Luxury brands keep their value

Four Seasons shareholders Cascade Investments and Kingdom Holding have agreed a stake sale that sees Cascade, backed by Bill Gates, take a majority holding in the luxury brand.  

The move, which puts a USD10bn enterprise value on Four Seasons, underlines the resilience of luxury through the pandemic, and its continuing attractiveness to investors. And it shows how there is plenty more distance for luxury brands to travel, as they spread into allied markets such as serviced residences. 

Cascade has acquired a 23.75% stake in Four Seasons from Kingdom, giving it a total shareholding of 71.25% after the deal. For Kingdom, the result is that its stake in the business reduces to 23.75%. As previously, the remaining 5% will stay in the hands of Four Seasons founder Isadore Sharp, held through his Triples Holdings vehicle.  

The price of the stake, at USD2.21bn, means the Four Seasons business has an enterprise value of USD10bn.  

Despite the selldown, Kingdom Holdings says it remains committed to supporting the business. 

Founded in 1960, today Four Seasons has 121 hotels and resorts and 46 residence projects, in 47 countries, with a pipeline of more than 50 projects. The company was listed on the New York stock exchange until 2007, when the current stakeholders successfully launched an acquisition vehicle to take the brand private – at that point, Four Seasons had 74 hotels.  

In an interview with Arab media, Kingdom CEO Talal Al-Mayman said the disposal would enhance shareholder returns, with the cash being spent on new investments, an increase in some of Kingdom Holding’s existing positions in other investments, and could be used to pay down debt. At the end of 2020, Kingdom reported a quarterly loss of USD52m, but has returned to profit in the subsequent quarter. 

Giordano Nicoletti, senior director in CBRE’s hotel team, points to four reasons why luxury hotels have survived the pandemic better than most. Luxury hotel customers, he notes, have largely felt little damage personally from the pandemic. The properties generally have large outdoor spaces, which they have exploited to keep business alive.  

For clients, they have been able to pivot towards more local and national client bases, who have driven rather than flying. “These new clients have discovered these hotels, and we believe this can be a long term shift.” And finally, hotels have been able to redeploy ancillary spaces, opening up new food and beverage offerings. 

Adam Maclennan, head of UK & Ireland at consultants PKF confirmed: “The sector seems to be very resilient – there is a lot of increase in supply, but growth in global wealth means there’s an increase in demand. The rich have got richer in the pandemic.”  

Colleague Christian Walter believes further segmentation is likely: “There will always be a top-notch luxury segment – we will probably see a growing uber luxury segment that sets itself apart from the ‘conventional luxury’ segment. For example, compare Mandarin Oriental or Bvlgari in Dubai with Fairmont or Sofitel in Dubai; the ADR of the former two is probably a multiple of the ADR of the latter two. The gap is growing.” 

CBRE often assists owners in hotel brand selection, and Nicoletti says the luxury end of the market is an increasingly competitive environment as the brands look to grow. “It’s becoming more frequent to have a specific agreement,” which will typically include a brand contribution either in the form of key money, or a minimum performance guarantee. And, as the competition get stiffer, so the key money is now being paid in part prior to opening.  

Many city markets will only have capacity for one of each luxury brand – and if the opportunity arises, then so does the will to win. “These chains, if they see a location as the right opportunity, they will go all in. Other things we are seeing, is very creative and competitive levels for the base and incentive fees. But what is not affected, is the length of the agreement”, as both parties need the time to recoup their initial commitment.  

PKF’s Maclennan says brand selection starts with those brands currently not represented in a location. “There’s not usually room for more than two or three in every market – London and Dubai might be the exception to that.”  

And he added the conversation is not just about the numbers: “A lot of investors in the luxury hotel business are ultra-high net worth individuals, and they’re not just looking at the bottom line – the brand is trying to develop a relationship with the owner.”  

One other big attraction for a developer in heading into the luxury space, says Malcolm Kerr, managing director of Horwarth HTL UK, is serviced residences, which are growing in prominence. “That’s critical to a significant proportion of new projects – sales can underwrite the development.”  

Kerr says the brands used to be wary of strata title sales, and the potential quality liabilities. But with developers keen to use unit sales to offset the cost of the adjacent hotel, they have grown to love them.  

Four Seasons now has 46 residence projects, while Rosewood has just announced its first stand-alone branded residence project, in Florida. Developer Ronto Group and backer Wheelock Street Capital will develop a 65-unit block for opening in 2025, which will feature full hotel amenities and a private restaurant. Around half of Rosewood’s signed hotel pipeline features co-located residences.  

“If you’re a developer, you need to get the project off the ground,” says Kerr, and the halo effect of a signed brand puts banks at ease, while also helping to drive serviced residence sales. International investors from another continent will usually be comfortable buying an apartment, if it is headed by a brand they know. “There is clearly potential for additional upper upscale branding on residences.”  

But Maclennan warned branded residences, while a boost to the real estate value, “are not guaranteed – they won’t work everywhere.”  

IHG, meanwhile, has tagged luxury as the route to greater returns, launching a new luxury collection brand, Vignette, off the back of the pandemic. CEO Keith Barr commented as the brand was launched in August 2021: ““We’ve been strategic with the enhancements we’ve made to our luxury and lifestyle portfolio in recent years – we’ve built on the heritage and global success of our InterContinental brand, with the rapid international expansion of Kimpton and Hotel Indigo, and acquisitions of Six Senses and Regent.”  

HA Perspective [by Andrew Sangster]: Luxury hotels have often been derided as trophy assets where return on ego matters more than return on investment. But this same market dislocation has also delivered outsized returns for the smartest (or luckiest) investors. 

Anyone that doubts luxury can be a serious business should take a look at the LVMH market cap – which at almost EUR320bn dwarfs not just the listed hoteliers but the OTA giants too. 

But even at LVMH, which now owns Belmond, it has been a difficult period. The division that includes hotels – “other activities” – lost EUR269m in the first six months of 2021. LVMH commented that “travel retail and hotel activities [were] still held back by the limited recovery in international travel”. 

And this is the nub of the matter. Without a meaningful recovery in international travel, luxury hotels in gateway cities are going to struggle. Resorts, if located in territories where there is either good domestic demand or are accessible to inbound travellers, are faring much better. 

The international travel recovery piece is still bleak. IATA, the international airline organisation, said that international passenger demand in July 2021 was 73.6% below July 2019. This was an improvement on June, which was down 80.9%, but it remains a dire situation. 

It would be brave to forecast international travel is going to rebound during 2022. At Hotel Analyst we are on extreme edge of optimism when suggesting 2023 is when it comes back in advanced economies (slower vaccine roll-outs mean low-income countries are likely to be a year, possibly two or three, behind). 

Even for advanced economies there will be divergence. The trans-Atlantic routes look likely to make it earlier than routes to Asia Pacific, countries that generally have had a much more sluggish vaccine rollout.  

This all leads to a situation where luxury hotels in say, Australia, will not enjoy much of a recovery until 2023 while London, New York or Paris may begin to see a rebound next year. And, of course, this is all dependent on no further Covid restrictions. 

There has never been a bigger market dislocation as the current one for luxury hotels. This presents opportunity as well as challenge.  

It may be that Kingdom Holdings is exiting Four Seasons, at what looks to be a good price, to engage with these opportunities. It may, of course, just be licking its wounds after Prince Alwaleed’s run-in with Mohammed bin Salman – MBS – the crown prince of the Kingdom of Saudi Arabia. 

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