For the entire European real estate market, the performance of luxury real estate can be described as outstanding. A research report released by the real estate brokerage firm CBRE Group Inc. on Wednesday shows that both high-end hotels and prime shopping streets have been helped by the rapid growth of the global wealthy class and the substantial wealth transfer from the baby boomer generation to their children, cushioning the impact of interest rate hikes on real estate adjustments.
Despite the heavy blow to high-end fashion, jewelry, and liquor brands due to the slowdown in Chinese tourism and consumption, as well as the increase in trade barriers, the relative strength of luxury goods is still evident. This has also affected companies like LVMH, which recently announced its worst quarterly report since 2020.
Tasos Vezyridis, Head of European Thought Leadership at CBRE, said, "Our research tells us that luxury outperforms other sectors, including in real estate, and this is set to continue." "The slowdown we experienced in 2024 appears to be short-term and concentrated in certain markets outside of Europe. Therefore, we expect London, Paris, Milan, and Amsterdam to lead the trend and influence the desires of affluent consumers globally."
The arrival of interest rate hikes has prompted institutional investors to withdraw significantly from commercial real estate as they await real estate valuation adjustments to reflect higher capital costs. However, high-net-worth investors and increasingly adventurous private equity firms have seized what seems to be a once-in-a-lifetime opportunity, either by acquiring parts of major European regions at historically low prices or profiting from rents expected to grow significantly.
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Blackstone Group, the world's largest private equity real estate investor, has been snapping up luxury stores in London and Paris, a remarkable move for the company that has been downsizing its retail real estate business for years. According to earnings calls, earlier this year, the company sold an iconic retail property in Milan for €1.3 billion (approximately $1.4 billion), one of the company's largest and most profitable deals.
James Seppala, Head of European Real Estate at Blackstone Group, said, "As luxury retailers seek prime locations for their flagship stores, demand in the industry remains resilient." "Essentially, the supply of these assets is limited, and we believe this will support their valuations in the long term."
Data from CBRE shows that luxury brands, which focus on securing the most sought-after spaces on the best shopping streets compared to brands targeting mass-market consumers, have driven rents to rise faster and more sustainably. The company's data indicates that rents on London's New Bond Street are nearly three times what they were in 2010, in stark contrast to Oxford Street, a main thoroughfare, where rents have hardly increased. The same is true in Paris, where the upscale Rue Saint-Honore has far outpaced the Boulevard Haussmann.
The actions of large hotel groups to retain their most valuable customers have led to a series of mergers and acquisitions of high-end brands, which use funds on their balance sheets for such activities. By shifting to a light asset model, which involves operating rather than owning most hotels, these funds on the balance sheets are freed up.
In the four years up to 2023, the average daily room rate for luxury hotels in London increased by 42%, outpacing the overall market's 27% increase. During the same period, luxury room rates in Paris and Milan rose by 42% and 60%, respectively, surpassing the 37% increase in the hotel markets of these two cities.
Kenneth Hatton, Head of European Hotels at CBRE, said, "For a long time, there has been a lack of understanding of luxury goods." "Major brand groups have learned from hotel and broader industry experts that luxury requires a different approach, and have therefore developed specialized departments to serve it."