has been constructed with good quality materials, workmanship and conforms to all
building, energy efficiency and health and safety legislation.
Planned Capital Expenditure
As the hotel underwent a significant refurbishment within the past several years there is no additional planned
capital expenditure that was brought to our attention. In general the hotel was very well presented. Accordingly,
the age and condition of the premises and FF&E is consistent with that of competing five-star properties.
Conclusion
For the purpose of our trading projections set out later in this report, we have allocated a proportion of the
annual repairs and maintenance costs into an FF&E reserve. We consider that as this hotel is in excellent
condition given the fairly recent capital expenditure program, it is more appropriate to begin to pay into a sinking
fund in order to cover future refurbishment. It also more closely resembles how the majority of potential
purchasers would prepare the Profit and Loss account for such a hotel.
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Property Tax
Current Property Taxes
We have made enquiries of the Valuation Office and the rateable value of the hotel is entered in the 2010 rating
List as follows:
Address
Description
Rateable Value
Café Royal, 68 Regent Street, London,
W1B 5EL
Hotel and premises
£3,400,000
Source: The Valuation Office Agency (www.voa.gov.uk)
The Uniform Business Rate for London for 2015/16 is £0.497.
Environmental Considerations
We have not carried out any investigations or tests, that determines the presence or otherwise of pollution or
contaminative substances or any other land (including any ground water).
The Environment Agency website suggests that the property is not in or near to an area liable to flooding.
Source: Environment Agency
It should however be noted that the property is located within the River Thames basin. However, the Thames
Barrier flood protection system has protected the capital from major flooding since its development. That is not
to say however that the city remains impenetrable to flooding.
We are not aware of any potential sources of contamination to the property, either current or historic, and we
found nothing during our inspection to give cause for concern.
In view of the characteristics and history of the property we would not expect there to be any outstanding
environmental issues.
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Planning considerations
Overview
The property, for planning purposes, lies in the City of Westminster, is Grade II listed and within the Regent
Street conservation area.
We have not been provided with documentation regarding town planning and building consent but understand
that all necessary consents pertaining to the existing use have been approved, and we have valued on this
basis. It should be pointed out that we are not planning consultants and should the Addressee require additional
information in this regard, they should consult a specialised firm of planning consultants.
Our valuation assumes that the Hotel has the benefit of all trading licences and operational certificates required
for its operation.
Planning Policy Framework
In March 2012 the National Planning Policy Framework (NPPF) for England replaced all Planning Policy
Statements and Guidance Notes. The NPPF is intended to make the planning system less complex and
centralised, and more accessible, with specific aims to protect the environment and promote sustainable growth.
Planning decisions will now be taken locally unless there is good reason for the Government to intervene, such
as nationally important infrastructure projects.
Statutory Considerations
Fire Risk Assessment
The Regulatory Reform (Fire Safety) Order 2005 came into force in England and Wales in October 2006,
replacing the requirement for fire certificates with Risk Assessments. The new law places the responsibility on
the employer or “responsible person” for a particular building or premises. He or she is required to assess the
risk of fire and take steps to reduce them. The findings of any risk assessment must be recorded in writing. The
onus is on that person to ensure the building is compliant. The fire authority is still permitted to inspect premises
to ensure adequate fire precautions are in place, and hotels, being places where there is a significant degree
of public access, will come under particularly close scrutiny.
We have been informed by the owner that a Risk Assessment has been undertaken.
Registration and Licensing
We are advised that the hotel holds a premises licence, as well as civil ceremonies licence although copies
have not been supplied to us.
Our valuation assumes that the appropriate licenses are in place and if this should prove otherwise then our
valuation may be negatively affected.
Disability Discrimination Act
The Disability Discrimination Act 1995 imposes duties on employers of more than 15 staff, trade organisations
and service providers not to discriminate against disabled persons. They must not treat those with disabilities
(whether physical, sensory, or cognitive) less favourably than those who are not disabled. To comply,
“reasonable” steps must be taken.
Hotels generally require (with few exceptions) to be accessible for wheelchair bound guest (including access
from the street into the hotel, and to all public areas) and to have a reasonable proportion of guest bedrooms
providing adequate accommodation for disabled guests. Adequate accommodation could include wider
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doorways (to allow easy ingress and egress of wheelchairs), alarm-light (to awake the hard of hearing in the
event of a fire), and specially adapted bathrooms (with seats in the showers and alarm cords).
Some hotels will need physical modifications for the occupier to be able to comply with the Act. Often these
will be minor, but if major modifications are required (for example to provide wheelchair access), these could
prove costly. A property without the necessary modifications may also be harder to sell or let.
During our valuation inspection we formed the impression that the building would not require significant
modification to enable most potential occupiers to comply with the Act; therefore, we have not allowed for any
costs of compliance.
Energy Performance Certificate
Under the Energy Performance of Buildings Directive, an Energy Performance Certificate (EPCs) must be made
available whenever a non-domestic building is constructed or marketed for sale or rent (subject to certain
exceptions). In addition, all public buildings over 1,000 sq m must display an EPC, even if not being sold or
leased. Domestic properties require an EPC as part of the Home Information Pack. As at the date of valuation,
therefore, the property does not require an EPC.
We have not seen an EPC for the property and are not qualified to estimate the building’s energy rating (which
must be carried out by a BRE-approved energy assessor). We have therefore assumed that the property’s EPC
rating will be comparable to its peers and will not have an adverse impact on its marketability.
Other Statutory Matters
Under the Food Safety Act 1990 businesses must have food safety assessments and put adequate controls in
place to prevent problems occurring. There are various sanctions that can be imposed on businesses that fail
to comply with the law, ranging from written warnings to legal notices and prosecution. Businesses which are
found to pose an imminent risk to health can be closed immediately. We have assumed the property is
registered under the Act and that there are no outstanding matters.
We have assumed the property is compliant with the Control of Asbestos Regulations 2006, whereby there is
a legal requirement to manage any asbestos containing material present.
We are unaware of any road scheme or compulsory purchase that might affect the subject property.
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Tenure and Operating Structure
Tenure
We understand that the Hotel is held long leasehold.
We have not examined nor had access to all the deeds or other documents relating to title/tenure under which
the Property is held. We should emphasise, however, that the interpretation of the documents of title (including
relevant deeds and planning consents) is the responsibility of your legal adviser and we therefore recommend
that they should be asked to verify the current position.
We have been not provided with a copy of the Land Registry Extract relating to the Property.
The Hotel and retail units are held long leasehold. We have been provided with a copy of the lease dated 2 July
2014 between (1) Her Majesty the Queen (2) The Crown Estate Commissioners (3) Barco Investments BV and
(4) Alrov Properties and Lodgings. The term extends to 125 years with a fixed rent payable of £50 per annum.
Tenancies
The hotel includes four retail units of which the hotel’s management have supplied us with lease information.
Operating Structure
The hotel is owner operated, independent of any formal brand or affiliation. The hotel includes four retail units
which are all let to third party tenants.
Hotel Operator/Brand
The subject hotel is owned by Alrov Properties & Lodging and operated by The Set Hotel Group. The Set
includes The Conservatorium, Amsterdam (opened December 2011) and Hotel Lutetia, Paris (currently closed
for extensive renovation). Alrov Luxury Hotels provides hotels of the highest quality, placing an emphasis on
providing a personal service and being housed within iconic buildings. The group currently has two existing
hotels in Israel as well as those listed earlier. We are advised the group has ambitions to expand into further
key city locations, therefore building on the brand awareness within the international markets.
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London Hotel Overview
Economy
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After a period of generally disappointing growth in 2011 and 2012, the UK economy showed clear signs of
recovery throughout 2014 that has continued into 2015. The solid momentum in the consumer sector is likely
to continue given firming wage growth and renewed deflationary pressures on the back of further declines in oil
prices and heavy discounting by retailers. These favourable conditions have resulted in a surge in consumer
confidence to a 15-year high.GDP is estimated to have increased by 0.5% in Q3 2015 compared with growth
of 0.7% in Q2 2015. In Q3 2015 output increased in services by 0.7%, 0.3% in production and 0.5% in
agriculture. In contrast, construction was reported to fall by 2.2%. These preliminary estimates of GDP are
produced using the output approach to measuring GDP. At this stage, data content is less than half of the total
required for the final output estimate. The estimate is subject to revision as more data become available, but
these revisions are typically small between the preliminary and third estimates of GDP.
In Q3 2015 GDP was estimated to be 2.3% higher compared with the same quarter a year ago and 6.4% higher
than the pre-economic downturn peak of Q1 2008. From the peak in Q1 2008 to the trough in Q2 2009, the
economy shrank by 6.1%. The index for distribution, hotels and restaurants increased by 0.8% in Q3 2015,
following an increase of 1.0% in the previous quarter. Retail made the largest positive contribution to the
increase. Between Q3 2014 and Q3 2015, distribution, hotels and restaurants output increased by 4.5 %. The
index for business services and finance increased by 1.0% in Q3 2015, following an increase of 0.6% in the
previous quarter. Real estate activities made the largest positive contribution to the increase. Between Q3 2014
and Q3 2015, business services and finance output increased by 3.1%.
Consumer spending surprised on the upside as ‘noflation’, record levels of employment and a pick-up in wages
boosted household budgets. Private spending rose by 3% year over year in Q2 while retail sales grew by an
average of 5% year over year in the last 12 months and surged to 6.5% in September – boosted by the warm
weather and the Rugby World Cup. The solid momentum in the consumer sector is likely to continue given
firming wage growth and renewed deflationary pressures on the back of further declines in oil prices and heavy
discounting by retailers. These favourable conditions have resulted in a surge in consumer confidence to a 15year high. Retailers’ expectations are positive ahead of the crucial Christmas period but a moderation is likely
in the longer term.
UK employment has continued to rise strongly, which has supported consumer spending growth despite
persistent subdued rates of real earnings growth. Rising house prices have also supported consumer
confidence and spending, but have also raised concerns about over-heating. Business investment has shown
signs of recovery since early 2013, although it remains below pre-crisis levels. Consumer spending growth is
projected to follow a broadly similar pattern to GDP, with some moderation over time. As always, there are
uncertainties inherent in any growth projections. Indeed, a deterioration in household budgets likely in 2016 due
to deep cuts to in-work benefits (estimated to outweigh the benefits of the ‘living wage’), are expected to put
some pressure on the retail sector.
There are also considerable downside risks relating to trends in the Eurozone and emerging markets (including
Ukraine). However, there are also upside possibilities if these problems can be avoided and a virtuous circle of
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rising confidence and spending can be established as in past economic recoveries. Inflation has fallen below
the 2% target, to 0.1% in October 2015, and it is expected to remain at or slightly below target for the remainder
of the year. There could still be upside risks to this inflation outlook in the longer term, however, if stronger
global growth pushes commodity prices up again at some point, or if domestic wages start to recover without a
corresponding rise in productivity.
UK Hotel Operating Market
Introduction
There has been a reversal in fortune for the UK market in 2015 as London has showed signs of softening while
the UK provinces continue an impressive run of growth. However it has to be borne in mind that London is
already operating at a high level and so the fact that it is able to continue to show positive growth is a major
factor. The overall 2016 outlook for both London and the provinces is for growth to continue albeit at a slower
pace than 2015.
The chart below shows occupancy, ADR and RevPAR performance over the last three decades with the stability
of the current performance clear to see in contrast to the troughs that appear during each recessionary period
(1990’s, 2000’s and the market shocks as a result of the New York 9/11 attack.
Source PWC, Hotstats, STR, ONS
As we move into 2016 it is anticipated that UK consumer spending and business investment will be the main
growth drivers. Consumer spending is expected to be stronger than GDP, with consumers benefitting from low
oil and food prices and positive real earnings growth. It also looks increasingly likely that interest rates will
remain low for the foreseeable future.
A weak Euro has been a particular challenge for hoteliers in London, although the strong dollar has attracted
more US business.
Supply side issues are set to become increasingly important and the growth in the budget sector in particular is
causing performance issues across the market, but particularly within the ‘squeezed’ middle market sector.
The Rugby World Cup held in September and October has been a success for hoteliers, perhaps more so in
the regions than in London, with locations such as Exeter and Newcastle hosting several low key games but
with surprising levels of resultant business. It did not help that England got knocked out at an early stage of the
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tournament, dampening some enthusiasm for the tournament. More worryingly for both London and the regions
is a lack of major events in the next couple of years. The biennial Farnborough International Airshow will take
place in July 2016, but with Euro 2016 Football in France and the Olympics in Rio, UK inbound visitors could
be affected in 2016.
Another important factor beyond demand is supply growth and with an expected 38,000 additional rooms set to
enter the market in 2016, there is likely to be some disruption to trading patterns. The majority of this supply is
in the budget sector, although for the first time since the recession larger full service hotels are now being
developed in the provinces with examples such as the Crowne Plaza in Newcastle. There will be some
oversupply across the country as well as the disruptive influence of alternative accommodation such as serviced
apartments, hostels and shared spaces such as Airbnb, onefinestay and Homestay.com. The extent of the
impact of these shared space providers is heavily debated with some considering them to be a more significant
threat than others. It is true that these space providers cannot offer the same levels of service as hoteliers but
it would be short sighted to ignore the potential competitive threat.
London
Although London saw a record 2014, 2015 has by comparison been underwhelming, with the pace of growth in
H1 2015 being very mixed, fluctuating on a monthly basis. The performance in H2 appears to be a little more
consistent, although events such as the Rugby World Cup will have helped. Londons role as a leading
international tourism destination and the popularity of city breaks has meant that while there is still a
considerable market for room nights in London, many hoteliers are reporting that the falling Euro is a key issue.
2014 saw 17.8 million overseas visits to London, up 5.8% from the previous record of 16.8 million. Despite the
Euro, even more visitors are expected to have visited London in 2016 with large conventions, continued strength
of business travel volumes, short break leisure trips and the Rugby World Cup.
London occupancies have averaged 80% or above since 2006 with PWC forecasting 84% occupancy for 2016,
which would be the highest level since the mid 1990’s when supply was much lower and with significantly fewer
budget hotels in London.
London ADR is now 22% above past peaks in nominal terms and is also back in real terms. PWC are forecasting
ADR growth of 1.8% in 2015 and 2.2% in 2016, taking ADR to £142 and £145 respectively.
The map below shows that as at Q3 2015, London RevPAR increased by 6%. Falling occupancy in July and
August was mitigated by rising room rates and the impact of the Rugby World Cup in September.
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The UK Provinces
H1 2015 has continued to see strong growth in the UK provinces. If 2014 was about occupancy, then the story
in 2015 is around the improvement in average rates. As shown on the map above, most UK cities have
continued to see strong RevPAR growth this year. The main exception to this has been Aberdeen which for the
third quarter in a row has been the worst performer with a RevPAR decline of 22%. This is the result of a
combination of new supply and a lack of recovery in the oil industry continues to impact demand. Aside from
Aberdeen the only other cities to see a decline are Glasgow and Liverpool. In the case of Glasgow, the city is
actually having a good year but is suffering from having a strong comparator in 2014 with the city having hosted
the Commonwealth Games. Similarly, Liverpool hosted the Open Championship in 2014 at the Royal Liverpool
Golf Club which was not replaced with a major event this year.
The top performer in Q3 2015 as shown above is Cardiff with 17% RevPAR growth. Cardiff benefitted from
hosting an Ashes test match in July as well as three major Rugby World Cup games. Similarly, Birmingham’s
performance also benefitted from hosting an Ashes test in the summer. Birmingham is also proving popular with
Chinese tourists. Birmingham Airport’s runway extension in 2014 has allowed for an increase in charter flights
between Beijing and Birmingham. In Q3 2015 Belfast also stands out with the city’s tourism industry having
grown significantly. The regeneration of the Titanic Centre in 2012 and hosting high profile events such as the
Giro d’Italia have contributed to this growth.
Although not included in the map above, the performance of Heathrow and Gatwick has been good during 2015.
Looking forward, the hotels surrounding either Gatwick or Heathrow are likely to benefit from the government’s
decision to build an additional runway. Although the Airports Commission have recommended Heathrow a
decision has not yet been made by the government. The active pipeline of new hotel beds at Heathrow is over
1,000 with the Gatwick pipeline almost non-existent. This would suggest that most investors expect expansion
at Heathrow. Due to greenbelt restrictions the opportunity to build more hotels at Gatwick is more restrictive.
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2016 Operating Forecast
PWC are forecasting occupancy growth of 0.6% in 2016, from 76% to 77%. ADR growth is predicted to fall but
should still be around 3.5% which would result in overall RevPAR growth of 4.2% in 2016, down from 6.3% in
2015 but still very strong and likely to continue to fuel the investment market. With occupancy in the mid to high
70’s this is generally considered to be the point at which hotels can then look to leverage room rates. However,
in those markets where new supply is coming through, the balance is often finely poised and any movements
to increase rate can often result in an immediate fall in occupancy.
There remains scope to increase rates as in real terms ADR is still lagging behind pre-recessionary peaks. In
real terms ADR is still 17% below the pre-recessionary peaks.
The positive travel backdrop is likely to continue to drive hotel demand. The brighter economic prospects mean
that we can expect corporates and consumers to continue to travel within the UK, both on short breaks and
corporate trips. Despite the Euro issues the first six months of 2015 saw over 16.8million overseas visits to the
UK, a 3% increase over the same period in 2014. Despite this, expenditure once over in the UK is down on
previous years, reflecting budget concerns. Visit Britain forecasts for the year end 2015 are for a 2.5% increase
in volume to 35.1 million with a 4.5% increase in expenditure. There are however considerable downside risks
and the recent terror atrocities in Paris could signal the beginning of a period which sees less people travelling.
The threat posed by ISIS is such that no city or major venue can consider being immune to an attack.
Overseas business visits continue to show a strong recovery, up 13% for the six months to June 2015. The
conference and meeting sector is still not fully recovered and corporate budgets remain under a degree of
pressure.
2016 Supply Outlook
Growth is not only influenced by demand but also by the quantity and quality of new hotel supply coming into
the market. The period 2009 to 2015 has seen an improving environment to obtain development finance and
the loosening affect is now being evidenced by more new hotels coming into the market. At present demand
generally is tending to outstrip new supply but it is a fine balance and indeed some markets are already
beginning to feel the impact of new supply, such as Aberdeen which is recoding negative growth at present.
The London hotel market has seen 23.6% growth in overall net room growth between 2008 and 2014, driven
by growth in the four star segment and the branded budget segment. Overall since the recession the UK
provinces has seen a 9.6% growth in room supply. Looking ahead, above average supply growth is expected
in 2015 and 2016 with a less active pipeline in 2017.
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Source: PWC
The UK market has seen an increasing trend towards more branded hotels in the market with a decline in the
mid-market and independent sector.
UK Hotel Investment overview
Introduction
There is a strong correlation between the operating and investment market and following robust operating
growth in the UK provinces, investment activity has picked up significantly over the last 12 to 24 months. In
2014, total UK hotel investment equated to approximately £5.5 billion, which was only marginally behind the
2006 peak. In 2015 we have seen this investment activity continue and the year-end forecasts indicate that a
total investment volume of £10 billion is likely to be achieved. There are a number of portfolio transactions still
to complete by the end of the year in order to validate this number such as Atlas Hotels which Eastdil Secured
are currently marketing on behalf of Lone Star. Please refer to the chart below:
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As shown in the chart above, approximately £5billion has been transacted from portfolio transactions in 2015,
which surpassed the peak years of both 2006 and 2007.
Portfolio Transactions
Since the beginning of 2014 there has been an unprecedented number of portfolio transactions, with
increasingly stronger yields being paid by a broad variety of global investors seeking to acquire UK hotel real
estate. The ability to acquire a group of hotels in a single transaction is very compelling with cost savings both
in terms of transaction costs and also operating costs going forwards with investors such as Lone Star, Topland,
Kew Green and Starwood Capital leveraging their ability to not only own the real estate but also to directly or
indirectly (through a third party management company) operate the hotel. The economies of scale that can be
achieved by merging two groups of hotels can also be compelling with head office costs unlikely to increase
exponentially with the uplift in revenue from another portfolio,
London Hotel Transaction Overview
London hotels are rarely traded tending to be held by long term investors and so as a consequence there are
only ever a few key transactions each year. However, in comparison to previous years, the last 12 months has
seen a reasonable amount of activity.
We set out below some of the key hotel sales and also some of the key openings and refurbishments which
have continued to shape the market. Please note that the transactiosn below are not intended to be comparable
to the subject property but we comment on them in order to provide some context to the overall London Hotel
investment market.
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The 5-star 93-bed Lanesborough Hotel on Hyde Park Corner in London's Knightsbridge reopened in July
following completion of a major 18-month renovation. The hotel previously operated under Starwood's St Regis
brand but is now managed by Oetker Collection on behalf of owners, ADIA.
David & Simon Reuben have acquired loans secured against the 5-star 496-bed Grosvenor House, A JW
Marriott Hotel in London and two US hotels. The loans were acquired from Bank of China, who funded the
Mayfair hotel's purchase by Indian conglomerate Sahara India Pariwar in 2010.
In May 2015 Oaktree Capital Management acquired a 50% stake in the 4-star 361-bed Hilton London Wembley
from property developer and investor Quintain for £40M. The transaction gives Oaktree full control of the
property, having acquired an initial 50% stake from Quintain for £30M in 2013.
In April 2015 Qatar Holding's Constellation Hotels acquired a 64% stake in Coroin Ltd, which owns the
Maybourne Hotel Group from the Barclay Brothers and Derek Quinlan. A price was not disclosed for the deal,
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which involves the luxury Claridge's, Connaught and Berkeley hotels in London. It is thought however that the
deal equated to in excess of £3,000,000 per bedroom.
In April 2015 Starwood Capital Group completed the sale of the 258-bed Ace Hotel London Shoreditch to
Limulus Ltd, which was advised by The Deerbrook Group. Ace Hotel Group will continue to manage the lifestyle
hotel, which was fully refurbished in 2013 and sold by JLL off a £150M guide price.
In Autumn 2015 the 85 bedroom Bulgari Hotel went under offer and has now completed at a rumoured purchase
price of £293,000,000 which reflects a price of £3,400,000 per bedroom and a net initial yield of 3.5%. The
transaction includes residential on the top floor which has previously been assessed at £7,000 per square foot.
Industry Trends
We set out below some of the key trends impacting the current hotel investment market.
Improved debt availability
With much stronger competition between banks, leading to lower margins and a gradual improvement in Loan
to Value. Overseas banks have tended to dominate the larger transactions over the last 24 months, making it
very difficult for the more traditional UK clearing banks to compete on the larger portfolios and higher value
single assets. Active overseas banks include Bank of China, United Overseas Bank, Bank of America, Wells
Fargo and a number of Middle Eastern banks. Other forms of debt financing are still required, particularly for
new development. Various alternative groups including pension funds, sovereign wealth funds and mutual funds
have entered the hotel sector, providing senior debt. However, it is likely that this alternative funding will
generally prefer a lease structure in place rather than lending against a trading entity.
Diverse Buyer Type
In the last several years there has been a significant shift in the type of investor, with private equity transactions
now accounting for almost 30% of all transactions, compared to just 12% in 2012. The private equity buyer has
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been driven to invest in the UK market due to the recovery in trading performance and taking advantage of
opportunities where there exists some latent upside potential. This may be in the form of a hotel having been
mismanaged, under invested, unbranded or indeed a combination of all three. A large number of the above
portfolio transactions reflect this exact scenario. The level of High Net Worth/Sovereign Wealth investment also
increased significantly, although this was to some extent distorted by the Maybourne Group of Hotels which
was acquired by Quatar’s Constellation Group. There had until that point been a relative lack of Sovereign
Wealth investment activity, with ADIA’s acquisition of Marriott and Edition Hotels being the last notable UK
activity.
Over the course of 2016, we would expect to see a number of owner operators come back into the market.
These groups are recovering their position and are now able to secure bank debt to chase strategic
opportunities. There should at some point be an increase in the amount of individual and small group sales as
the portfolios transacted over the last couple of years are churned. We are anticipating Lone Star to sell a
number of non-core assets via Savills in early 2016.
Global Investment
The last couple of years has seen a significant influx of overseas money into the UK, led firstly by the US and
more recently by Asian investors. Examples of recent Asian investment includes Frasers Hospitality acquisition
of Malmaison and Hotel du Vin and China based CTS’s acquisition of Kew Green Hotels. Middle Eastern
investors have been less active but are constantly watching the market for an opportunity.
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31 December 2015
Conclusion
The hotel sector has benefitted from continued positive momentum on multiple fronts. At this point in time there
are no significant headwinds on a national level. Supply remains largely in check with the exception of some
markets. Buyers and developers continue to look for acquisition opportunities, with many requiring a strong
asset management opportunity in order to proactively add-value.
The outlook for the 2015 remains bullish and growth expectations have been revised up relative to the activity
we have seen during the first half of 2015. Investors will be increasingly mindful of the timing in regard to interest
rate rises and will also continue to closely monitor the Euro zone for signs of improvement. At this point, we
would expect to see an increasing shift in deal activity away from the UK and into continental Europe seeking
better returns from hotel investment properties.
THE REGENT STREET OCCUPATIONAL MARKET
Regent Street has a range of established multiple fashion and footwear stores, focused at the middle and upper
end of the quality spectrum as well as the high end department store Liberty and prestigious flagship/destination
stores like Burberry and Apple. Whilst many of these brands are UK based, including Coast, Church’s Shoes
and Jaeger, an increasing number are overseas operators such as fashion retailers from the US and Europe
like Zara, Timberland, Cos, Hollister Co, Gilly Hicks and Brooks Brothers; retailers from the UK are underrepresented when compared to the Central London average. There are also some speciality retailers such as
Lush, L’Occitaine and Crabtree & Evelyn and Zara Home.
As in many of the Central London sub markets, the prime pitch within this busy and constantly changing area
can be difficult to define precisely and rental levels are often affected by the attributes of individual buildings.
However, traditionally the northern part of the eastern side of Regent Street has been regarded as prime pitch,
leading south from Oxford Circus, just past Hamleys. Retailers here include Coast, & Other Stories (H&M
Hennes’ premium brand), Omega, Cos, Desigual All Saints, Banana Republic and Armani Exchange.
On the western side of Regent Street the quality of the retail offer has improved very significantly over much of
the length of the street. This was begun in part by the 2004 completion of the redevelopment scheme on the
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North West side, which attracted Apple's flagship store and marked a significant step forward in the Street's
fortunes.
The fashion offer on the western side of the street is now typified by retailers like Ted Baker, Hobbs, Burberry
and Hackett. Superdry trades on the western side of the street, with Hollister further down. The subject units
are at the southern end of the street, traditionally the more secondary part though with tenant demand
consistently high this is increasingly less relevant.
In addition there is the Quadrant 3 scheme which provides 54,000 sq ft of retail space, now anchored by Whole
Foods as well as office and residential accommodation. Other development completions involved the W4 block
development which welcomed J.Crew to the mid-western part of the street in 2013. Works continue on the W5
development at 169-179 Regent Street with the development due to complete imminently. Ralph Lauren has
reportedly taken one unit for its Polo Fascia brand, whilst the other store is reportedly pre let to Michael Kors
which is to relocate along the street allowing it to operate its largest European Store.
COMPETING SUB-MARKETS
According to PMA research, Central London’s eight key retail sub-markets differ in size and retail offer. Oxford
Street is by far the largest with retail floor space approaching four and a half million square feet. Knightsbridge
and Regent Street, although sizeable centres, are much smaller; Regent Street, with 1.3 million sq ft has around
30% of the floor space of Oxford Street. Covent Garden and Bond Street have very different retail offers but are
broadly similar in size, with around 820,000 and 850,000 sq ft respectively, whilst Kensington High Street and
Kings Road are rather smaller. Retailing in the City of London has a more diffuse pattern but the main
concentrations total around 1.6 million sq ft.
Regent Street's PMA Retail Score has increased significantly in recent years and is now closer to that of Bond
Street and Oxford Street. It is now clearly number three in the hierarchy.
OCCUPATIONAL DEMAND
Perhaps the most telling statistic for Regent Street, is that the vacancy rate currently stands at 0%. This makes
Regent Street currently one of the most sought-after Central London locations, with retailer demand described
as 'very strong'.
In recent years, retailer demand for Regent Street has purportedly rocketed as the Street has become a hotbed
for both new international retailers and domestic retailers (particularly at the luxury end of the market) wishing
to locate their anchor stores here, testament to The Crown Estate's regeneration programme. As such, no
vacant units have been recorded on the street since 2010. Also rather significantly, no prime vacancies have
been recorded on Regent Street in recent memory.
The most significant hub of activity this time round was just south of prime, where Hugo Boss and Kate Spade
had agreed terms to divide up Esprit's former store between them, whilst across the road at the Crown Estate's
redevelopment, pre-lets have also been secured with Michael Kors - who will relocate to open their largest
European store - and Polo Ralph Lauren. These deals reflect both the ever growing demand from luxury retailers
for space in London and Regent Street's rise as a sought after location for upmarket brands.
Further down the street, there was not quite as much movement with the only significant arrival being the UK
debut of Spanish jewellery retailer Uno de 50.
South of Vigo/Glasshouse Street, Jo Malone and Stefanel both signed up for new flagships stores, whilst prelets for Hunter Boot, Villebrequin and Kiehls reported last year were all open and trading. Hunter Boot is trading
on an assignment from Hollister, as the US retailer continues to scale back its activity in the UK market.
Since our most recent update, we understand Jaeger surrendered its lease on prime and the unit has been
subsequently assigned to quality fashion retailer Coach, who will relocate from the southern end of Regent
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Street, as well as shoe retailer Stuart Weitzman, who will open their first UK store here. Also leaving Regent
Street will be French Connection, who will close their loss-making store opposite prime in March 2016. We
understand that the unit it to be redeveloped.
Another characteristic of strong occupational demand is the level and frequency of premium payments by
incoming tenants to secure accommodation. These are very much the norm now on Regent Street with at least
2 instances in the last 18 months of premiums being paid that exceed £2m.
RENTS AND DEALS
At mid-2015, agent sources estimated prime rents in Regent Street at £650 psf Zone A. This represents no
change on the end 2014 level of prime rents in the area with rents now 36.8% above the pre-recession peak of
£475 psf ZA. We have been told that this level is most likely nearer £700 psf ZA
Regent Street has seen impressive rental growth over the period of record, spurred on by the Crown Estate's
regeneration programme. Compared to the explosive growth seen in other central London submarkets however,
Regent Street looks slightly more measured and indeed there has been relatively little rental growth in the last
two years; prime Zone A rents hit £650 psf in March 2013, based on a letting to Kiko, and this is where they
remained at the time of our 2015 valuation.
Demand for the street remained extremely strong, but agents suggested that rather than further record rents
being achieved on prime, it was more likely to be a case of rents 'catching up' along the rest of the street.
Placing the tone of prime rents at present is not easy. Traditionally, top rents were achievable in the block
adjacent to Oxford Circus and tended to decrease as you move down the pitch. However, there has been no
churn on prime and rent reviews for the majority of units are due to be enacted within the next couple of years.
The most recent evidence, a mid-2014 rent review for Accessorise, was settled at £662.50 psf Zone A, indicating
things have perhaps not moved on just yet.
There has been more happening opposite prime, however. A new top rent for this pitch was set with a 2015
letting to Links of London at £750 psf Zone A. The relevance of this transaction is tempered slightly by the very
small unit size and the fact that the global rent was just £263,000 p.a. Rent reviews for several units also
suggested growth: Church's Shoes achieved a headline rate of £700 psf Zone A (average rent £665 psf ZA),
Karen Millen showed £625 psf Zone A and Barker's Shoes £587 psf Zone A. As with the Hackett letting some
years ago (discussed below) this is evidence that in central London top rents are not only achieved on prime,
but good secondary locations can get similar values on the basis of strong retailer demand and low churn.
In the block north of Beak Street, agents placed achievable rents here in the order of £550 psf Zone A by mid2014. Once again, evidence is slim, although a January 2015 rent review for Reiss was settled at £600 psf Zone
A. There have been two new lettings to Kate Spade and Hugo Boss here, however the terms are not yet in the
public domain. We are advised, however, that the terms of both deals were slightly softer than they could have
been, with the Crown Estate
On the east side of the street, running between New Burlington and Vigo Street, rents appear to be in the order
of £500-550 psf. There was a new entrant to Regent Street, Spanish jewellery brand Uno de 50, who leased a
small unit for £555 psf Zone A; a rent review for Toywatch further south also reflected £507.50 psf Zone A.
Immediately south of Vigo Street, there has been more recent evidence to analyse. Rents are generally in the
range of £450-500 psf with no disparity between rents on the opposing sides of the street, although there are
some exceptions. In 2015 Jo Malone secured two units which will be amalgamated to create a UK flagship in a
deal that reflected £565 psf Zone A, a record level for this part of the street. Stefanel also moved in at a slightly
lower rate of £458 psf Zone A, although that letting did involve a £1.8 million premium. Indeed, 2015 rent reviews
for Charles Tyrwhitt and Sting achieved respective Zone A rates of £500 and £450 psf. Previous 2014 lettings
to Villebrequin and Hunter Boot have shown in the region of £425 and £475 respectively.
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Rents on this part of the street have shown a very strong increase in the past five years. Sting's global rent
doubled between rent reviews from £1.445 million in 2010 to £3.05 million in 2015, whilst Austin Reed is in the
process of marketing its unit since an upcoming rent review is likely to also show an uplift in the region of 50%
on the passing rent of £1.7 million. Such cases suggest there may be issues of affordability going forward,
however it seems there is no shortage of demand at present.
Notwithstanding the rise in rental values, Regent Street rents are still attractive compared to Oxford Street (£950
per sq ft ITZA) and Bond Street (£1,500 per sq ft ITZA).
THE INVESTMENT MARKET
THE REGENT STREET AND WEST END PROPERTY MARKET
Agent sources placed prime retail yields at 3.00% in summer 2015 on rack rented income, showing an inward
shift of 25 basis points compared to this level 12 months previous.
Central London retail purchases are almost exclusively the preserve of overseas purchasers seeking wealth
preservation opportunities as opposite to debt- financed purchasers seeking added value. Therefore, we
continue to seek yields harden on trophy assets such as the subject property. We do not foresee any significant
changes in supply and demand in the short to medium term that would detrimentally affect the value of the
subject property.
The Crown Estate owns the freeholds of the properties on Regent Street and, although third parties own a
number of head leases that are sometimes traded (such as the subject property), the volume of investment
activity is generally not high.
Following considerable transactional activity in 2012, there was only one deal in 2013 and to date, no investment
transactions in 2014 or 2015. The one transaction in 2013 constitutes the largest that has taken place in recent
years, with Norges Investment Management further strengthening their relationship with The Crown Estate by
paying £97.5 million for a 25% stake in Quadrant 3, reflecting an initial yield of 4.45%. This mixed use scheme
incorporates 200,000 sq ft of offices, plus around 65,000 sq ft retail and residential units.
The only investment activity along the street in 2013 was the off market sale, back to the Crown Estate of 137
-141 Regent Street for £18.75m reflecting 3.74%. Before this there is evidence of a transaction involving Great
Capital Partnership who sold 100 Regent Street to Hermes Real Estate Investment Management for £64.6
million reflecting a net initial yield of 3.66%, the property is occupied by Austin Reed. Meanwhile Regent Arcade
House was sold to Stenham Property in August 2012 for £48 million reflecting a net initial yield of 5.00%
In February 2012, a joint venture between Great Portland Estates and Capco known as The Great Capital
Partnership, sold Kingsland House, 122-124 Regent Street, and Carrington House, 126-130 Regent Street and
288-300 Regent Street back to Great Portland Estates for £84 million.
The Regent Street Partnership acquired the head lease of Jaeger House at 200-206 Regent Street for £50
million in January 2012 from IVG Institutional Funds, which had previously acquired the property for £40 million
in late 2010. The property consists of 29,000 sq ft of retail floor space from which Jaeger trades, and 19,000 sq
ft of offices.
Away from Regent Street the most recent comparable evidence is at 157 Oxford Street. The property comprises
5,700 sq ft or retail let to Everything Everywhere at £400 psf ITZA with c.14 years unexpired. The rent is highly
reversionary in such where current levels are reported to be £600 per sq ft ITZA. The property sold for 2.17%
or £20.1 million in June 2015. While in a different location with longer unexpired term, the sale clearly illustrates
pricing for revisionary retail assets in the West End.
Moving to closet to the absolute prime retail pitch in the country, 105 Old Bond Street is currently on the market
at an asking price of £160,000,000 or 2.05% NIY. The retail element is let to Tod’s and Alexander Mcqueen
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31 December 2015
for a term in excess of 12 years unexpired. The low yield reflects the expectation of rental growth from £800 per
sq ft ITZA to in excess of £1,300 per sq ft ITZA and investor demand for assets on the most expensive retail
street in the UK.
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Hotel Market Supply and Demand Analysis
Supply Analysis-Existing Competitive Supply
The subject property competes to varying degrees with numerous hotels in the area. We have however focused
our detailed analysis upon the some of the most prestigious five-star hotels in central London. These include
the Four Seasons (193 bedrooms), The Lanesborough (93 bedrooms), Claridge’s Hotel (203 bedrooms), The
Connaught Hotel (121 bedrooms), and The Dorchester Hotel (294 bedrooms).
Please find below a map showing the relative location of each competitor to the subject:C o mp e ti t ion Ma p
A Four Seasons Hotel B The Lanesborough C Claridge’s Hotel
D The Connaught Hotel E The Dorchester F Subject Property
Four Seasons Hotel (A)
The current Four Seasons remains on the original site of the Four Seasons Inn on the Park which opened in
1970. In December 2010 the hotel reopened after a £125 million redevelopment where an extra floor was
added to the building. The hotel has 193 bedrooms of which 46 are suites, 3 food and beverage offerings
including the new “Amaranto” restaurant, which opened in December 2010. In addition the hotel offers a spa
on the new 10th floor and 10 meeting rooms with capacities of 15 – 500 Covers. The 11-storey hotel now boasts
a sophisticated and modern character set in the desirable location of Mayfair and situated near the southeast
corner of Hyde Park. The Spa at Four Seasons is a located on the rooftop of the hotel and offers floor to ceiling
glass windows with views of London. The Fitness Centre also offers sweeping views across the city and
features state-of-the-art cardio and weight training equipment.
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The Lanesborough (B)
The Lanesborough is on Hyde Park Corner, Knightsbridge, Central London, England. Operated by the American
Starwood Hotels Corporation, the hotel is reputedly the most expensive hotel in London, with the highest rate
as of 2013 being up to £18,000 per night for the "The Lanesborough Suite". A 24-hour private butler is available
to each guest. The Lanesborough has accommodated visiting royalty, eminent politicians and entertainers.
Opposite are Hyde Park and Apsley House, the home of the Duke of Wellington (title). The hotel is next to Hyde
Park Corner tube station and has several restaurants and bars - each with their own unique style. The
Lanesborough is currently undertaking an extensive renovation project. As a result, the hotel has been closed
since the 20th December 2013 and not due to re-open until Spring 2015. The new designs by world renowned
interior designer, Alberto Pinto, will enhance all guest rooms and public areas. The renovations will honour the
building's architectural heritage as one of London's most revered Regency landmarks, and embody the
signature style that has become synonymous with The Lanesborough, whilst incorporating the latest in
contemporary luxury and technological innovations.
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Claridge’s (C)
Claridge’s Hotel was originally a single house bought by William and Marianne Claridge in the 1800’s. They
then ambitiously bought the adjoining five houses. In 1893 they sold the hotel to the then owner of The Savoy,
Richard D’Oyly Carte, in 1893 who closed the hotel and reopened it again in 1898 after a refurbishment.
Claridge’s is now owned by the Maybourne Group. The hotel has 203 bedrooms of which 65 are suites, 4 food
and beverage offerings including the recently opened ‘Fera at Claridge’s’, a Michelin Starred restaurant. In
addition the hotel offers a health club & spa, a gym, 10 meeting rooms with capacities of 4 to 800 covers. The
fitness centre and spa are both located on the top floor of the hotel and offer stunning views of the surrounding
area.
The hotel has recently undergone a restoration and refurbishment over the last four years and is
therefore in very good condition.
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The Connaught Hotel (D)
The Connaught Hotel was originally opened in 1815 as the Prince of Saxe-Coburg Hotel. It was formed of two
houses, owned by the Duke of Westminster. In 1892 the hotel was rebuilt by the owners under the direction of
Sir John Blundell Maple. In 1897 the hotel, known as the Coburg opened. In 1917, the hotel is rechristened
The Connaught, a reference to Queen Victoria’s seventh child, Arthur. The hotel is owned by the Maybourne
Group. The hotel has 121 bedrooms of which 34 are suites, 4 food and beverage offerings including the Hélène
Darroze, a Michelin Starred Restaurant. In addition, the hotel offers a spa, swimming pool and fitness centre,
7 meeting rooms with capacities of 4 to 450 covers. The hotel underwent a £70 million refurbishment in 2007
and is in reasonable condition.
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The Dorchester (E)
The Dorchester hotel opened as a brand new building in 1931 by Lady Astor. The hotel quickly became
synonymous as a haunt for famous artists, poets and writers and gained a reputation as a luxurious hotel. The
hotel is part of the Dorchester Collection which includes other luxury hotels around Europe and the USA
including the Plaza Athénée in Paris and the Beverley Hills Hotel in The USA. The hotel has 250 bedrooms of
which 56 are suites, three food and beverage offerings, including the only hotel three Michelin Star restaurant
in the UK, Alain Ducasse at the Dorchester. In addition the hotel offers a health club and spa, a gym, 9 meeting
rooms with capacities of 15 to 500 covers. Although the hotel has not been subject to a full restoration and
refurbishment for a few years, 22 of the suites were redesigned in 2012 and the four room ballroom suite was
restored to its 1930’s classic design.
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The above competitive set comprises London’s leading luxury hotels. They are well established and have a
built a strong reputation based upon their service, quality of hotel and prime locations. The subject hotel, whilst
not benefiting from history, is nonetheless a property that is of equal quality and in some respects provides a
superior level of finish than any of the above competitive set.
Upon the property becoming established in the market, and on the basis it operates under a world class
management team, we consider it will be, in due course, considered one of London’s leading hotels.
Recent Openings and Proposed New Hotels
Supply Trends
There has been a slight shift in terms of new luxury hotels towards the south, east and west and out from the
central London. This is likely due to a shift in major new regeneration and infrastructure schemes, for example,
the Vauxhall Nine Elms Battersea area where Battersea Power Station re‑development and the new American
Embassy will help revitalize the area; as well as the availability and cost of land and perhaps a trend to more
modern luxury. Attracting guests far afield from traditional core areas may be a more difficult task than building
the hotels.
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31 December 2015
Source PWC
After 11,000 new rooms opened in 2011 and 2012, London saw post Olympics supply slowdown in 2013. Supply
is set to rise again by around 5% in 2014 and again in 2015, as over 12,000 new rooms will open.
Budget hotel openings have been dominating the new supply, predominantly due to Premier Inn and
Travelodge’s presence in this sector. Both groups are completing refurbishment programs which may impact
other hotels in the budget and three star spaces. In total, an additional 45 hotels (6,000 bedrooms) are set to
enter the London market in 2014 with 60% of these in the budget sector.
We have undertaken a Hotel Supply search via the AM:PM Hotels Database covering all 5 Star Hotels within
central London:According to the database, there are 83 five star hotels (15,200 bedrooms) within central London. We have
then considered the areas which directly influence the hotel, as follows (in no particular order):•
Bond Street, Embankment, Green Park, Hyde Park Corner, Knightsbridge, Marble Arch, Oxford Circus,
Piccadilly Circus, St. James Park, Temple and Victoria.
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According to the database, there are 50 existing five star hotels (9,407 bedrooms) within the above selected
areas. Please find below a list covering all 50 hotels in the search area:SUPPLY OF FIVE STAR HOTELS IN CENTRAL LONDON
Location
Hotel Name
Brand
Bedrooms
Bond Street
Claridge's
Independent
203
Bond Street
Connaught
Independent
90
Bond Street
Westbury
Independent
246
Embankment
Metropole Corinthia
Corinthia
294
Embankment
Royal Horseguards
Guoman Hotels
281
Green Park
Athenaeum
Independent
121
Green Park
Browns
Rocco Forte Hotels
117
Green Park
Dukes
Small Luxury Hotels of the World
90
Green Park
May Fair London
Independent
410
Green Park
Park Lane
Sheraton
303
Green Park
Ritz
Leading Hotels of the World
133
Green Park
St James's Hotel & Club
Althoff Hotel Collection
61
Green Park
Stafford London by Kempinski
Kempinski
105
Hyde Park Corner
45 Park Lane
Dorchester Collection
46
Hyde Park Corner
Berkeley
Independent
214
Hyde Park Corner
Dorchester
Dorchester Collection
244
Hyde Park Corner
Four Seasons London at Park Lane
Four Seasons
192
Hyde Park Corner
Halkin by COMO
COMO Hotels & Resorts
41
Hyde Park Corner InterContinental London Park Lane
InterContinental
447
Hyde Park Corner
Lanesborough ‐ a St Regis Hotel
St Regis Hotels & Resorts
93
Hyde Park Corner
London Hilton on Park Lane
Hilton
453
Hyde Park Corner
Metropolitan by COMO
COMO Hotels & Resorts
163
Knightsbridge
Belgraves
Thompson Hotels
85
Knightsbridge
Bulgari Hotel & Residences
Bulgari
85
Knightsbridge
Capital
Pride of Britain
50
Knightsbridge
Jumeirah Carlton Tower
Jumeirah Hotels & Resorts
216
Knightsbridge
Jumeirah Lowndes
Jumeirah Hotels & Resorts
87
Knightsbridge
Mandarin Oriental Hyde Park
Mandarin Oriental
200
Knightsbridge
Park Tower Knightsbridge
Starwood Luxury Collection
280
Knightsbridge
Wellesley
Preferred Hotel Group
37
Marble Arch
Grosvenor House, A JW Marriott Hotel
JW Marriott
494
Marble Arch
Hyatt Regency London ‐ The Churchill
Hyatt
434
Marble Arch
London Marriott Hotel Park Lane
Marriott
157
Marble Arch
Montcalm
Shaftesbury Hotels
143
Oxford Circus
Langham London
Langham Hotels
380
Piccadilly Circus
Cafe Royal
The Set
159
Piccadilly Circus
Ham Yard
Firmdale Hotels
91
Piccadilly Circus
Le Meridien Piccadilly
Le Meridien
280
Piccadilly Circus
Sofitel London St James
Sofitel
183
Piccadilly Circus
W London
W
192
St James's Park InterContinental London Westminster
InterContinental
256
Temple
ME London
ME by Melia
157
Temple
One Aldwych
Leading Hotels of the World
105
Temple
Savoy, A Fairmont Managed Hotel
Fairmont Hotels
268
Temple
Waldorf Hilton, London
Hilton
298
Victoria
41
Red Carnation Group
30
Victoria
Goring
Pride of Britain
71
Victoria
Lord Milner
Independent
11
Source: AMPM Model
Owner‐operator
Owner‐operator
Owner‐operator
Owner‐operator
Owner‐operator
Owner‐operator
Owner‐operator
Owner‐operator
Owner‐operator
Managed
Owner‐operator
Managed
Managed
Owner‐operator
Owner‐operator
Owner‐operator
Owner‐operator
Owner‐operator
Managed (2043)
Managed
Leasehold
Leasehold (2091)
Managed
Managed
Owner‐operator
Managed
Owner‐operator
Owner‐operator
Managed
Managed
Leasehold
Owner‐operator
Managed
Owner‐operator
Owner‐operator
Leasehold (2133)
Leasehold (2138)
Leasehold
Owner‐operator
Leasehold
Managed (2032)
Managed
Managed
Managed
Managed
Owner‐operator
Owner‐operator
Owner‐operator
Operator
Maybourne Hotel Group
Cola Holdings
CHI Hotels & Resorts
GLH Hotels Management (UK)
Ralph Trustees
Rocco Forte Hotels
Seven Tides
Edwardian Group
Park Lane Hotel
Barclay Brothers
Althoff Hotels & Residences
Kempinski
Dorchester Services
Dorchester Services
Premier Group WLL
Como Hotels & Resorts
InterContinental Hotels Group
Starwood Hotels & Resorts
Hilton Worldwide
Como Hotels & Resorts
Commune Hotels & Resorts
Prime Hotels
Capital Group
Jumeirah International
Jumeirah International
Mandarin Oriental Hotel Group
Bespoke Hotels
Marriott
Churchill Group
Marriott
Precis Properties
Langham Hotels International
Alrov Hotels
Firmdale Hotels
Accor
InterContinental Hotels Group
Melia Hotels International
Hemisphere Hotels
Fairmont Hotels & Resorts
Hilton Worldwide
Red Carnation Group
Goring Holdings
Mantis Group
L UXURY H OTEL P IPELINE
We have undertaken a new Hotel Pipeline search which covers the same areas as outlined above. The Pipeline
of new five star hotels is 14 (1,289 bedrooms). Some of these new hotel bedrooms include extensions to existing
hotels.
In terms of the 1,289 bedrooms, 379 (29%) are due to open in the next couple of years. These hotels include:Location
Bond Street
Green Park
Temple
Cushman & Wakefield
Hotel Name
Claridge's (extension)
May Fair London (extension)
Arundel Great Court
Opening
On Hold
On Hold
On Hold
Bedrooms
40
2
200
Model
Owner‐operator
Owner‐operator
Leasehold
31 December 2015
The following schemes are currently listed as speculative.
Location
Hotel Name
Green Park
Arts Club
Green Park
Browns (extension)
Hyde Park Corner
Berkeley (extension)
Hyde Park Corner
Peninsula London
Marble Arch
London Marriott Hotel Park Lane (extension)
Source: AMPM
Opening Bedrooms
Model
Speculative
16
Owner‐operator
Speculative
5
Owner‐operator
Speculative
27
Owner‐operator
Speculative
100
Managed
Speculative
12
Managed
Peninsula Hotel
Grosvenor and The Hong Kong and Shanghai Hotels, Limited (the owner of Peninsula Hotels) have announced
that they have agreed terms to enter into, upon completion of HSH’s purchase of a 50% interest in 1-5
Grosvenor Place, SW1 in London, United Kingdom, a 50:50 joint venture partnership that seeks to redevelop
the site. The newly formed partnership will aspire to redevelop the 1.5 acre site opposite the gardens of
Buckingham Palace and overlooking Hyde Park into a mixed use scheme incorporating HSH’s first hotel in the
UK – The Peninsula Hotel London.
Mr Clement K.M. Kwok, Managing Director and CEO of Peninsula Hotels, commented: “London is one of the
world’s most important financial centres and a key international gateway city for business tourism. This project
is consistent with our Group’s long term strategy, representing our desire to further expand in Europe.”
The partnership will be formed following HSH’s acquisition of Derwent London’s 50% leasehold interest in the
site for £132.5 million (approximately HK$1,564 million, exclusive of value added tax and other applicable
taxes).
The Peninsula Hotels group has a unique identity among the world’s leading hotels. Established in 1928, they
now operate prestigious luxury properties in nine major cities. These include the flagship in Hong Kong, plus
Shanghai, Tokyo, Beijing, New York, Chicago, Beverly Hills, Bangkok and Manila, Paris opening in August 2014
and London under development.
Outline planning consent has recently been secured for the new hotel.
Sea Containers House
The Mondrian at Sea Containers House on the South Bank, opened in September 2014. Designed and built in
the 1970’s as part of the rejuvenation of the South Bank, it was the work of architect Warren Platner who was
well known for his cruise ship designs and the Windows of the World restaurant in the World Trade Centre. Built
to become a hotel it never opened in the 1970’s due to the oil crisis and was turned instead into offices. It is the
first Mondrian hotel (Morgans Hotel Group) outside of the USA. Industrial ocean liner cabins influence the style
of the 359 bedrooms. The hotel is presented to a minimalist design. There is a bar and restaurant together with
a 56 screening room. However, perhaps the hotels main attraction is the AGUA Bathhouse & Spa which is now
one of London’s largest spas.
Admiralty Arch
The proposed new hotel at Admiralty Arch, at the Trafalgar Square end of the Mall will inevitably enter the
market at some point although this scheme seems to continue to be held up in development terms.
Conclusion
Whilst there is an active pipeline of new hotels set to come into the market, there are still relatively few new
hotels set to provide competition at the luxury end of the market. This should therefore allow the subject hotel
Cushman & Wakefield
31 December 2015
to continue to build market share. A lack of new hotels also means that the globes luxury brands have less
choice and so in reality should be strongly motivated to sign up the Café Royal if the brand route was taken.
Business Overview
Introduction
The hotel boasts an elegant and modern design with cutting edge technology in its guestrooms and event
spaces. The quality of the finish and materials is outstanding and the operating business appears to be
improving following an increased sales and marketing effort by management.
Set Hotels do not operate any type of points based Loyalty Scheme in the same way as an international brand
given its limited portfolio of properties. It would appear that the Café Royal is attracting new guests and
increasing its market share from other five star hotels in the area since our last valuation.
The group does not have a central reservation system and instead all telephone bookings are made direct to
the hotel. The website is administered centrally and a reasonably high proportion of bookings are made direct
through this online system.
There are clearly a number of factors which are resulting in the significant under-performance of the hotel. Hotel
management are beginning to see some signs of an improvement. The hotel is currently operating without a
General Manager, with the last GM having been terminated in December 2015 following 18 months of service,
during which time the hotel has not progressed.
The supplement between room types has historically been around £20 which is very poor for a hotel of this
quality with not enough focus on optimising the rate through the bedroom mix. We understand that the hotel is
beginning now to increase the supplement to around £50. The hotel management are targeting suite guests
from the Middle East and also have a marketing plan for the United States with key sales people in both of
these locations.
The private members club continues to lose money which is unprecedented for a club of this quality in this
location. We understand that club membership has increased to around 900 this year, paying between £800
and £1,200 per annum. Hotel management are looking to target members who would also join the spa.
A new concept in 2016 will be known as 50 Days by Albert Adrià was conceived. A collaboration between Café
Royal and Albert Adrià, named by Time Magazine as one of the most influential chefs of gastronomy - with the
intention of delivering the extraordinary. A celebration of the pleasure of good food and drink, fine hospitality
and Albert’s first enterprise outside his native Spain during his 30 year career. A residency in two of London’s
most precious historic rooms. This initiative has now fully sold out.
There is a new focus on weddings with 9 events secured so far for 2016 but with a target of 25 to 30 events
annually.
There is a renewed focus on operating costs looking to secure more competitive purchasing rates on food and
beverage. There have also been some payroll initiatives with one example being that each cleaning maid has
been given an extra room to clean. A new position has also been created to replace the mini-bars which then
makes the overall turn-around of each room more efficient. Kitchen costs are being cut by combining teams
within the kitchen, effectively reducing the number of positions.
We understand that hotel management will shortly be introducing a loyalty scheme which will allow regular
guests to collect points. We have not been provided with the full detail but consider this a good initiative to
capitalise on guest loyalty and drive even harder the levels of repeat business.
Cushman & Wakefield
31 December 2015
Tripadvisor Comments
Tripadvisor Reviews about Café Royal date from December 2012 to December 2015. A summary of the quality
and the guest profile is outlined below.
The comments about the hotel illustrate a very consistent theme with 80% indicating excellent experience. The
hotel is ranked 45 out of 1,058 hotels in London.
Guests especially like the location and service. Other positive feedback includes compliments on the décor and
cleanliness of the rooms.
The opinions about the staff are generally very favourable. Most guests denote them as excellent or very good,
with occasional comments expressing varying degrees of dissatisfaction. The guest profile is diverse which
bodes well for penetrating market share in the luxury five-star segment.
The food and beverage outlets were also generally well received among the reviews. Quality of food and service
coupled with ambience were the some of the hallmarks mentioned among others. Several reviews indicated
additional stays in the future.
Sales & Marketing
The sales and marketing strategy has clearly been very important both prior to the hotel reopening and during
2015. Management has indicated they are starting to see results from sales and marketing efforts through
occupancy figures, albeit at a much more conservative pace than originally projected.
Hotel management are beginning to see more business being created through American Express with much of
this being more highly rated than some of the original business taken on by the hotel.
We understand that there is also a focus on improving the general marketing around Set Hotels and begin to
establish the brand.
Guest Demand Analysis
The market for transient accommodations is an all-encompassing term referring to the various types of travellers
that utilise the hotel facilities in a given market area. The total number of rooms occupied by these travellers
during a specific time frame represents a market's accommodated room night demand.
In analysing demand within a specific market, individual segments are considered based on the nature of travel
present in the area. Three primary demand classifications occur in most markets including commercial, meeting
and group, and leisure. In the case of the subject hotel we have identified the key segments as follows:
Commercial

Leisure

Meeting & Group (often referred to as MICE - Meetings Incentives Conference and Events)
The proximity of the hotel to Regent Street is producing a diverse group of customers, which is something Set
Hotels may have not necessarily experienced to the same extent in their other hotels.
The current business mix is approximately 50% corporate and 50% leisure.
Cushman & Wakefield
31 December 2015
Commercial Demand
Commercial demand arises from individuals who are conducting business and visiting various firms in the
subject's market area. Commercial demand is strongest Monday through Thursday nights and declines
significantly on Friday and Saturday before increasing somewhat on Sunday (although Sundays remain the
most challenging day of the week). Commercial travellers typical length of stay ranges from one to three days
and remains relatively constant throughout the year, although some declines are noticeable in late December
and during other holiday periods.
Commercial travellers generally are not rate sensitive and represent a very desirable and lucrative market that
provides a consistent level of demand at relatively high room rates. Commercial demand in the subject's market
area is generated primarily by the wide variety of corporate tenants in the surrounding area.
The hotel is currently trying to reduce some of the corporate business in order to create availability for the higher
rated leisure guests that they are currently missing out on due to relying too heavily on volume led low ADR
corporate contracts. As a relatively small 159 bedroom hotel, the business should not be attracting this lower
value corporate business. Instead, the hotel should be concentrating on smaller corporate contracts but at a
higher value and indeed the hotel management are currently working to attract companies in the fashion and
media industry as well as hedge funds and investment banks.
Meeting and Group Demand
Meeting and group demand includes groups who reserve blocks of rooms for meetings, seminars, trade
association shows, and other similar gatherings of ten or more persons. Meeting and group demand is typically
strongest during the spring and autumn months, while the summer months represent the slowest period for this
market. Winter demand can vary based on location. Meeting and group travellers typically achieve an average
length of stay of three to five days. Historically, most corporate groups met on weekdays and social groups
used the weekend periods. However, in the recent past, corporate group booking trends have changed to
include some or all of the weekend. Many corporate groups have been utilising weekend meetings as a cost
containment measure, which usually results in lower airfares and hotel room rates, especially in non-resort
markets.
Meeting and group demand is generally quite profitable for hotels. Although room rates are sometimes
discounted for large groups, the hotel benefits from the use of meeting space and the inclusion of in-house
banquets and cocktail receptions. In order to attract the meeting and group segment, hotels must offer meeting
and banquet facilities, as well as an adequate number of guestrooms to house function attendees.
Meeting and group demand for the subject hotel is likely to be predominantly evening based given the
entertainment core of the hotel. The meeting spaces are modern in nature and can facilitate corporate events
as well as private parties and functions.
The hotel is focussing heavily on higher value groups in order to continue to maintain and grow ADR but also
to push occupancy to a level that is commensurate with a 159 bedroom hotel in this location.
Leisure Demand
The leisure demand segment consists of individual tourists and families visiting the attractions of a local market
and/or passing through en route to other destinations. Leisure demand is strongest Friday and Saturday nights,
holiday periods and the summer months. These peak periods generally are negatively correlated with
commercial and meeting and group demand. The spring is also a prime period for weddings and other social
activities.
Leisure travellers tend to be the most price-sensitive segment in the lodging market and typically demand
extensive recreational facilities and amenities.
Cushman & Wakefield
31 December 2015
Nationality Mix
Although we have not been provided with actual statistics, it is our understanding that the hotel attracts a wide
range of nationalities. Outside UK-based guests, residents from the USA, Western Europe, Asia, and the Middle
East frequent Café Royal.
Review of Financial Operating Statements
The subject property is an existing hotel with a limited operating history due to having recently been renovated
and re-opened. The income and expense statements, illustrated in the tables on the following pages, were
provided by the management of the subject property, and are unaudited. The statement below details the
subject’s operating history for 2015 as well as the 2016 budget. Where applicable, we have reorganised the
statements in accordance with the Uniform System of Accounts for the Lodging Industry (Tenth Revised
Edition), published by the Educational Institute of the American Hotel and Motel Association.
Cushman & Wakefield
31 December 2015
Cushman & Wakefield
31 December 2015
Although the hotel made a significant loss during 2015, hotel management have projected the hotel to return to
profit in 2016. Please see below.
It is clear that this scenario has been played out before and each year that goes by seems to result in a poor
hotel trading performance followed by more optimistic management projections for the following year.
The first point to make is that there is categorically no precedent for a hotel such as the subject to make an
operating loss and therefore for valuation purposes we should consider that the current operator is under
performing and therefore not operating the business as it should be. Under the RICS valuation guidelines the
valuer is guided toward reconstructing the operating performance to reflect a competent operator running the
business commensurate with the wider market.
It is our opinion that the performance of the hotel could be substantially improved beyond the current trading
and near term trading projections. We consider that a brand could potentially accelerate the stabilisation of the
hotel, although in the long term would potentially remove any additional upside that can be gained by developing
a new brand, as Set Hotels are currently doing.
It is our firm view that prospective purchasers for this hotel would choose to ignore the historic performance and
form their own view as to the prospective future trading performance. This to some extent is being demonstrated
by unsolicited interest in the hotel from investors all across the globe seeking to secure a central London hotel.
Our agency takes calls from investors on a weekly basis providing us with their investment requirements and
this is often for a hotel within the West End forming a fairly tight geographical area, within which lies the Café
Royal.
Cushman & Wakefield
31 December 2015
We have accordingly put together our own trading projections based on benchmark data from comparable
central London hotels having consideration to the physical accommodation of the Café Royal. There are two
very important factors which will in our opinion result in strong bidding for the subject property:1. Excellent location.
2. High Quality product having been finished to a very high quality.
We set out our trading projections below:-
Cushman & Wakefield
31 December 2015
C&W Projections
2016
1
159
70.00%
460.00
Number of Rooms
Occupancy Rate
Average Room Rate
Average Room Rate Growth
Revenue Per Available Room (RevPAR)
2017
2
159
76.00%
506.00
10.00%
384.56
322.00
Days Open
2018
3
159
78.00%
541.42
7.00%
422.31
2019
4
159
80.00%
563.08
4.00%
450.46
2020
5
159
80.00%
577.15
2.50%
461.72
365
365
365
365
365
Available Rooms
58035
58035
58035
58035
58035
Occupied Rooms
40625
44107
45267
46428
46428
1.106
1.046
1.046
1.020
TOTAL SALES
31,667,270
%
POR
PAR
36,397,440
%
POR
PAR
39,190,109
%
POR
PAR
41,275,862
%
POR
PAR
42,253,522
%
POR
PAR
BEDROOMS
Sales
Expenses
Departmental Profit
18,687,270
4,600,000
14,087,270
59.0%
24.6%
75.4%
460.00
113.23
346.77
117,530
28,931
88,599
22,317,940
4,810,286
17,507,654
61.3%
21.6%
78.4%
506.00
109.06
396.94
140,364
30,253
110,111
24,508,622
4,944,467
19,564,154
62.5%
20.2%
79.8%
541.42
109.23
432.19
154,142
31,097
123,045
26,142,530
5,081,391
21,061,139
63.3%
19.4%
80.6%
563.08
109.45
453.63
164,418
31,958
132,460
26,796,093
5,183,019
21,613,074
63.4%
19.3%
80.7%
577.15
111.64
465.52
168,529
32,598
135,931
FOOD & BEVERAGE
Food & Beverage Sales
Other Income / Room Hire
Food & Beverage Cost
Departmental Profit
9,000,000
6,500,000
2,500,000
28.4%
0.0%
72.2%
27.8%
221.54
0.00
160.00
61.54
56,604
0
40,881
15,723
10,000,000
6,662,500
3,337,500
27.5%
0.0%
66.6%
33.4%
226.72
0.00
151.05
75.67
62,893
0
41,903
20,991
10,500,000
6,915,675
3,584,325
26.8%
0.0%
65.9%
34.1%
231.96
0.00
152.77
79.18
66,038
0
43,495
22,543
10,847,308
7,108,250
3,739,058
26.3%
0.0%
65.5%
34.5%
233.64
0.00
153.10
80.53
68,222
0
44,706
23,516
11,064,254
7,250,415
3,813,839
26.2%
0.0%
65.5%
34.5%
238.31
0.00
156.16
82.15
69,587
0
45,600
23,986
CLUB FLOOR
Sales
Expenses
Departmental Profit
2,500,000
1,900,000
600,000
7.9%
76.0%
24.0%
61.54
46.77
14.77
15,723
11,950
3,774
2,562,500
1,947,500
615,000
7.0%
76.0%
24.0%
58.10
44.15
13.94
16,116
12,248
3,868
2,626,563
1,996,188
630,375
6.7%
76.0%
24.0%
58.02
44.10
13.93
16,519
12,555
3,965
2,692,227
2,046,092
646,134
6.5%
76.0%
24.0%
57.99
44.07
13.92
16,932
12,869
4,064
2,759,532
2,097,244
662,288
6.5%
76.0%
24.0%
59.44
45.17
14.26
17,356
13,190
4,165
230,000
45,000
185,000
1%
19.6%
80.4%
5.66
1.11
4.55
1,447
283
1,164
235,750
46,125
189,625
0.6%
19.6%
80.4%
5.35
1.05
4.30
1,483
290
1,193
241,644
47,278
194,366
0.6%
19.6%
80.4%
5.34
1.04
4.29
1,520
297
1,222
247,685
48,460
199,225
0.6%
19.6%
80.4%
5.33
1.04
4.29
1,558
305
1,253
253,877
49,672
204,205
0.6%
19.6%
80.4%
5.47
1.07
4.40
1,597
312
1,284
1,250,000
900,000
350,000
3.9%
72.0%
28.0%
30.77
22.15
8.62
7,862
5,660
2,201
1,281,250
922,500
358,750
3.5%
72.0%
28.0%
29.05
20.92
8.13
8,058
5,802
2,256
1,313,281
945,563
367,719
3.4%
72.0%
28.0%
29.01
20.89
8.12
8,260
5,947
2,313
1,346,113
969,202
376,912
3.3%
72.0%
28.0%
28.99
20.88
8.12
8,466
6,096
2,371
1,379,766
993,432
386,335
3.3%
72.0%
28.0%
29.72
21.40
8.32
8,678
6,248
2,430
17,722,270
56.0%
436.25
111,461
22,008,529
60.5%
498.98
138,418
24,340,939
62.1%
537.72
153,088
26,022,467
63.0%
560.49
163,663
26,679,741
63.1%
574.65
167,797
2,500,000
2,500,000
950,000
1,000,000
6,950,000
7.9%
7.9%
3.0%
3.2%
21.9%
61.54
61.54
23.38
24.62
171.08
15,723
15,723
5,975
6,289
43,711
2,630,857
2,630,857
987,729
1,052,343
7,301,785
7.2%
7.2%
2.7%
3.3%
20.1%
59.65
59.65
22.39
23.86
165.55
16,546
16,546
6,212
6,619
45,923
2,720,784
2,720,784
1,009,355
1,088,314
7,539,237
6.9%
6.9%
2.6%
2.8%
19.2%
60.10
60.10
22.30
24.04
166.55
17,112
17,112
6,348
6,845
47,417
2,797,797
2,797,797
1,031,250
1,119,119
7,745,963
6.8%
6.8%
2.5%
2.9%
18.8%
60.26
60.26
22.21
24.10
166.84
17,596
17,596
6,486
7,038
48,717
2,856,331
2,856,331
1,045,687
1,142,532
7,900,882
6.8%
6.8%
2.5%
2.7%
18.7%
61.52
61.52
22.52
24.61
170.17
17,964
17,964
6,577
7,186
49,691
MINOR OPERATING DEPARTMENT
Sales
Expenses
Departmental Profit
SPA/LEISURE/GOLF
Sales
Expenses
Departmental Profit
GROSS OPERATING INCOME
LESS EXPENDITURE
Administrative & General
Sales & Marketing
Heat, Light & Power
Repairs & Maintenance
TOTAL UNDISTRIBUTED COSTS
GROSS OPERATING PROFIT
10,772,270
34.0%
265.17
67,750
14,706,744
40.4%
333.44
92,495
16,801,702
42.9%
371.17
105,671
18,276,505
44.3%
393.65
114,947
18,778,859
44.4%
404.47
118,106
LESS FIXED COSTS
Property Tax
Insurance
Management Base Fee
Management Incentive Fee
Rent
TOTAL FIXED COSTS
1,700,000
310,000
633,345
487,735
450,000
3,581,081
5.4%
1.0%
2.0%
6.0%
1.4%
11.3%
41.85
7.63
15.59
12.01
11.08
88.15
10,692
1,950
3,983
3,068
2,830
22,523
1,734,000
316,200
727,949
715,716
459,000
3,952,864
4.8%
0.9%
2.0%
6.0%
1.3%
10.9%
39.31
7.17
16.50
16.23
10.41
89.62
10,906
1,989
4,578
4,501
2,887
24,861
1,768,680
316,200
783,802
835,981
468,180
4,172,843
4.5%
0.8%
2.0%
6.0%
1.2%
10.6%
39.07
6.99
17.31
18.47
10.34
92.18
11,124
1,989
4,930
5,258
2,945
26,244
1,804,054
322,524
825,517
919,465
477,544
4,349,103
4.4%
0.8%
2.0%
6.0%
1.2%
10.5%
38.86
6.95
17.78
19.80
10.29
93.67
11,346
2,028
5,192
5,783
3,003
27,353
1,804,054
322,524
845,070
948,433
487,094
4,407,175
4.3%
0.8%
2.0%
6.0%
1.2%
10.4%
38.86
6.95
18.20
20.43
10.49
94.92
11,346
2,028
5,315
5,965
3,063
27,718
NET OPERATING PROFIT (Pre FF&E Reserve)
7,191,189
22.7%
177.02
45,228
10,753,879
29.5%
243.82
67,634
12,628,859
32.2%
278.98
79,427
13,927,402
33.7%
299.98
87,594
14,371,684
34.0%
309.55
90,388
1,455,898
Fixtures, Fittings & Effects Reserve
NET OPERATING PROFIT (Post FF&E Reserve)
Cushman & Wakefield
950,018
3.0%
23.39
5,975
6,241,171
19.7%
153.63
39,253
9,297,982
4.0%
33.01
9,157
1,567,604
4.0%
34.63
9,859
1,651,034
4.0%
35.56
10,384
1,690,141
4.0%
36.40
10,630
25.5%
210.81
58,478
11,061,254
28.2%
244.35
69,568
12,276,367
29.7%
264.42
77,210
12,681,543
30.0%
273.14
79,758
31 December 2015
We have adopted four hotel comparables in benchmarking where we consider the Café Royal should be
achieving in the hands of a hypothetical operator seeking to optimise the revenue and profitability of the
business through the most efficient operation of the hotel.
We have arrived at our conclusions through analysing POR and PAR as well as % of revenue/profit. We have
had regard to the F&B accommodation at the subject hotel as compared to the comparables as well as the
location and other specific characteristics. Our approach is though dominated by a benchmarking process and
not an analysis on a per cover or per square metre basis.
In terms of occupancy we have considered comparable benchmark hotels whereby we have access to trading
data which includes the Corinthia, Ham Yard and the Rosewood Hotel. We have considered occupancy based
on the number of bedrooms of the competitive hotels and also whether they derive an advantage of being a
branded hotel. Our occupancy conclusion is that with only 159 bedrooms the Café Royal should be capable of
performing at a stabilised occupancy of 80%. Although this represents over 15% points above the existing
occupancy level we are comfortable that this is the extent to which the hotel is currently under trading. We are
also suggesting that the hotel would still take 4 years to reach this point, such is the extent of ground the
business needs to make up on its comp set.
Our ADR projection also considers our knowledge of competing hotels as well as STR data available to us. We
are satisfied that our projected rate, whilst significantly higher than the achieved rate is at a level which is
supported by the competitive set. The bedroom product is very high end and therefore with the exception of the
ratio of suites to bedrooms should be compared to the high end comp set for London.
Our projected NOP equates to around £40,000 per bedroom in our first year projection. This compares with our
benchmark hotels all achieving in excess of £50,000 per bedroom. The differential to some extent reflects the
difference in non-bedroom income at the subject hotel compared with the competing hotels.
Our room’s departmental profit in Year One equates to £86,000 per bedroom whereas the competitive set
equates to an average of around £100,000 per bedroom. We have applied operating costs in accordance with
industry norms and the competitive set. We have made some key decisions in preparing our projections such
as determining that the Private Members Club simply should not be operating at a loss. Whilst these businesses
do tend to be low margin, there is no other precedent in the market for a business of this type in this location to
be making a departmental loss. We would say that over the 12 months prior to 31 December 2015, the London
market has generally seen an improvement in performance. However, this is not the case across the board and
since the Paris attacks in November 2015 there has been a noticeable softening in the London market.
Please find below some additional F&B benchmark analysis.
Cushman & Wakefield
31 December 2015
Please find below as requested some additional OPEX benchmarking analysis.
Our operating cost structure is in line with similar central London 5 star hotels with the exception of MOD
expenses. Unfortunately, each hotel tends to be different in terms of the income generated within this
department and so it is more difficult to benchmark. We have to some extent been guided by the historic
accounts in respect of this line item which has historically shown that an 80% margin is achievable.
Our previous FF&E reserve at 1% of revenue reflected the fact that the hotel was still relatively new. However,
it is important that the FF&E reserve now begins to accumulate in order to cover the cost of a soft refurbishment
in the next five or six years. Our FF&E reserve now stabilizes at 4% of total revenue from 2017 onwards.
Our profit margin is the result of our benchmarking exercise against similar hotel which generate a departmental
profit of between £12,000 and £20,000 per available room. We are at the top end of this range but consider that
the F&B at the Café Royal is potentially a more profitable mix of business than some of the benchmarking
hotels.
Cushman & Wakefield
31 December 2015
London
We have included a lengthy section in this report covering the London hotel operating and investment market.
These sections have been added to reflect the importance in the current market of considering the global
interest which is likely to result in a prime London asset coming to the market. It is therefore important to examine
what advantage London may offer to investors over and above other key cities around the world.
In summary London is currently providing a number of important investment drivers ensuring that it can be
competitive against competing cities:
London is a prime global city;

Significant annual growth in visitor numbers

Democratic political status;

Strength of currency;

Transparency of planning system;

Lack of corruption;

Continued forecast growth in the worldwide luxury market with forecast increases in the number of
HNW with a wealth in excess of £30million and also those in excess of £1billion.
The risks London faces are clearly the inverse of the above factors, although clearly a democratic political
status, planning system and lack of corruption are long term factors which are highly unlikely to change in the
foreseeable future.
CAFÉ ROYAL HOTEL
We consider that if the subject was to be offered to the market there is likely to be a significant level of demand
from both domestic and international investors.
The location is a key factor being situated in the heart of London’s West End. The property is well situated near
various historical, entertainment, and tourist attractions and vacant land for a potential new development is nonexistent.
The Quality of the finished product is also a key factor. The current market is dominated by investors who are
seeking to extract additional value either through re-branding, new management, re-positioning of F&B etc. The
hotel has been completed to an extremely high quality and so there are certainly no opportunities to improve
this further. The type of purchaser attracted to the hotel is therefore more likely to be a high net worth individual
wishing to make an ‘ego’ purchase or perhaps a highly capitalised owner operator who might perceive the
acquisition of Café Royal to represent an opportunity to introduce a high quality London flagship hotel into their
existing portfolio.
The hotel is not currently branded but does create some room for extraction of additional value if an international
operator were to acquire the property.
P OTENTIAL P URCHASERS
There are a number of potential investors were the property to be exposed to the market.
Cushman & Wakefield
31 December 2015
As mentioned above we foresee it more likely that a high net worth or owner operator would emerge as the
successful buyer. Whilst we do not consider Café Royal to have yet achieved Trophy status (although we would
not discount this in the future), it remains a highly desirable asset.
Although a number of potential purchasers will probably have the ability to acquire the asset for cash, there are
others who will require a debt facility. We are confident that subject to the terms and conditions and loan amount
agreed, the hotel offers excellent security and therefore it is foreseeable that a number of banks would be willing
to support a new purchaser. The only real caveat to this is that the historic trading cannot be relied upon and
so this may make some of the more traditional lenders more nervous.
Although we would not rule it out, we consider it unlikely that a Sovereign Wealth fund would emerge as a
potential buyer as the absence of an established brand is absent. These funds typically target larger branded
hotels which are under the operation and control of much larger operating companies such as Hilton, IHG,
Starwood, Fairmont etc.
Private Equity groups are highly focussed on returns and exit strategies with the opportunity to ‘add value’. Café
Royal does not therefore fit with this requirement, being an investment acquisition which needs to be supported
by a long term hold strategy.
The leasehold status of the property could deter some investors, particularly international investors who
generally prefer freeholds, although there is increasing evidence to suggest that leasehold properties are
beginning to lose some of their stigma. It is increasingly difficult to fine freehold opportunities in central London,
which has long been the case with the private London Estates controlling the market, but new financial
structures being put in place by pension and insurance companies acquiring freehold properties subject to a
ground lease is growing.
E XPOSURE T IME A ND M ARKETING T IME
Based on our review of national investor surveys, discussions with market participants and information gathered
during the sales verification process, a reasonable marketing period for the subject property at the value
concluded within this report would have been approximately 3 to 6 months. This assumes an active and
professional marketing plan would have been employed by the current owner.
T ENURE
Our valuation has to reflect the leasehold tenure.
Investors invariably have a preference for freehold assets but in central London they are scarcer and it is not
uncommon for a hotel to be subject to a ground lease. The rent can typically be a broad range as a proportion
of overall EBITDA from nominal peppercorn to upwards of 50% of the overall EBITDA. The higher the margin
of rent to EBITDA the more nervous investors will become, particularly as the rent might increase in the future
at a quicker rate than the overall profits from the business. There is market evidence to suggest that yields for
leasehold assets are higher than for the equivalent freehold. This can range from a 25 basis point differential to
as much as 200 basis points if the terms and conditions of the lease are very onerous.
O PERATING S TRUCTURE
In its current format, the subject hotel can be sold free and clear of any management agreement or franchise
agreement. This would be particularly appealing to potential purchasers as it leads to a broad range of future
options. It will also serve to broaden the type of investors likely to bid on the hotel. An owner operator would
see the advantages of being able to own and operate, whereas a PE, property company or institutional investor
may see an opportunity to create a management agreement and either brand the property or continue to operate
as an independent entity.
Cushman & Wakefield
31 December 2015
RETAIL
Location/Situation and Competition
The property is located on the eastern side of one of the prime retail streets in the UK. Traditionally a stronger
location than the western side. It is located on the southern end of Regent, the weaker end but with tenant
demand outstripping supply the gap between north and south is decreasing.
Regent Street receives approximate 7.5m visitors a year.
Building Design/Condition/Suitability
The building was redeveloped in 2012 behind the listed façade. The design, condition and suitability of the
property and accommodation is satisfactory for the current mix of uses.
Site/Environmental Issues
None of which we are aware. The property is located in an area that has long been in retail and office uses and
we
Planning/Statutory Issues
None of which we are aware
Tenure
Long leasehold interests occasionally deter potential purchasers. However, along Regent Street the freeholds
are owned by the Crown Estate and even long leasehold ownerships are uncommon. Therefore, being a long
leasehold is not necessarily detrimental. In addition, the unexpired term of c.121 years and as such this does
not have any detrimental impact on value.
Income Security and Tenant Quality
Nespresso have strong turnover figures and their parent, Nestlé Holdings UK limited, are of the highest
covenant strength. Lotus are loss making but owned by a Proton a blue chip Asian motor car manufacturer.
Wolford made a marginal loss as at April 2014 but have reasonable turnover.
In the current market tenant quality and to an extent lease length are not of paramount importance as demand
is so high that void periods are practically non-existent and the vacancy rate for Regent Street according to
Promis currently stands at 0%.
Lettability
Given the excellent location of the property we anticipate minimal void periods should space become available.
There is more demand than supply currently for units on Regent Street and on assignment of leases we have
commented above on the substantial premium payments that have been made / received. The only issue in
terms of void periods would be the tenant mix specified by the hotel which has to work with the hotel’s brand
image. Since we cannot comment knowledgeably on the policy our view of void periods reflect the wider Regent
Street market.
Cushman & Wakefield
31 December 2015
Asset Management Opportunities
Opportunities are tied in with securing reversions and increasing the rental income through rent reviews. Re
gearing Wolford’s lease as it nears the break or attracting a tenant on a premium are other sources of increased
revenue.
Rental and Capital Performance and Growth Prospects
Rental growth stands at 18%, assuming our estimate of Market Rental Value - £500 psf ITZA, in the past c. 12
months. We have concluded at the upper end of the range of evidence but that is largely because the other
relevant evidence we have identified is historic.
Capital growth prospects are excellent with investors seeking to capitalise on rental growth, short void periods
hence enhanced income security and a market characterised by extremely low supply.
Saleability
If available on the market, the subject property would represent a highly desirable asset and would generate a
significant level of attention. Potential purchasers would include institutional investors and property companies
similar to the existing owner.
Valuation
Methodology
There are three generally accepted approaches to developing an opinion of value: Income Capitalisation, sales
comparison and Cost. The approach used depends on its applicability to the property type being valued and
the quality of information available. The reliability of each approach depends on the availability and
comparability of market data as well as the motivation and thinking of purchasers.
The valuation process is concluded by analysing each approach to value used in the appraisal. When more
than one approach is used, each approach is judged based on its applicability, reliability, and the quantity and
quality of its data. A final value opinion is chosen that either corresponds to one of the approaches to value, or
is a correlation of all the approaches used in the appraisal.
We have considered each approach in developing our opinion of the market value of the subject property. We
discuss each below and conclude with a summary of their applicability to the subject property.
Income Capitalisation Approach
The Income Capitalisation Approach is based on the principle that the value of a property is indicated by the
net return to the property, or what is also known as the present worth of future benefits. The future benefits of
income-producing properties, such as hotels, is net income before debt service and depreciation, derived by a
projection of income and expense, along with any expected reversionary proceeds from a sale.
The two most common methods of converting net income into value are direct Capitalisation and discounted
cash flow analysis. In direct Capitalisation, net operating income is divided by an overall rate extracted from the
market to indicate a value. In the discounted cash flow method, anticipated future net income streams and a
reversionary value are discounted to provide an opinion of net present value at a chosen yield rate (internal rate
of return or discount rate). The rate is assessed by analysing current investor yield requirements for similar
investments.
Cushman & Wakefield
31 December 2015
Our experience with hotel investors indicates that the methodology used in estimating market value by the
Income Capitalisation Approach is comparable to that employed by typical hotel investors. For this reason, the
Income Capitalisation Approach produces the most supportable market value opinion, and it generally is given
the greatest weight in the hotel valuation process.
Sales Comparison Approach
The Sales Comparison Approach is a method of developing an opinion of market value in which a subject
property is compared with comparable properties that have been recently sold. Preferably, all properties are in
the same geographic area and/or of the same property type. One premise of the Sales Comparison Approach
is that the market will establish a price for the subject property in the same manner that the prices of comparable,
competitive properties are established.
The sales prices of the properties deemed most comparable to the subject property tend to set the range in
which the value of the subject property will fall. Further consideration of the comparative data allows the valuer
to derive an amount representing the value of the appraised property, in keeping with the definition of value
sought, as of the date of the appraisal.
The Sales Comparison Approach may provide a useful value opinion in the case of simple forms of real estate
such as vacant land and single-family homes, where the properties are homogeneous and the adjustments are
few and relatively simple to compute. In the case of complex investments such as hotel facilities, where the
adjustments are numerous and more difficult to quantify, the Sales Comparison Approach loses a large degree
of reliability.
Hotel investors typically do not employ the Sales Comparison Approach in reaching their final purchase
decisions. Factors such as the lack of recent comparable sales data and the numerous adjustments that are
necessary often make the results of the Sales Comparison Approach questionable. Although the Sales
Comparison Approach may provide a range of values that supports the final opinion of value, reliance on this
approach beyond the establishment of broad parameters is rarely justified by the quality of the sales data.
As an appraiser, one attempts to mirror the actions of the marketplace. In that our experience indicates that
sophisticated hotel investors depend largely on financial considerations when making final purchase decisions,
we generally do not give the Sales Comparison Approach strong consideration in the hotel appraisal process
beyond establishing a probable range of value.
Cost Approach
The Cost Approach is based on the proposition that an informed purchaser would pay no more for the subject
than the cost to produce a substitute property with equivalent utility. This approach is particularly applicable
when the property being valued involves relatively new improvements which represent the Highest and Best
Use of the land; or when relatively unique or specialised improvements are located on the site for which there
are few improved sales or leases of comparable properties.
In the Cost Approach, the valuer forms an opinion of the cost of all improvements, depreciating them to reflect
any value loss from physical, functional and external causes. Land value, entrepreneurial profit and depreciated
improvement costs are then added, resulting in an opinion of value for the subject property.
We find that knowledgeable hotel buyers base their purchase decisions on economic factors, such as projected
net income and return on investment. Because the cost approach does not reflect these income-related
considerations and requires a number of highly subjective depreciation estimates, this approach is given
minimal weight in the hotel valuation process.
Cushman & Wakefield
31 December 2015
Valuation Inputs
Selection of Applicable Rates of Return
Our analysis of applicable terminal Capitalisation and discount rates for the subject property specifically
consider the building type and condition, the current local hotel market conditions, estimated future trends in
the local and national market for transient accommodations, and current investor considerations and required
returns on investment for similar investments in full service hotels where the fee simple interest is being
conveyed.
Terminal Capitalisation
Based upon our knowledge of current investment returns required by typical hotel investors, along with factors
affecting investment risk specific to the subject property, we have employed a reversionary Capitalisation rate
of 4.5% for the subject property. Our capitalisation rate selection process was weighted by our analysis of the
resulting running yields, which in this case equates to a net initial yield of 2.8%. This is however based on the
hotel continuing to build upon its performance and so a more realistic position would be the stabilised yield
which is in this case 4.5%. It is very difficult to compare this with other hotel transactions as there have not been
any similar hotels to analyse. We are aware that at the very top end of the retail market investors have paid sub
3% yields (as low as 2.5%) for freehold Bond Street flagship stores. We must consider in regard to the Café
Royal Hotel that it is held on a leasehold basis and whilst in an excellent location is not as prime as Bond Street.
It is also generating an operational income stream rather than a fixed rent income stream and so the greater
potential volatility of this will be taken into account by investors. By adopting a capitalisation rate of 4.5% our
resultant stabilised initial yield of 4.5 % represents spread of almost 150 basis point from prime retail. We
consider this is appropriate to reflect both the leasehold tenure and the exposure to operational income as
opposed to fixed rental income.
Discount Rate Selection
The discount rate is the rate of return which equals the sum of the real return anticipated in the investment plus
a change in value and any risk premiums associated with the specific investment when compared to alternative
investments. It is the average annual rate of return necessary to attract capital based upon the overall
investment characteristics.
The discount rate selection requires the valuer to interpret the attitudes and expectations of market participants.
Discount rates are partly a function of perceived risks. Risk is a function of general economic conditions and
characteristics of the investment. The critical elements of an investment include the quantity and certainty of
gross income, operating expenses, and resultant net income over some future time period. Value is a reflection
of future income expectations and such elements are risky.
A determination of the proper discount and Capitalisation rates for the subject involved speaking with investors
and brokers of hotel properties throughout the country, discussing investment parameters with other hospitality
industry experts, and considering the results of several published investment surveys.
We have selected a Discount Rate of 6.25% to our Day One valuation. This allows for some additional execution
risk as the trading projections are currently unproven. We would expect upon maturity that the Discount Rate
may reduce to reflect the fact that there is a much lower risk to the achievement of the future trading projections
as they will have been proven historically by the point of stabilisation.
Discounted Cash Flow Model
Our valuation analysis and discounted cash flow model are presented on the following page. Incorporated in
our model are these assumptions and opinions.
Cushman & Wakefield
31 December 2015
Projection Period:
10 years with sale/refinancing at beginning of the following year.
Internal Rate of Return:
We have utilised a discount rate of 6.25 percent (annually) in
this analysis.
Terminal Capitalisation Rate:
We have utilised a terminal Capitalisation rate of 4.5 percent in
this analysis The terminal Capitalisation rate is applied to the
eleventh year net operating income.
The discounted cash flow analysis indicates a rounded market value of £250,000,000 (£1,500,000 per room).
Sensitivity Analysis
Please find below a sensitivity analysis in respect of our valuation conclusions above.
Cushman & Wakefield
31 December 2015
Market Value
Discount Rate
6.25%
0.00% Data Table
Term. Cap Rate
4.50%
0.00% Data Table
Discount Rate
£250,000,000
Terminal Cap Rate
-1.00%
-1.00%
-0.75%
-0.50%
324,000,000
317,000,000
311,000,000
-0.25%
304,000,000
0.00%
0.25%
0.50%
0.75%
1.00%
298,000,000
292,000,000
286,000,000
280,000,000
274,000,000
-0.75%
308,000,000
302,000,000
295,000,000
289,000,000
283,000,000
278,000,000
272,000,000
266,000,000
261,000,000
-0.50%
294,000,000
288,000,000
282,000,000
276,000,000
271,000,000
265,000,000
260,000,000
255,000,000
250,000,000
-0.25%
282,000,000
276,000,000
270,000,000
265,000,000
260,000,000
254,000,000
249,000,000
244,000,000
239,000,000
0.00%
271,000,000
265,000,000
260,000,000
255,000,000
250,000,000
245,000,000
240,000,000
235,000,000
230,000,000
0.25%
261,000,000
256,000,000
251,000,000
246,000,000
241,000,000
236,000,000
231,000,000
227,000,000
222,000,000
0.50%
252,000,000
247,000,000
242,000,000
237,000,000
233,000,000
228,000,000
224,000,000
219,000,000
215,000,000
0.75%
244,000,000
239,000,000
235,000,000
230,000,000
225,000,000
221,000,000
217,000,000
212,000,000
208,000,000
1.00%
237,000,000
232,000,000
228,000,000
223,000,000
219,000,000
215,000,000
210,000,000
206,000,000
202,000,000
-1.00%
-0.75%
-0.50%
0.00%
0.25%
0.50%
0.75%
1.00%
Discount Rate
271,000,000
265,000,000
260,000,000
255,000,000
-0.25%
250,000,000
245,000,000
240,000,000
235,000,000
230,000,000
Term. Cap Rate
298,000,000
283,000,000
271,000,000
260,000,000
250,000,000
241,000,000
233,000,000
225,000,000
219,000,000
Sensitivity Analysis ‐ Subject to VP
350,000,000
300,000,000
250,000,000
200,000,000
150,000,000
100,000,000
50,000,000
‐
‐1.00% ‐0.75% ‐0.50% ‐0.25% 0.00% 0.25% 0.50% 0.75% 1.00%
Discount Rate
Term. Cap Rate
Retail Valuation
Rental Value
Rental value has been assessed on the basis of Market Rent, assuming a new lease drawn on standard,
effective full repairing and insuring provisions, for a term of 10 years with upwards only rent reviews and
incentives granted equivalent to 3 months’ rent.
Opinion of rental value
Market Rent:
£3,487,948 pa
Rental evidence and justification
We have identified the following comparable transactions shown in Appendix B4
With particular regard to the historic Piquadro letting have based our opinion on £5,382 per sq m (£500 psf
ITZA), giving a total rental value for the retail accommodation of £3,487,948 pa.
Capital Value
Unless stated otherwise, yields are expressed net of notional purchaser’s costs at 5.80%.
Cushman & Wakefield
31 December 2015
Sales Evidence
We have attached a schedule of recent sales transactions at Appendix B4.
Conclusion, Justification and Approach
We have based our valuation on an equivalent yield approach of 3.50% which results in a net initial yield of
1.66% but 2.33% when the property is fully income producing.
The choice of yield is in line with the most recent market evidence on at 157 Oxford Street for a reversionary
prime retail property which sold in June 2015 at £20.1 million or 2.17% and the sale of 100 Regent Street to
Hermes Real Estate Investment Management at 3.66% or £64.6 million.
Market Valuation
Hotel
In our opinion, the Market Value of the long leasehold interest in the hotel, as at 31 December 2014, is:
£250,000,000
(Two Hundred and Fifty Million Pounds)
Retail
Our valuation calculations are shown in further detail within the Appendices.
In our opinion, the Market Value of the long leasehold interest in the Four Retail Units is:
£91,500,000
(Ninety One Million Five Hundred Thousand Pounds)
This reflects an equivalent yield of 3.5%. It also equates to £55,811 per sq m (5,815 per sq ft).
Cushman & Wakefield
31 December 2015
Glossary of Terms and Definitions
Below we have listed a Glossary of Key Terms which are used throughout both the hotel industry and within
our valuation report.
Adjusted GOP
Administrative
General
and
AGOP - Gross Operating Profit after deduction of base management fees
Comprises expenses associated with the payroll related expenses for employees
classified as Administrative and General (A&G). A&G departments comprise the
manager’s office, accounting, cost control, purchasing and receiving, information
systems, security and HR.
Average Room Rate
Average Room Rate (ARR) is the total rooms’ revenue (over whatever period)
divided by the number of rooms occupied It is also sometimes referred to as
Average Daily Rate (ADR).
Capex
Capital Expenditure are funds used by an organisation to upgrade physical assets,
such as property and equipment.
Earnings Before Interest, Taxation, Depreciation and Amortisation.
Food & Beverage department. This is a specific cost centre for hotels and generally
includes sales, including revenue from the bar, room service and conference and
banqueting.
EBITDA
F&B
FF&E Reserve
Furniture, fixtures and equipment reserve. This is usually a percentage of turnover
that is deducted each year as a sinking fund to ensure guest bedrooms, public
areas and back of house (including plant & machinery) are maintained.
Fixed Charges
Includes Property Tax, Insurance, Management Fees, Other Non-Operating
Expenses, FF&E Reserve and Rent.
Gross Operating Profit
Cost of insuring the building and contents, liability insurance and business
interruption premiums.
The rate of interest at which all future cash flows must be discounted in order that
the net present value of those cash flows, including the initial investment, should
be equal to zero.
GOP
Insurance
Internal
Rate
Return (IRR)
of
Management Fees
Net Operating Profit
The cost of management services performed by a management company to
operate the property as a whole.
NOP is calculated as Gross Operating Profit less Fixed Charges.
Calculated as the number of rooms sold divided by the total number of available
rooms throughout the period being analysed.
Includes revenue generated from space rentals such as concessions or leased
space. Also includes revenue from laundry, spa, business centre, limousine and
other miscellaneous services provided by the hotel.
Occupancy
Other Income
Other Income (F&B)
This includes the sales of services and all products that are non consumable food
items within the F&B department, such as revenue from the sale of audiovisual
equipment, public room rentals and cover charges.
POMEC
Property Tax
Repairs
Maintenance
Property Operations & Maintenance & Energy Costs
All taxes assessed against the property by the government.
Includes the costs associated with the payroll, materials and third party costs
associated with maintaining the property and contents at an operational standard.
Cushman & Wakefield
&
31 December 2015
RevPAR
Revenue per available room or room yield is a measure of the revenue earned per
hotel room derived by dividing the total Rooms Revenue by the total number of
available rooms in a given period.
Room Revenue
Sales & Marketing
The revenue generated through the rental of rooms and suites to guests.
Includes the costs of property specific advertising, centralised/brand advertising
costs and payroll related to Sales & Marketing employees.
The sum revenues (net of sales tax) from all the operational departments,
including Rooms Revenue, F&B Revenue, Room Hire and other revenue.
Expenses that are considered applicable to the entire property and are not able to
be appropriately split between the operating departments. Comprises of
Administrative & General, Sales & Marketing and Repairs & Maintenance.
Total Revenue
Undistributed
Expenses
Cushman & Wakefield
020 7152 5006 Tel direct
020 7152 5393 Fax direct
[email protected]
Cushman & Wakefield LLP
43/45 Portman Square
London
W1A 3BG
Tel 020 7935 5000
Fax 020 7152 5360
www.cushmanwakefield.com
The Directors
Alrov Property and Lodging
Rotcheild 46
Tel Aviv 66883
Israel
17 March 2016
Dear Sirs
Annual Accounts of Alrov and Lodging for Financial Year ending 31 December 2015
The Café Royal, Regent Street, London W1B 5EL, UK
We understand that you will be including a copy of our report and valuation in your Annual Accounts for year
ending 31 December 2015.
We give hereby give our consent to the inclusion of our report dated 17 March 2016 as an appendix, and to the
references to it and our name in your report, and in due course look forward to receiving a copy of the published
document.
In addition, we hereby give our consent that this letter (together with our report), be included in the Company’s
published prospectus, and to any other report published by the Company from time to time.
We would however reiterate that in accordance with our terms and conditions entered into between us our report
can only be relied upon by the addressee, in this case Alrov Property and Lodging.
Yours faithfully
IAN M THOMPSON MRICS
PARTNER
For and on Behalf of Cushman & Wakefield LLP
Cushman & Wakefield LLP is a limited liability partnership registered in England & Wales with registration number OC328588. The term partner is used to
refer to a member of Cushman & Wakefield LLP or an employee or consultant with equivalent standing and qualifications. A list of members of the LLP is
open to inspection at our registered office at 43/45 Portman Square, London, W1A 3BG. Regulated by the Royal Institution of Chartered Surveyors.

CAFE ROYAL HOTEL

Transcription

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