In most asset classes, constraint is a problem to solve. In European luxury hospitality and branded residences, it is increasingly the point. Across gateway cities from Paris to Milan, London to Rome, a tightening web of planning restrictions, heritage protections and physical space limitations is serving as a deterrent to some. For some others however, it is a moat.
Why
At a time when construction costs remain elevated - Eurostat data shows construction input costs across the EU surged post-2021 and have only partially stabilised - and prime urban land is scarce, refurbishment and adaptive reuse of older buildings have become strategic routes to value creation.
Jay Ahluwalia, principal director at developer Dominus notes: “The modern traveller wants more from their travel experiences. They want to stay somewhere that is the experience itself and heritage has got a great role to play here.”
And as luxury becomes even more and more about experience, and planning/space considerations come more to the fore, the stars are aligned for history to step is as a differentiator and drive value.
For Angelo Maccaferri, global head of business development at Maybourne Hotel Group, the reasoning is blunt: supply and demand. Many European cities have limited central land availability, strict conservation rules and, in some cases, hotel licensing caps linked to overtourism concerns.
“All of us luxury operators are looking for prime central locations in key gateway cities and that’s very difficult to find, especially in smaller European city centres like Milan, Geneva and Zurich,” he says.
Cash cow
What appears restrictive though also spells value. In Paris, Maybourne acquired the former French Ministry of Defence, converting it into The Maybourne Saint-Germain, an ultra-luxury hotel with very lucrative branded residences.
In branded residences, the scarcity economics become even clearer. Maybourne’s Paris residences have reportedly achieved pricing of nearly €70,000 per square metre, a result Maccaferri credits to both brand and product scarcity.
“In cities where there’s so little branded residence supply, the sky’s the limit,” he says.
The dynamic mirrors hotel performance. In supply-constrained luxury markets such as Milan, ADRs remain among the highest in Europe, supported by limited new pipeline and high barriers to entry.
And the pivot to heritage is not purely aesthetic or driven by the experiential trend. It is also increasingly tied to sustainability. When considering development, retention of existing structures materially reduces embodied carbon compared with demolition and rebuild.
Ahluwalia sees this as a growing driver. “As the sustainability story becomes ever more important, the retention of buildings will become of heightened importance.” he says.
Additionally, Ahluwalia notes capital partners react really well to these types of projects. “They have almost all the efficiency of modern ground-up projects, but they have a more defensible marketing strategy.”
Defensibility is the operative word. As hospitality becomes increasingly mainstream, competition for prime luxury assets has intensified. Prices have risen, capex has increased and returns are under pressure. It is in this context that heritage becomes insulation as it produces assets that cannot easily be replicated.
“I think for sure, when you look at it in the context of Europe, constraint and scarcity will be defining features. Europe has very saturated city centres with a lot of historical significance, there are very few opportunities to develop and it takes a long time to do so. Demand grows while supply is very much constrained,” Maccaferri says.
Making it work
But it’s not all smooth sailing both Maccaferri and Ahluwalia warn. Historic buildings can be difficult to subdivide and expensive to develop. Selectiveness is also a must, when choosing both projects and partners.
“You have to focus on the underlying business model that supports the asset, not purely the appeal of a heritage building”, Ahluwalia says, warning that balancing heritage and efficiency is critical.
“You need to couple your brilliant ideas about what a historic space could become with the right level of efficiency to figure out if there's another element to the building where you can be really efficient, for example how you lay out the rooms. It’s about making sure there's the right balance of history and the ability to make the most of revenue generating spaces,” he says.
“If it can add without subtracting, that’s where you find the balance,” he adds.
Close collaboration with conservation bodies and local authorities is also essential, Ahluwalia says, spotlighting Dominus’ Lost Property St Paul's London, a 150-room boutique hotel built behind a retained façade near St Paul’s Cathedral, a project made complex by the historical façade. Bu while the façade retention added complexity and cost, it also added identity.
For Maybourne, pragmatism is equally central as ultra-luxury assets require patient capital. “These assets need time to grow, stabilise and breathe. You need investors with a long-term vision,” Maccaferri says.
However, he highlights the importance of being willing to compromise. “Heritage constraints and space considerations mean you might not end up having the hotel exactly as you would if it were a completely ground-up development,” he says.
But the payoff is differentiation as a result of history unique from building to building. It seems that in an increasingly crowded market, authenticity, physical uniqueness and a story grounded in heritage may be the ultimate premium drivers.