Key points
- Hotels with a RevPAR (Revenue Per Available Room) above US$ 750 are typically considered ultra-luxury, sitting at the top of the market in terms of quality and price;
- In the ultra-luxury segment, price sensitivity is minimal or nonexistent, and its clientele belongs to the wealthiest layer of society, which makes the segment quite resilient during adverse economic periods;
- The performance of ultra-luxury hotels in terms of RevPAR growth is superior to that of all other segments of the U.S. hotel market;
- Ultra-luxury hotels have distinctive characteristics, such as unique locations, iconic buildings and renowned brands, which create barriers to competition and make them assets more likely to preserve value over the long term;
- Strong fundamentals have been driving the ultra-luxury hotel segment: growth of the luxury market as a whole; consumers' growing appreciation of unique experiences; rising wealth of the economic elite in the U.S.; the growing presence of institutional investors in this market, among others;
- Because of their characteristics, ultra-luxury hotels are perceived as less risky assets than hotels in other segments, which is reflected in lower cap rates for this segment.
Ultra-luxury hotels: a market of their own
Traditionally, luxury hotels can be identified by offering excellent locations, spacious accommodations, sophisticated decor, fine dining, exclusive amenities, privacy and security – in short, “5-star” hotels; or 6- or 7-star hotels, although these classifications do not officially exist.
Today, however, the definition of luxury has become less obvious. On one hand, the use of the term “luxury” has become widespread. On the other, even within the segment of truly luxury hotels, there is great variation. In this sense, it can be said that there is a fairly clear segmentation between luxury and ultra-luxury hotels.
In ultra-luxury hotels, beyond high quality and impeccable service, more subjective aspects such as authenticity, the establishment of genuine and individualized relationships, personalized service and exclusivity are increasingly being used in this differentiation.
In terms of demand profile, the difference is also striking. While luxury hotels are frequented by high-income clients and executives — clients with some degree of price sensitivity — in the ultra-luxury segment, price sensitivity is minimal or nonexistent. Nightly rates above four thousand dollars are not uncommon, and thousand-dollar spa sessions are barely noticed on the final bill. This, of course, provided the guest feels their expectations have been met, or even exceeded, which is usually no easy task.
Beyond more qualitative definitions of what luxury and ultra-luxury hotels are, the specialized market also works with a quantitative metric for these definitions. Thus, luxury hotels would be those with a RevPAR above 500 dollars and ultra-luxury hotels those with a RevPAR above 750 dollars. For reference, a RevPAR above 750 dollars can be achieved, for example, in a hotel with 50% occupancy and an Average Daily Rate of 1,500 dollars. In any case, a hotel rarely fits the ultra-luxury profile with average daily rates below 1,000 dollars.
RevPAR stands for “Revenue Per Available Room” and is a metric that combines Occupancy with the Average Daily Rate. As an example, a hotel with 70% occupancy and an Average Daily Rate of 100 dollars would have a RevPAR of 70 dollars.
Some of the most renowned ultra-luxury hotel brands
Given the definitions above, few flags are considered truly ultra-luxury, and among experts no more than a few dozen worldwide fit this profile. Unlike luxury hotel brands, ultra-luxury flags tend to have few hotels, ranging from a handful of units to just over a hundred, with the average around 30 hotels worldwide. This ends up being a consequence of the promises of scarcity, exclusivity and personalization typical of the ultra-luxury segment.
Below, 20 of these most prestigious brands are shown.
Trends for the ultra-luxury hotel market
Living experiences vs. acquiring luxury goods
Compared to older generations, younger high-income consumers have placed greater value on living experiences than on acquiring luxury goods. Partly due to the mass commercialization of luxury products, and also to the counterfeiting of these products, such goods often no longer represent a status symbol as they once did, nor are they such clear markers of personality. These consumers are therefore beginning to value living authentic and personalized experiences, which end up becoming more subtle and even more exclusive markers of status. Ultra-luxury hotels, among other segments, benefit directly from this phenomenon.
Partnerships between luxury brands from different segments
Luxury hotels have been partnering with luxury product brands and vice versa. In addition to the mutual reinforcement of image, these partnerships allow products from famous brands to be sold (or rented, in the case of jewelry, watches and accessories) in the hotels, as part of a more complete experience of sophistication.
Some luxury brands have also ventured into the hotel market, strengthening their business portfolio and expanding the space they occupy in their consumers' minds (and wallets). Examples of this phenomenon are Bulgari and Armani entering as boutique hotel flags, and LVMH — the owner of Louis Vuitton — acquiring Belmond.
Aman, one of the most authentic brands in the ultra-luxury segment, however, adopted the opposite strategy. Although it has no loyalty programs, its hotels have a loyal clientele strongly identified with the brand's values, the “Amanjunkies.” Taking advantage of this, the company launched cosmetic, wellness and accessory products under the Aman Essentials line, available at the brand's hotels and at luxury retail stores such as Harrods in London.
Combining experience and environmental sustainability
This is a particularly sensitive point for this industry, since the conflict between luxury and environmental sustainability is obvious. Luxury and ultra-luxury hotels are characterized by the use of large spaces, by the wide offering of products and services and by the use of natural resources on a much larger scale per guest than cheaper accommodation options. However, because margins are higher, the luxury hotel industry can reduce its impact by investing in more efficient energy and water systems, in more durable materials, in the purchase of local products and in more efficient waste collection and reuse systems, among other things. In this way, it is possible, at least in part, to reduce the environmental impact of the business.
What makes ultra-luxury hotels attractive to investors
The ultra-luxury hospitality market is on an upward trajectory, driven by solid market fundamentals and shifting consumer trends. Some of the main fundamentals of this market are:
- Greater Resilience Through Economic Cycles: The luxury and ultra-luxury market benefits from a demand segment that is more price-inelastic, willing to pay a premium for exclusivity, luxury experiences and the highest level of service.
- Extraordinary Lodging Fundamentals: Luxury and ultra-luxury hotels have historically outperformed other U.S. market segments in terms of RevPAR growth.
- Major Growth in the Wealthiest Population: Over the past 20 years, the number of billionaires increased from about 200 to more than 2,780, with total wealth rising from about US$ 2 trillion to more than US$ 14.2 trillion.
- Generational Projects in Unique Markets: The luxury and ultra-luxury hotel market offers the opportunity to invest in irreplicable lodging projects in unique destinations, while also being industry leaders in RevPAR and profitability per room, resulting in rapidly rising generational value.
- Scarcity Premium: The opportunity to own an irreplicable ultra-luxury asset is a rarity in the world of lodging investments, evidenced by the lack of transactions above $1.5 million per key.
- Exceptional Appreciation of Ultra-Luxury Hotels: The combination of solid lodging fundamentals, resilience through economic cycles and a scarcity premium, together with an investor profile composed of institutional-quality owners with a practically unlimited pool of capital, has led to exceptional asset appreciation in the ultra-luxury space.
- Growing Institutional Presence with Operations and Asset-Management Expertise: The investor landscape in the luxury and ultra-luxury segments has expanded, now encompassing family offices and investment funds, as well as the traditional high-net-worth individuals and foreign investors.
- Growing Air Access Through Private Aviation: A growing number of these markets are beginning to offer private air-charter partnerships to serve the demand of higher-purchasing-power consumers.
Performance of luxury and ultra-luxury hotels
In terms of average annual RevPAR growth from 1995 to 2019 — a period that disregards the effects of the pandemic, which were very strong between 2020 and 2022 and affected all segments — ultra-luxury hotels in the U.S. delivered performance more than twice the average of the U.S. hotel market. Growth also surpassed that of traditional markets such as Miami Beach and Manhattan. From 2009 to 2019, performance was even better, with an even more accelerated RevPAR growth.
Mistakes in managing ultra-luxury hotels
Network expansion with loss of quality
When an ultra-luxury hotel chain expands, it is very important that it not lose the mindset that guides this type of business. It is not uncommon, for example, for the chain to begin prioritizing economies of scale and for certain cuts to be made in favor of greater standardization. The problem with this kind of approach is that, little by little, the flag loses its essence and, all of a sudden, customers — usually very demanding — abandon the brand.
In managing ultra-luxury hotels, the mindset should always be based on revenue expansion (a “top-line mentality”), since price sensitivity in this segment is practically nonexistent, as long as the hotel manages to deliver what guests want.
The misuse of loyalty programs
Some hotel chains with ultra-luxury brands in their portfolio end up using these hotels to let some of their frequent-traveler clients “burn” the many points accumulated in their loyalty programs. The problem with this kind of approach is that, when a relevant portion of the guests at these hotels comes to be made up of this audience, the hotel's true client — the economic and artistic elite who pay the high nightly rates and consume the expensive services — tends to drift away from the brand.
Conclusion
The luxury and ultra-luxury market, in general, is in a period of expansion around the world. In the hotel segment, this phenomenon repeats itself and promises to be permanent, since several of the fundamentals supporting this growth appear to be here to stay.
Some of these fundamentals are the segment's resilience during adverse economic periods, its superior performance relative to other segments of the hotel market, the rising wealth of the wealthiest population, and the growing institutional presence among investors, among others. In addition, some of the characteristics of ultra-luxury hotels, such as their differentiation from the competition and their long-term value preservation, have also been increasingly attracting large investors, such as pension funds and sovereign wealth funds.
Finally, given these fundamentals, another important factor is that the market assigns lower risk to ultra-luxury hotels compared to other segments, which is reflected in lower cap rates for this category of hotel. This set of factors thus makes the risk-return profile of this type of investment quite attractive.
