Cushman & Wakefield LLP W1A 3BG · Cushman & Wakefield LLP 43/45 Portman Square London W1A 3BG Tel 020 7935 5000 Fax 020 7152 5360 20 March 2015 Alrov Property and Lodging The Alrov

Cushman & Wakefield LLP 43/45 Portman Square

London

W1A 3BG

Tel 020 7935 5000

Fax 020 7152 5360

WWW.CUSHMANWAKEFIELD.COM

20 March 2015

Alrov Property and Lodging

The Alrov Tower

46 Rothschild Boulevard

66883 Tel-Aviv, Israel

For the attention of: Roni Greenbaum

Café Royal

68 Regent Street

London

W1D 4BY

Dear Sir

INSTRUCT IONS

We are pleased to submit our valuation report, which has been prepared for financial reporting purposes.

The valuation has been carried out in accordance with your instructions. The extent of our professional liability to you is also

outlined within these instructions. We confirm that we have sufficient knowledge, skills and understanding to undertake the

valuation competently. We confirm that we do not have any conflict of interest in respect of this instruction.

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 2014.

BACKGROUND TO THE VA LUAT ION

You have told us that the valuation report is required for financial reporting purposes and that these financial statements are

being prepared in accordance with IFRS and in particular IFRS 13.

ALROV PROPERTY AND LODGING

31 DECEMBER 2014

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CUSHMAN & WAKEFIELD

BASES OF VALUAT ION The valuation and report has been prepared in accordance with the RICS Valuation Standards, 8th Edition as amended (the

“Red Book") by a valuer acting as an External Valuer, as defined within the Red Book. We confirm that the valuer conforms

to the stipulated requirements.

The valuation and report has been prepared in accordance with the IVSC International Valuation Application 1 (IVA 1).

The property has been classified as being held as an investment and has been valued on the following basis:

Hotel - Market Value as a fully-equipped operational entity, having regard to trading potential

Retail – Market Value as income producing investment let to occupational tenants

Our Principal Terms of Appointment as Valuers (within Appendix A) contain full definitions of the Red Book valuation bases.

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 (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 rational 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 to value and utilised the Sales Comparison Approach

as a test of reasonableness.

ASSUMPT IONS , DEPARTU RES AND RESERVAT IONS

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.


31 DECEMBER 2014

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CUSHMAN & WAKEFIELD

INSPECT ION

We inspected the property on 12 December 2014. The property was inspected internally and externally from ground level,

with the exception of the retail units which were previously inspected by C&W valuers on 31 January 2013. 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.

GENERAL COMMENT

Our opinion of value is based on an analysis of recent market transactions, supported by our market knowledge.

All valuations are professional opinions on a stated basis, coupled with any appropriate assumptions or special assumptions.

A valuation is not a fact, it is an estimate. The degree of subjectivity involved will inevitably vary from case to case, as will the

degree of certainty, or probability, that the valuer’s opinion of market value would exactly coincide with the price achieved

were there an actual sale at the valuation date.

The purpose of the valuation does not alter the approach to the valuation.

Property values can change substantially, even over short periods of time, and so our opinion of value could differ significantly

if the date of valuation was to change. If you wish to rely on our valuation as being valid on any other date you should consult

us first.

Should you contemplate a sale, we strongly recommend that the property is given proper exposure to the market.

We recommend that you keep the valuation of this property under frequent review. We take no responsibility for any events,

conditions, or circumstances affecting the market that exists subsequent to the date of 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.

You should not rely on this report unless any reference to tenure, tenancies and legal title has been verified as correct by

your legal advisers.

CURRENCY

The property has been valued in local currency (Pound Sterling).

PROPERTY R IGHTS VALU ED

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.


31 DECEMBER 2014

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CUSHMAN & WAKEFIELD

VALUATION

Based on the agreed to Scope of Work, and as a result of our analysis, we have developed the following opinions of Market

Value:

Value Conclusions

Property Tenure Valuation

Date

Market Value

Apportionment

Café Royal Hotel Leasehold 31/12/2014 £250,000,000

Retail Units Leasehold 31/12/2014 £65,000,000

Aggregate Value Leasehold 31/12/2014 £315,000,000

We consider a realistic period in which to conclude a sale at our valuation is 3 to 6 months.

The above valuation is £15million 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 and

£250,000,000 as at 31 December 2013.

OPERAT IONAL ASSUMPT I ONS

For the purposes of this report, we assumed that the subject will be operated as a 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 full service hotels in London.

Please note that due to the fact that the subject property is significantly under-trading when benchmarked against similar

luxury hotels in Central London, we have by necessity adjusted the trading projections to reflect those that might be expected

to be achieved by a typical average operator. We have benchmarked our trading projections against other similar hotel assets

although given the confidential nature of the information we hold on the other assets, we cannot reveal their trading results

in this report.

INFORMAT ION PROV IDED

We can confirm the following sources of information have been made available to us in order to prepare our valuation:-

1. 2014 year end trading results;

2. 2015 Budget;


31 DECEMBER 2014

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CUSHMAN & WAKEFIELD

3. Interview with Hotel Management

4. Lease from Crown Estate

5. Occupational leases (retail)

In our opinion, although the information provided has been adequate we would have expected to have received more detailed

financial accounting information for a business of this type. This is however another indicator for us to draw our conclusion

that the current operation could be further optimised to achieve trading results on a par with other similar hotels in the

market.

CONF IDENT IAL ITY

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.

DISCLOSURE & PUBL ICA T ION

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.


31 DECEMBER 2014

PAGE 6

CUSHMAN & WAKEFIELD

Signed for and on behalf of Cushman & Wakefield LLP

Ian Thompson MRICS

Partner

[email protected]

David Lusher MRICS

Partner

[email protected]

John O’Neill MRICS

Partner

[email protected]

CAFÉ ROYAL, LONDON I

EXECUT IVE SUMMARY

The following is an executive summary of the information that we present in more detail in the report.

LOCATION

The subject 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

According to PWC, the summer trading turbulence failed to halt growth in London for 2014. London saw a great start to

2014 which generally continued through the duration of 2014. RevPAR in H1 2014 saw an increase of 3.8% relative to figures

from the same period a year prior. A more subdued trading period set in during May, June and July for a number of reasons,

including the timing of Ramadan, and fewer events including no Champions League final. Rooms supply growth is expected to

sustain at around 4% overall for 2014, according to data from AM:PM. The general sentiment from hoteliers is that the new

supply is not an issue in the current market.

HOTEL INVESTMENT MARKET

On a global basis the primary markets are seeing a significantly increasing pace of deal activity, while secondary markets are

also now beginning to improve substantially. These enhanced deal volumes are mainly being driven by a more stable hotel

operating performance, but also due to increased debt market activity and many investors holding substantial cash reserves

which need to be deployed.

There has been a noticeable rise in the movement of global capital, being driven mainly by opportunistic purchases of assets

that rarely come to market, as well as investors seeking diversification, on a geographic, political and currency basis.

The lack of Trophy/prestigious sales in the London market has however led to a lack of supporting evidence to the obvious

investor sentiment that is exists. There is a substantial amount of pent up demand for London from buyers around the globe

including the USA, Middle East and Asia.

CAFÉ ROYAL, LONDON II

THE BUSINESS

The historic Café Royal Hotel partly 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.

HISTORICAL TRADING PERFORMANCE

Please find below a summary of the hotels performance in respect of 2014 and 2015 (budget):-

Year 2014 2015

Number of Rooms

Occupancy Rate

Average Room Rate

RevPAR

TOTAL SALES 20,698,570 31,597,869

BEDROOMS

Sales 13,055,995 17,557,630

Departmental Profit 8,345,472 12,640,973

FOOD & BEVERAGE

Food & Beverage Sales 5,938,465 9,603,702

Departmental Profit 1,983,109- 1,626,116

OTHER

Sales 1,704,110 4,436,537

Departmental Profit 823,921- 430,341

GROSS OPERATING INCOME 5,538,442 14,697,430

LESS EXPENDITURE

UNDISTRIBUTED COSTS 6,719,367 7,127,822

GROSS OPERATING PROFIT 1,180,925- 7,569,608

LESS FIXED COSTS

FIXED COSTS 2,502,059 3,165,418

NET OPERATING PROFIT -3,682,984 4,404,190

Historic Trading (Year Ending December)

159 159

66.00% 68.00%

349.00 444.91

230.34 302.54

CAFÉ ROYAL, LONDON III

CUSHMAN & WAKEFIELD TRADING PROJECTIONS

Please find below a summary of our five year trading projections:-

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 much 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)

C&W Projections

Year Yr 1 Yr 2 Yr 3 Yr 4 Yr 5

Number of Rooms

Occupancy Rate

Average Room Rate

Revenue Per Available Room (RevPAR)

TOTAL SALES 31,261,025 35,912,267 38,433,240 40,468,535 41,426,012

BEDROOMS

Sales 18,281,025 21,832,767 23,751,752 25,335,202 25,968,583

Departmental Profit 13,681,025 17,022,481 18,807,285 20,253,811 20,785,564

FOOD & BEVERAGE

Food & Beverage Sales 9,000,000 10,000,000 10,500,000 10,847,308 11,064,254


OTHER

Sales 3,980,000 4,079,500 4,181,488 4,286,025 4,393,175


GROSS OPERATING INCOME 18,016,025 22,185,856 24,271,744 25,921,964 26,573,191

LESS EXPENDITURE

UNDISTRIBUTED COSTS 6,950,000 7,300,909 7,528,027 7,734,004 7,888,629

GROSS OPERATING PROFIT 11,066,025 14,884,947 16,743,718 18,187,961 18,684,562

LESS FIXED COSTS

FIXED COSTS 3,911,199 4,680,351 5,315,918 5,955,295 6,050,942

NET OPERATING PROFIT 7,154,826 10,204,596 11,427,800 12,232,665 12,633,620

450.00 495.00 524.70 545.69 559.33

315.00 376.20 409.27 436.55 447.46

159

70.00% 76.00% 78.00% 80.00% 80.00%

159159 159 159

CAFÉ ROYAL, LONDON IV

SWOT ANALYS I S

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 Weakness

Very desirable central London location along

Regent Street;

Iconic building with historical ties

High quality finish throughout the premises;

Ample ancillary facilities coupled with distinctive

historic guest suites;

Unique events space located throughout the hotel

able to accommodate a variety of requirements;

Supplementary income generated from club

memberships;

Excellent transportation links

High suite ratio and large room sizes

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

Opportunit ies Threats

Capture additional market share in the five-star

segment through increased marketing and effort;

Capture a high proportion of London’s media and

creative industries

Limited brand standards, therefore able to

undertake imaginative marketing selling

opportunities

Continued new supply entering London in the 5

star segment;

London visitor numbers decrease;

Economic and/or political events may reduce

demand at certain points in the future;

CAFÉ ROYAL, LONDON V

PROPERTY PHOTOGRAPHS

Entry from Regent Street (View from Mezzanine)

Oscar Wilde Bar

CAFÉ ROYAL, LONDON VI

The Studio

Queensberry Event Room

CAFÉ ROYAL, LONDON VII

Portland Guest Room

Typical Guest Room Bathroom

CAFÉ ROYAL, LONDON VIII

View of Piccadilly Circus from Dome Suite Terrace

View of Celestine Suite

CAFÉ ROYAL, LONDON IX

Table of Contents

INSTRUCTIONS ---------------------------------------------------------------------------------------------------------------------------------- 1 EXECUTIVE SUMMARY -------------------------------------------------------------------------------------------------------------------------- 1 SWOT ANALYSIS --------------------------------------------------------------------------------------------------------------------------------- 4 PROPERTY PHOTOGRAPHS ------------------------------------------------------------------------------------------------------------------- 5

LOCATION ANALYSIS --------------------------------------------------------------------------------------------------------------------------- 11 INTRODUCTION ------------------------------------------------------------------------------------------------------------------------------- 11 LOCATION --------------------------------------------------------------------------------------------------------------------------------------- 11 RETAIL PERSPECTIVE --------------------------------------------------------------------------------------------------------------------------- 15 DEMOGRAPHIC INFORMATION ------------------------------------------------------------------------------------------------------------ 16 KEY OBSERVATIONS --------------------------------------------------------------------------------------------------------------------------- 17

PROPERTY ANALYSIS ---------------------------------------------------------------------------------------------------------------------------- 18 GENERAL DESCRIPTION ---------------------------------------------------------------------------------------------------------------------- 18 HOTEL ACCOMMODATION ----------------------------------------------------------------------------------------------------------------- 19 CONDITION & CAPITAL EXPENDITURE -------------------------------------------------------------------------------------------------- 35 PROPERTY TAX --------------------------------------------------------------------------------------------------------------------------------- 35 ENVIRONMENTAL CONSIDERATIONS ---------------------------------------------------------------------------------------------------- 35 PLANNING CONSIDERATIONS ------------------------------------------------------------------------------------------------------------- 36 STATUTORY CONSIDERATIONS ----------------------------------------------------------------------------------------------------------- 37

TENURE AND OPERATING STRUCTURE --------------------------------------------------------------------------------------- 39 TENURE ------------------------------------------------------------------------------------------------------------------------------------------- 39 OPERATING STRUCTURE --------------------------------------------------------------------------------------------------------------------- 39 HOTEL OPERATOR/BRAND ------------------------------------------------------------------------------------------------------------------ 39

LONDON HOTEL OVERVIEW ------------------------------------------------------------------------------------------------------------- 40 ECONOMY --------------------------------------------------------------------------------------------------------------------------------------- 40 CITY OVERVIEW -------------------------------------------------------------------------------------------------------------------------------- 40

LONDON HOTEL INVESTMENT MARKET -------------------------------------------------------------------------------------- 49 INDUSTRY TRENDS ---------------------------------------------------------------------------------------------------------------------------- 54

HOTEL MARKET SUPPLY AND DEMAND ANALYSIS ----------------------------------------------------------------- 61 SUPPLY ANALYSIS-EXISTING COMPETITIVE SUPPLY ----------------------------------------------------------------------------------- 61 RECENT OPENINGS AND PROPOSED NEW HOTELS --------------------------------------------------------------------------------- 66

BUSINESS OVERVIEW ---------------------------------------------------------------------------------------------------------------------------- 72 INTRODUCTION ------------------------------------------------------------------------------------------------------------------------------- 72 GUEST DEMAND ANALYSIS ------------------------------------------------------------------------------------------------------------------ 73 COMMERCIAL DEMAND ---------------------------------------------------------------------------------------------------------------------- 73 MEETING AND GROUP DEMAND ---------------------------------------------------------------------------------------------------------- 74 LEISURE DEMAND ------------------------------------------------------------------------------------------------------------------------------ 74 NATIONALITY MIX ----------------------------------------------------------------------------------------------------------------------------- 74 REVIEW OF FINANCIAL OPERATING STATEMENTS ----------------------------------------------------------------------------------- 74

INVESTMENT CONSIDERATIONS ----------------------------------------------------------------------------------------------------- 79 INVESTMENT CONSIDERATIONS ----------------------------------------------------------------------------------------------------------- 79

VALUATION ----------------------------------------------------------------------------------------------------------------------------------------------- 82 METHODOLOGY-------------------------------------------------------------------------------------------------------------------------------- 82 VALUATION INPUTS --------------------------------------------------------------------------------------------------------------------------- 83 DISCOUNTED CASH FLOW MODEL ------------------------------------------------------------------------------------------------------- 84

GLOSSARY OF TERMS AND DEFINITIONS ------------------------------------------------------------------------------------ 88

APPENDIX CONTENTS ------------------------------------------------------------------------------------------------------------------------- 90

CAFÉ ROYAL, LONDON X

CAFÉ ROYAL, LONDON 11

Location Analysis

INTRODUCT ION

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.

LOCAT ION

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.

COUNTRY 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).

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.


CITY MAP

AREA MAP


AERIAL MAP

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.


RE TAIL PERSPECT IVE

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

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.

COMMUNICAT IONS

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.

DEMOGRAP HIC INFORMAT ION

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.

The unemployment rate in the United Kingdom stood at 6.0% in October 2014.

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.

48%

21%

12%

5%

2%

2% 0%

10%

Religion

Christian

No Religion

Muslim

Hindu

Jewish

Sikh

Budddhist

Other

60%19%

13%

5%1% 2%

Ethnic Group

White

Asian

Black

Mixed

Arab

Other


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.

KEY OBSERVAT IONS

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 DESCR IPT ION

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.

Main Entrance from Regent Street


HOTEL ACCOMMODAT ION

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.


Accommodation Number of Keys Area (m²)

Portland Rooms 19 30

Mansard Rooms 27 30

Portland Deluxe 49 37

Mansard Deluxe Rooms 9 36

Junior Suite 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

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

The Studio (screening room) 40 16

Total 490 508

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


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

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.


LAP POOL

The lap pool measures 19m in length.

FITNESS CENTER


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.

TEN ROOM


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.

GREEN BAR


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.

THE GRILL ROOM


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.

THE DOMINO ROOM


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.

CAFÉ ROYAL CLUB


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

We were able to gain access to the Queensberry Suite, which fronts Regent Street. The accommodation 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.

QUEENSBERRY SUITE


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.


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.


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.


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.


Unit 4

The fourth retail unit is part of the hotel and branded as “Café 1865 at Café Royal”, we have valued this accommodation

as if it were available as a lock up shop. As such, it 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.


CONDIT ION & CAP ITAL 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 2 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.

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 2014/15 is £0.476.

ENV IRONMENTAL CONSID ERAT IONS

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.

PLANNING CONS IDERAT I ONS

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 CONS IDERAT IONS

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 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 1000 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.


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.

OPERAT ING 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 Luxury Hotels 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.


London Hotel Overview

ECONOMY

After a period of generally disappointing growth in 2011 and 2012, the UK economy showed clear signs of recovery during

2013 that have continued in the first half of 2014. The UK economy grew by 0.8% in the first quarter of 2014 compared to

the previous quarter, and was up by just over 3% on a year earlier. The recovery has now gathered real momentum. Official

GDP data is only available up to Q2 2014, but more recent business surveys suggest that the relatively strong UK recovery

is expected to continue into the third quarter. The latest Markit/ CIPS Purchasing Managers’ Indices (PMIs) for services and

manufacturing were both significantly above 50 meaning that activity in these sectors is increasing at a relatively strong pace.

The construction PMI has also been above 50 for a sustained period of time due in particular to stronger house building

activity. 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 also shown signs of recovery since early 2013, although it

remains well below pre‑crisis levels. UK GP growth is projected to average around 3% in 2014 and around 2.6% in 2015.

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.

There are 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 rising confidence and

spending can be established as in past economic recoveries.

Inflation has fallen below the 2% target, to 1.6% in the year to July 2014, and it is expected to remain at or slightly below

target in 2014‑15. 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.

A calmer situation in the Eurozone has supported financial markets since autumn 2012, while the US economy still seems to

be on the road to recovery despite some dip in activity in early 2014 due to heavy snowfall. The US remains a key market

for the UK hotels sector though its post‑crisis recovery has been far from easy. Emerging market performance has been

much less strong, however, with Chinese growth slowing (but remaining fast in absolute terms), and more marked downturns

in economies such as India, Brazil, South Africa and Turkey. The situation with Russia and Ukraine also remains an important

source of geopolitical uncertainty, as does the ongoing conflict in the Middle East. A marked increase in global oil prices could

have a significant negative impact on GDP growth.

CITY OVERV IEW

London is the capital city of England and the United Kingdom. It is the most populous city in the United Kingdom with a

metropolitan area of over 13 million inhabitants. Standing on the River Thames, London has been a major settlement for two

millennia, its history going back to its founding by the Romans. London's ancient core, the City of London, largely retains its

1.12-square-mile (2.9 km2) mediaeval boundaries and in 2011 had a resident population of 7,375, making it the smallest city


in England. Since at least the 19th century, the term London has also referred to the metropolis developed around this core.

The bulk of this conurbation forms the Greater London administrative area (coterminous with the London region.

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 and has the fifth-or sixth-largest metropolitan area GDP in the world depending on

measurement. London is a world cultural capital. 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. London's 43 universities form the largest

concentration of higher education in Europe. In 2012, London 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. The

region had an official population of 8,416,535 in 2013, making it the most populous municipality in the European Union, and

accounting for 12.5% of the UK population. London's urban area is the second-largest in the EU with a population of 9,787,426

according to the 2011 census. London's metropolitan area is the largest in the EU with a total population of 13,614,409, while

the Greater London Authority puts the population of London metropolitan region at 21 million.

London contains four World Heritage Sites: the Tower of London; Kew Gardens; the site comprising the Palace of

Westminster, Westminster Abbey, and St Margaret's Church; and the historic settlement of Greenwich (in which the Royal

Observatory, Greenwich marks the Prime Meridian, 0° longitude, and GMT). Other famous landmarks include Buckingham

Palace, the London Eye, Piccadilly Circus, St Paul's Cathedral, Tower Bridge, Trafalgar Square, and The Shard. London is home

to numerous museums, galleries, libraries, sporting events and other cultural institutions, including the British Museum,

National Gallery, Tate Modern, British Library and 40 West End theatres. The London Underground is the oldest

underground railway network in the world.

LONDON HOTEL OPERAT I NG PERFORMANCE

INTRODUCTION

The London hotel market is steeped in tradition and heritage and it is important to understand the pivotal role history plays

in this, and is essential to understand in order to begin to make any judgements on any future aspects of the market place.

The hotel industry has over time adapted itself to the current social needs and trends of the time drawing influence from

models around the world and utilising technological advancement.

Indications are that over the next decade, there will be a significant growth in personal wealth with an 85% increase in the

number of billionaires forecasted by 2022. As affluence increases then so does the desire for high end luxury brands with the

hotel segment being no exception. All indicators suggest that London is well advanced as a global location and has become a

leading economic and development centre. This growth in demand is already happening with London’s most significant luxury

brands seeing a 23.6% increase in ADR since 2005 and an increase of 36% in RevPAR. Top global indices indicate that London

is competing with New York and Tokyo in the categories of economic power, competitiveness, financial centres and GDP

(Gross Domestic Product). London is politically stable and crucially offers investor friendly regulatory frameworks and tax

regimes for investment and ease of transferring funds out of the UK.


On a global basis, hotel operating fundamentals are set to remain strong during the remainder of 2014. Most major markets

have seen hotel demand levels recover to the previous peak, although average rates still have a way to go. A longer term

force underpinning demand for hotels globally is the aging population, with high levels of discretionary income and longer life

spans. Corporate demand is shifting from baby boomers to millennials, and hotels are already re-concepting brand offerings

to cater to these “tech savvy”, fashion conscious guests.

Global demand is likely to be tempered by conference and group business, which is still well below the previous peak. This

will continue to lead to a slow uptick in profit increases for hotels which are more reliant upon this segment.

A BRIEF HISTORY

The underlying performance of the London hotel market in 2013 was remarkable. Many were concerned of a possible

hangover after the 2012 Olympic Games and a 40 year record of new supply growth in the previous 12 months. However,

in 2013 London took both of these in its stride.


In contrast to the slumps in tourist volumes noted by other host cities, hotel performance throughout London and the UK

benefitted from the worldwide exposure created by the Olympics. A steady increase in the number of tourists visiting the

UK was temporarily halted in the summer of 2012, where non-games visitors avoided the UK, perhaps due to the high prices

and perceived tourist congestion.


London experienced a slow start to 2013, but the year began to improve very quickly and delivered exceptional records for

overseas tourism. ADR strengthened despite continuing supply increases and occupancy remained high, averaging 82% in

2013. Overall, 2013 saw a 1.8% decline in ADR but a 2.2% advance in occupancy resulted in a 0.4% gain in RevPAR. Please

refer to the table below for a historic comparison:-

Occupancy ADR RevPAR

2008 79.6% £119.80 £395.40

2009 80.5% £113.90 £91.70

2010 82.3% £123.40 £101.60

2011 82.1% £133.40 £109.50

2012 80.6% £139.40 £112.30

2013 82.4% £136.90 £112.80

The above table is presented in a chart below showing occupancy between 2008 and 2013:-


The chart below shows ADR between 2008 and 2015(F):-

An alternative approach to looking at trading performance is to assess underlying profitability and it is here that many thought

London would deteriorate against 2012 in the absence of an event to match the Olympics. Although profitability fell in 2013

it was only by 2% and indeed in the final quarter profitability increased to an average of 6%, see chart below.

77.00%

78.00%

79.00%

80.00%

81.00%

82.00%

83.00%

84.00%

2008 2009 2010 2011 2012 2013 2014

(F)

2015

(F)

Occu

pan

cy

Year

London Occupancy

Occupancy

£80.00

£90.00

£100.00

£110.00

£120.00

£130.00

£140.00

£150.00

£160.00

2008 2009 2010 2011 2012 2013 2014

(F)

2015

(F)

AD

R

Year

London ADR

ADR


Profit levels are being particularly influenced by the online travel agencies, who continue to shake up the market, and while

contributing to increased volumes, also charge significant commissions. These, as well as operator fees, staffing, energy and

refurbishment costs are all factors which will require an active asset management strategy.

London deluxe and tourist hotels seem to have performed in opposite directions. Although the deluxe segment room’s yield

grew considerably by 14.2% in 2010, the budget segment experienced more modest growth of 6.7%. The following year the

results were reversed, with the top end growing by 5.6% while the bottom end enjoyed a surge of 15.4%. In 2013 the tourist

hotels growth rate of 3.7% surpassed that of the deluxe segment, which was up only slightly by 0.6%. Occupancy was the

main driver behind this. In 2011 London experienced a steep increase in the luxury segment with the opening, or re-opening,

of a number of major deluxe hotels including the Renaissance St Pancras, the Savoy, 45 Park Lane, Corinthia and the Four

Seasons amongst others. Then in 2013 the flat performance of the deluxe segment was overtaken by the 2.5% increase in

occupancy and the 1.2% increase in ARR for the tourist segment. Lower rated segments experienced slower recovery at

first, but this has gathered pace.

London boutique hotels were the only segment that managed to increase their rates considerably in 2013, largely due to

burgeoning demand for such properties. Despite a 5.1% increase in ARR, occupancy for London boutique hotels remained

fairly stable at 78.5%, resulting in a rooms yield growth of 4.6%. The boutique segment was the year’s best performer in

London, even as the top end (usually a more stable category) experienced the lowest increase in rooms yield, up by a modest

0.6% to £199.28. Regular travelers, including new segments like the “Millennials” generation, continue to choose the boutique

segment as an alternative to more traditional upscale accommodation. Hotel groups are recognising the importance of this

bracket and introducing new boutique hotel concepts.


2014 TRADING PERFORMANCE

According to PWC the summer trading turbulence failed to halt growth in London for 2014. London saw a great start to

2014 and H1 2014 RevPAR was up 3.8% over the same period in 2013. A more subdued trading period set in during May,

June and July for a number of reasons, including the timing of Ramadan, and fewer events including no Champions League

final. Rooms supply growth is expected to remain at around 4% overall this year, according to data from AM:PM. The general

sentiment from hoteliers is that the new supply is not an issue in the current market.

The Rugby World Cup is likely to have a knock‑on effect in London in 2015. PWC anticipate that the Rugby World Cup

could be a significant demand driver, pushing London hotel occupancy up further. It remains unclear how the slowdown in

the Russian outbound market will impact London overall.

PWC expect the full 2014 outturn to be similar to their previous forecast in March, and will see marginal 0.5% occupancy

growth taking occupancy overall to 83 percent; almost 3% ADR growth to £140.52 and 3.4% RevPAR growth to £116.41.

The following table sets out this forecast together with historic trading results.


The following graph details monthly trading to June 2014.

The sector still faces plenty of challenges and geopolitical uncertainty. New products and business models can sometimes

represent a challenge for existing businesses. Every so often a new trend has the potential to change the established way of

doing business and can leave some businesses ill prepared for the new order. A case in point that is relevant to the UK hotel

sector is the potential impact of so called shared economy models such as Airbnb or onefinestay.


London Hotel Investment Market

A GLOBAL OVERVIEW

On a global basis the primary markets are seeing a significantly increasing pace of deal activity, while secondary markets are

also now beginning to improve substantially. These enhanced deal volumes are mainly being driven by a more stable hotel

operating performance, but also due to increased debt market activity and many investors holding substantial cash reserves

which need to be deployed.

There has been a noticeable rise in the movement of global capital, being driven mainly by opportunistic purchases of assets

that rarely come to market, as well as investors seeking diversification, on a geographic, political and currency basis.

Please see below an illustration of the capital flows currently being seen across the Global Real Estate Investment Market

(please note that this includes both hotels and commercial real estate activity).


The above shows the average transaction price per bedroom and whilst it incorporates a broad sample of hotels the key

feature is Paris and London’s dominance in Europe.

The above chart demonstrates London’s rapid growth coming out of the recession, fuelled as mentioned above by the appetite

of international investors seeking to deploy capital in London.

The chart below details hotel investment volumes over the last 10 years, demonstrating a potential return in 2014 to levels

last seen in 2007.


HOTEL TRANSACTIONS

From year to year there tend to be relatively few transactions in London and so it is important to look back further in history

in order to ascertain the longer term investment trends. The table below sets out some of the major transactions which have

completed since 2011.


Date Property Rooms Tenure Grade Price Price/Room

Nov-14 Holiday Inn Express Cheltenham Town Centre 132 3 14,000,000 106,061

Nov-14 Travelodge Stratford 188 LH 2 18,000,000 95,745

Oct-14 Kingways Hall 170 FH 4 96,000,000 564,706

Sep-14 Premier Inn London Spittalfileds 189 3 34,700,000 183,598

Sep-14 NH Harrington Hall 200 5 89,000,000 445,000

Jun-14 Park Inn Heathrow 895 LH 3 72,000,000 80,447

Apr-14 London Marriott Hotel Grosvenor Square 237 FH 4 125,000,000 527,426

Feb-14 Umi Hotel 116 FH 2 30,000,000 258,621

Feb-14 Abba Queensgate Hotel 90 FH 4 40,000,000 444,444

Jan-14 London Marriott Edition 173 FH 5 130,000,000 751,445

Jan-14 Wyndham Grand Hotel 158 LH 5 65,000,000 411,392

Nov-13 Millenium Bridge House 348 LH 5 87,000,000 250,000

Sep-13 Grand Plaza Serviced Apartments Bayswater 198 FH 4 98,000,000 494,949

Aug-13 Metropolitan by COMO Park Lane Hotel 163 FH 5 46,000,000 282,209

Apr-13 Hilton London Wembley 361 FH 4 30,100,000 83,380

Apr-13 Travelodge Farringdon 219 LLH 2 25,000,000 114,155

Mar-13 Intercontinential Park Lane 447 LH 5 301,500,000 674,497

Mar-13 Hempel Hotel 35 FH 5 33,000,000 942,857

Feb-13 Apex City Of London Hotel 179 FH 4 18,700,000 104,469

Jan-13 HI & Staybridge Olympic Park 350 LLH 4 58,000,000 165,714

Nov-12 Holiday Inn Express Earls Court 150 FH 2 8,700,000 58,000

Oct-12 La Suite 33 FH 5 10,600,000 321,212

Sep-12 The Tophams Hotel 50 LH 4 16,000,000 320,000

Aug-12 Bayswater Inn 140 FH 2 39,500,000 282,143

Aug-12 The Garden Court Hotel 37 FH 2 6,900,000 186,486

Aug-12 Leinster Inn 84 FH 20,000,000 238,095

Aug-12 The Cavendish 230 LH 5 158,800,000 690,435

Jun-12 Knightsbridge Green Hotel 31 LH 5 17,500,000 564,516

May-12 Hoxton Hotel 208 FH 4 65,000,000 312,500

Apr-12 Hilton Hotel Southbank 281 FH 4 35,000,000 124,555

Apr-12 Crowne Plaza Shoreditch 196 FH 4 68,000,000 346,939

Mar-12 Ramada Encore London West 150 FH 2 22,000,000 146,667

Mar-12 Ramada Hyde Park 213 FH 2 52,500,000 246,479

Mar-12 Ramada Ealing 189 FH 2 21,000,000 111,111

Feb-12 Intercontinential Westminster 256 FH 5 90,000,000 351,563

Feb-12 The Kingsley by Thistle 129 FH 4 42,170,000 326,899

Feb-12 Novotel London West 630 FH 3 8,000,000 12,698

Jan-12 No 11 (Cadogan Square) 54 LLH 5 32,000,000 592,593

Jan-12 Marylebone Travelodge 113 LLH 2 15,350,000 135,841

Dec-11 Atelier Apartments 24 11,500,000 479,167

Dec-11 Holiday Inn Mayfair 195 4 155,000,000 794,872

Dec-11 The Cromwell Hotel 85 20,000,000 235,294

Dec-11 Hotel Verta 70 4 16,000,000 228,571

Nov-11 Radisson Edwardian New Providence Wharf 169 FH 4 37,500,000 221,893

Nov-11 Sanderson, St Martins Lane 354 5 192,000,000 542,373

Nov-11 Plaza Hotel, Wembley 306 FH 4 15,000,000 49,020

Oct-11 Hesperia London Victoria 212 FH 4 55,000,000 259,434

Oct-11 Ibis 348 FH 4 38,350,000 110,201

Sep-11 W London 192 4 200,000,000 1,041,667

Aug-11 Great Northern Hotel, Kings Cross 109 LH 3 12,500,000 114,679

Aug-11 Travelodge - Docklands 131 FH 3 10,470,000 79,924

Jul-11 Park Lane Mews Hotel 72 FH 5 45,000,000 625,000

Jul-11 Hoxton Hotel 208 67,500,000 324,519

Jul-11 Odeon Cinema, Leicester Square Hotel 169 70,000,000 414,201

Jun-11 Travelodge - Bondway 180 FH 3 17,400,000 96,667

May-11 Aerodrome 109 FH 3 6,500,000 59,633

May-11 10 Trinity Square 100 70,000,000 700,000

May-11 Dorset Square Hotel 37 Undisclosed #VALUE!

May-11 Regency Park 108 FH 4 Undisclosed #VALUE!

May-11 Malmaison Charterhouse Square 97 FH 4 31,500,000 324,742

Apr-11 Royal Park 48 FH 5 Undisclosed #VALUE!

Mar-11 Cadogan 65 LH 15,400,000 236,923

Jan-11 Maybourne Group (60% Stake) 463 977,419,000 2,111,056

London Hotel Sales 2011-2014


It is possible to see that despite much investment ‘chatter’ concerning hotel values in excess of £1million per bedroom there

have in fact been very few, if any transactions to have reached this level. The W Hotel achieved in excess of £1million per

key in 2011 mainly as a result of the fixed income commercial leased investments attached to the hotel.

Although valuation can be very much evidence led it also has to consider market sentiment and investor appetite. The fact

that there is no particular evidence of transactions in excess of £1million per bedroom does not necessarily mean that certain

hotels could not potentially trade at a significantly higher price given a ‘willing’ seller and a ‘willing’ buyer. The market has for

a long time suffered from a lack of willing sellers with there being very limited alternative options to invest any proceeds from

a sale.

There have been very few major London hotel transactions in the last 12 months. The Marriott Edition hotel was sold as part

of a small global portfolio and so the apportionment of the London sale price is difficult to determine. The asking price was

around £150million although we have allocated a sale price of £130million above, based mainly on the extended period of

time it took to sell this asset. This pricing equates to around £750,000 per bedroom, which is similar to the deal price of the

InterContinental Park Lane.

Swedish investor Pandox has sold the Hilton Docklands hotel at 265 Rotherhithe Street, SE16, to HIG Capital. Pandox has

agreed to sell the 378-bedroom hotel off a circa £50m guide price. Completion was on 31 March 2014. The three-acre site,

which includes Grade II listed warehouses and docks, was thought to be Pandox’s last remaining asset in the UK. It was sold

by Northern Irish property tycoon Patrick Hegarty’s firm WG Mitchell in 2005 for £65m.The property was originally planned

for residential use. However, it was developed into a hotel and let to Hilton.

The sale of the Grand Plaza Hotel in Bayswater is an interesting transaction in that it achieved around £500,000 per bedroom

which is a very full price for Bayswater and provides yet further evidence that this area of central London is finally beginning

to improve in value.

The Cavendish Hotel sold in August 2012 at just under £700,000 per bedroom, although this hotel is being re-positioned as

an aparthotel/service apartments with a substantial amount of capital investment.

In one of London’s latest high profile transactions, a Hong Kong-based private equity investment firm has acquired one of

London’s top hotels, the Marriott London Grosvenor Square, for just over £125m. We understand that Joint Treasure

acquired the 43-year long leasehold on the five-star hotel from Chicago-based hotel investor Strategic Hotels & Resorts. The

deal reflects a price of around £528,000 a room. The freehold of the 236-bedroom hotel is owned by the Grosvenor Estate.

Strategic Hotels & Resorts bought the Marriott London Grosvenor Square from an affiliate of Blackstone Real Estate Partners

for £103m in 2006. The sale means Strategic has now exited the European market. The Mayfair hotel also comprises celebrity

chef Gordon Ramsay’s restaurant the Maze Grill. The hotel, which was formerly a stately townhouse, underwent a £19m

refurbishment which was completed in 2009. It is located next to the American Embassy and a short walk from Hyde Park.

We understand from the vendor’s agents Jones Lang LaSalle hotels that:-

“The formal sale process attracted over a dozen offers from investors who are still seeking to place capital in to

London hotel real estate. Both Asian and Middle Eastern investors remain the most eager”.


INDUSTRY TRENDS

DEBT

Debt liquidity is now beginning to improve at a faster pace. New lenders and a greater level of liquidity are beginning to

compress margins and keep overall debt costs stable. As well as the established banks such as RBS, Lloyds, HSBC and Barclays,

we are also beginning to see greater activity from overseas banks to include the Bank of China, United Overseas Bank and a

number of Middle Eastern banks and US banks, such as Wells Fargo and GE Capital.

Other forms of debt financing are still being required, and 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 there to be a lease structure in place rather than lending against a trading entity.

OWNERSHIP TRENDS

It will be interesting to see the extent to which US investors continue to return to the UK and Europe during the remainder

of 2014 and into 2015. Driving the US outbound capital will be the perception of greater value in Europe as US hotel values

in primary markets are already close to peak levels, although of course this would also apply to London.

It is likely that High Net Worth investors from Asia and the Middle East will continue to become increasingly active in the

UK and European hotel sector. These investors are likely to continue in their quest to seek out trophy assets across Europe,

with locations such as London leading the way given the strong trading fundamentals. We see Chinese investors being

particularly active in London and already we are seeing some high value commercial property investment deals being

underpinned by Chinese capital.

We are also seeing increasing activity from Private Equity firms, and whilst they may be more focused on the secondary

markets which should drive better returns, London should remain a market of interest. We expect to see a continuation of


the larger corporate and M&A deals, with well capitalised firms acquiring platforms and intellectual property to speed up

growth.

We may also begin to see increasing strategic investments by global hotel companies who may decide that the best way to

grow their brand is to put their balance sheets to work in key locations.

International interest in London and London’s property market has grown significantly over the past few years. UK ownership

is still strong although it has decreased in the London market and opened up to investors from the Middle East and Far East.

This is being driven by London being considered an ‘economically and politically stable location, which continues to benefit

from favourable exchange rates.

Please see the table below which ranks by nationality, the ownership of London’s luxury hotels:-

Despite the recent surge in overseas investment, UK domestic ownership still accounts for around 35% of the capitals luxury

hotel supply. Middle Eastern investors are ranked second with 13 (23%) of the capitals luxury hotels. The Far East, Ireland,

USA and India make up 33% of supply with the balance held by various nationality types.

The Middle Eastern market is one of London’s most important having some time ago surpassed the dominance of the US

market, spending five times more than domestic visitors. Hotels favoured by Middle Eastern guests include the Dorchester,

Four Seasons, InterContinental Park Lane, Mandarin Oriental, Claridges, Ritz and the Hilton Park Lane.

Another growing global interest in London’s property market is from the Chinese with the Dalian Wanda Group completing

two luxury transactions worth in excess of £1billion. The first investment relates to the £320million purchase of a 91.8%

holding in Sunseeker International and then in a separate transaction, an investment of £700million in the Vauxhall area of

London for a luxury five star Wanda Hotel, making it their first international location outside of China. This is a very clear

example of an investor seeking to position a new brand in London. The barrier for entry for many new investors is through

new development rather than acquiring existing assets. This is in some ways forced upon them due to the lack of willing

sellers in the market.

Earlier in 2014, Hong Kong and Shanghai Hotels invested £132.5million for a 50% stake in 1-5 Grosvenor Place (other 50%

owned by the Grosvenor Estate). The site was acquired from Derwent London with the intention to develop into a mixed


use residential and luxury hotel development. The 168,000sqft property is located at Hyde Park Corner in Belgravia. It is

currently proposed that Peninsula will operate the hotel by way of a management agreement.

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 under-represented 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 Jaeger, Coast, & Other Stories, Desigual and Gap; the latter three retailers occupy the

reconfigured former Liberty building.

Prime pitch also includes the former Dickins & Jones, where redevelopment has brought in H&M Hennes, All Saints, Banana

Republic and Armani Exchange to Regent Street's prime pitch.

On the western side of Regent Street the process of change continues apace; the quality of the retail offer has improved very

significantly over much of the length of the street and the fashion offer 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. The completion of the redevelopment scheme on the north west side of the street at the end of

2004 marked a significant step forward in Regent Street's fortunes, attracting Apple's flagship store.

At the southern end of Regent Street is the Quadrant 3 scheme which also provides 54,000 sq ft of retail space, now anchored

by Whole Foods in addition to 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 towards the end of 2015. Ralph Lauren has reportedly taken

one unit for its Polo Fascia 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 according to Promis 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

‘strong’, verging on 'very strong'. Demand has been particularly high from overseas retailers and a selective lettings policy on

the part of the major landlord (The Crown Estate) has delivered a successful focus on upper middle market fashion. Recent

high profile lettings to J, Crew, & Other Stories, SuperGroup, Hollister, Anthropologie are good examples, with the latter

two retailers making their UK debuts in flagship stores on Regent Street. This approach means that Regent Street is now

well-positioned, in terms of retail offer, between the standard retail provision of Oxford Street and the very exclusive offering

of Bond Street.

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 £4m.

At end 2014, agent sources estimated prime rents in Regent Street at £650 psf Zone A. This represents no change on the

mid 2014 level of prime rents in the area with rents now 36.8% above the pre-recession peak of £475 psf ZA. This level was

based on a spring 2013 deal to Italian make-up brand Kiko, initially reported as £640. More recently, a lease re-gear for

Omega in November 2013 also achieved £640 psf Zone A, whilst in November 2012 "& Other Stories" paid £630 psf Zone

A for its prime lease.

Previous passing rents for the aforementioned stores highlight the strong rental growth witnessed on prime Regent Street in

recent years: Omega initially took its unit on assignment in 2010 at a passing rent of £456.50 psf Zone A, based on a 2009

rent review; Kiko's store was previously let to Coast which had a renewal in 2010 at £555 psf Zone A; and "& Other Stories"

unit was previously let to Mamas & Papas with a 2010 rent review settled at £500 psf Zone A. The latter two deals involved

the outgoing tenant receiving premiums to surrender their leases; Mamas & papas received £4.4m and Coast £0.5m, typical

for deals on Regent Street deals in recent years.

Demand for the street remained extremely strong at the time of our latest 2014 audit, 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.

This was already apparent on the rest of prime where traditionally rents tend to fall block by block, moving south along

prime. Indeed, in the former Dickens & Jones block, agents now placed ERVs at £625 psf Zone A, notable growth from the

£570 psf Zone A achieved in a series of 2012 rent reviews for Armani, All Saints and Banana Republic; previous 2006/07 pre-

lets of these stores achieved around £400-£440 psf Zone A.

Agents also estimated that rents for stores within the Liberty block and Hamleys block would have increased to around £575

psf Zone A. 2011/12 rent reviews in the former Liberty Regent Street building for Gap, Desigual and Cos were settled

between £440-£465 psf Zone A. In the Hamleys block, the most recent open market letting was to Juicy Couture in March

2012.


In the block north of Beak Street, lettings in 2009 to Guess and Anthropologie reflected Zone A rents of £400 psf; agents

placed achievable rents here in the order of £550 psf Zone A at the time of our 2014 audit. Whilst there has been limited

open market evidence along the top west side of the street in recent years, we were aware that a number of 2014 rent

reviews were underway at the time of our latest audit. Agents anticipated these reviews could set a new precedent for this

side of the street in the order of £575-£600 psf Zone A. This would reflect solid growth from the previous tone of around

£400 psf Zone A achieved on 2010 rent reviews for Karen Millen and former tenant Quiksilver. Longchamp took an

assignment of Quiksilver's unit in 2012, paying a sizeable premium of £4.25m.

A clear illustration of how top rents are not always confined to the traditional prime pitch in Central London areas, but are

dependent on the specifications of individuals units, was the letting of 193-197 on the west side to Hackett in May 2013 at

£640 psf Zone A; this included Hackett paying a £4m premium. This shows a vast jump from the £350 psf Zone A that was

paid by the previous tenant, Ferrari, on its lease in 2008. Two blocks immediately south, J Crew and Watches of Switzerland

took pre-lets at the W4 development. Whilst J Crew's deal remains strictly confidential, we understand that Watches of

Switzerland paid £465 psf Zone A for their flagship store in February 2013. These lettings highlight how the differentiation in

rental tones midway along the street, on either side, has ceased in recent years.

South of Beak Street, on the east side, agents placed rents in the region of £500-£525 psf Zone A, again a healthy increase

from the last known evidence of £400 psf Zone A for rent reviews for Tommy Hilfiger and Mappin & Webb in 2011. Agent

also placed the blocks between the W4 development and Burberry on the west side at around £500-£550 psf Zone A, which

would represent a notable climb from the £350 psf Zone A suggested in 2012. Immediately south of Vigo Street, agents

purport no disparity between rents on the opposing sides of the street and estimate a tone in the order of £475 psf Zone A

on the basis of a letting to Hunter Boots in April 2014. 2011 transactions to Sebago and Uniqlo achieved £340 psf Zone A.

Closer to Piccadilly, rents had also moved on with a recent July 2014 letting to Vilebrequin achieving £420 psf Zone A and

an end 2013 letting to Piquadro achieved £400 psf Zone A. Meanwhile, Kiehl's took a nearby unit on assignment, paying £1.2m

for the privilege. We have heard confidentially of nearby deals, currently in negotiation that exceed both of these levels but

they are unsigned. Once again, these show a sizeable jump from previous rental evidence in 2011 when lettings to Lotus and

Nespresso Originals achieved £260 and £270 psf Zone A respectively.

Notwithstanding the rise in rental values, Regent Street rents are still attractive compared to Oxford Street (£821 per sq ft

ITZA) and Bond Street (£1,200 per sq ft ITZA).

THE INVESTMENT MARKET

THE REGENT STREET AND WEST END PROPERTY MARKET

Agent sources placed prime retail yields at 3.25% in summer 2014 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. 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 181 – 183 Oxford Street. The property comprises

11,920 sq ft or retail let to Vision Express at £514 psf ITZA with c.11 years unexpired. The rent is reversionary in such close

proximity to the prime sector of the Street where levels are reported to be £850 per sq ft ITZA. The property sold for

2.64% or £35 million in December 2014. 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 of Old Bond Street, in February 2014, 141-142 New Bond Street sold at

2.64% net initial yield or a sale price of £75.2 million. The property is let to Fendi for a term of 13 years unexpired. The low

yield reflects the expectation of rental growth and investor demand for assets on the most expensive retail street in the UK.



Hotel Market Supply and Demand Analysis

SUPPLY ANALYS I S -EX I ST ING COMPET IT IVE 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:-

Compet it ion Map

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.

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.

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.


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.


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.


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.

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 Trave lodge’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.

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:-


The obvious omission above is the recently opened 5 star Shangri La Hotel at London Bridge.

LUXURY HOTEL PIPELINE

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 Hotel Name Brand Bedrooms Model Operator

Bond Street Claridge's Independent 203 Owner-operator Maybourne Hotel Group

Bond Street Connaught Independent 90 Owner-operator Maybourne Hotel Group

Bond Street Westbury Independent 246 Owner-operator Cola Holdings

Embankment Metropole Corinthia Corinthia 294 Owner-operator CHI Hotels & Resorts

Embankment Royal Horseguards Guoman Hotels 281 Owner-operator GLH Hotels Management (UK)

Green Park Athenaeum Independent 121 Owner-operator Ralph Trustees

Green Park Browns Rocco Forte Hotels 117 Owner-operator Rocco Forte Hotels

Green Park Dukes Small Luxury Hotels of the World 90 Owner-operator Seven Tides

Green Park May Fair London Independent 410 Owner-operator Edwardian Group

Green Park Park Lane Sheraton 303 Managed Park Lane Hotel

Green Park Ritz Leading Hotels of the World 133 Owner-operator Barclay Brothers

Green Park St James's Hotel & Club Althoff Hotel Collection 61 Managed Althoff Hotels & Residences

Green Park Stafford London by Kempinski Kempinski 105 Managed Kempinski

Hyde Park Corner 45 Park Lane Dorchester Collection 46 Owner-operator Dorchester Services

Hyde Park Corner Berkeley Independent 214 Owner-operator Maybourne Hotel Group

Hyde Park Corner Dorchester Dorchester Collection 244 Owner-operator Dorchester Services

Hyde Park Corner Four Seasons London at Park Lane Four Seasons 192 Owner-operator Premier Group WLL

Hyde Park Corner Halkin by COMO COMO Hotels & Resorts 41 Owner-operator Como Hotels & Resorts

Hyde Park Corner InterContinental London Park Lane InterContinental 447 Managed (2043) InterContinental Hotels Group

Hyde Park Corner Lanesborough - a St Regis Hotel St Regis Hotels & Resorts 93 Managed Starwood Hotels & Resorts

Hyde Park Corner London Hilton on Park Lane Hilton 453 Leasehold Hilton Worldwide

Hyde Park Corner Metropolitan by COMO COMO Hotels & Resorts 163 Leasehold (2091) Como Hotels & Resorts

Knightsbridge Belgraves Thompson Hotels 85 Managed Commune Hotels & Resorts

Knightsbridge Bulgari Hotel & Residences Bulgari 85 Managed Prime Hotels

Knightsbridge Capital Pride of Britain 50 Owner-operator Capital Group

Knightsbridge Jumeirah Carlton Tower Jumeirah Hotels & Resorts 216 Managed Jumeirah International

Knightsbridge Jumeirah Lowndes Jumeirah Hotels & Resorts 87 Owner-operator Jumeirah International

Knightsbridge Mandarin Oriental Hyde Park Mandarin Oriental 200 Owner-operator Mandarin Oriental Hotel Group

Knightsbridge Park Tower Knightsbridge Starwood Luxury Collection 280 Managed Starwood Hotels & Resorts

Knightsbridge Wellesley Preferred Hotel Group 37 Managed Bespoke Hotels

Marble Arch Grosvenor House, A JW Marriott Hotel JW Marriott 494 Leasehold Marriott

Marble Arch Hyatt Regency London - The Churchill Hyatt 434 Owner-operator Churchill Group

Marble Arch London Marriott Hotel Park Lane Marriott 157 Managed Marriott

Marble Arch Montcalm Shaftesbury Hotels 143 Owner-operator Precis Properties

Oxford Circus Langham London Langham Hotels 380 Owner-operator Langham Hotels International

Piccadilly Circus Cafe Royal The Set 159 Leasehold (2133) Alrov Hotels

Piccadilly Circus Ham Yard Firmdale Hotels 91 Leasehold (2138) Firmdale Hotels

Piccadilly Circus Le Meridien Piccadilly Le Meridien 280 Leasehold Starwood Hotels & Resorts

Piccadilly Circus Sofitel London St James Sofitel 183 Owner-operator Accor

Piccadilly Circus W London W 192 Leasehold Starwood Hotels & Resorts

St James's Park InterContinental London Westminster InterContinental 256 Managed (2032) InterContinental Hotels Group

Temple ME London ME by Melia 157 Managed Melia Hotels International

Temple One Aldwych Leading Hotels of the World 105 Managed Hemisphere Hotels

Temple Savoy, A Fairmont Managed Hotel Fairmont Hotels 268 Managed Fairmont Hotels & Resorts

Temple Waldorf Hilton, London Hilton 298 Managed Hilton Worldwide

Victoria 41 Red Carnation Group 30 Owner-operator Red Carnation Group

Victoria Goring Pride of Britain 71 Owner-operator Goring Holdings

Victoria Lord Milner Independent 11 Owner-operator Mantis Group

Source: AMPM

SUPPLY OF FIVE STAR HOTELS IN CENTRAL LONDON


The following hotels are currently on hold.

The following schemes are currently listed as speculative.

Lanesborough Hotel

The re-opening of the Lanesborough hotel is a very important consideration in terms of the future hotel trading performance

in London. As previously discussed, it is anticipated to directly compete with the subject and is scheduled to reopen in Spring

2015.

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.

Location Hotel Name Opening Bedrooms Model

Bond Street Beaumont Due 2014 73 Managed

Embankment Great Scotland Yard Due 2016 234 Leasehold (2138) / Managed

Knightsbridge Mandarin Oriental Hyde Park (extension) Due 2014 2 Owner-operator

London Bridge St Olave's Grammar School Due 2015 70 Owner-operator


Bond Street Claridge's (extension) On Hold 40 Owner-operator

Green Park May Fair London (extension) On Hold 2 Owner-operator

Temple Arundel Great Court On Hold 200 Leasehold


Green Park Arts Club Speculative 16 Owner-operator

Green Park Browns (extension) Speculative 5 Owner-operator

Hyde Park Corner Berkeley (extension) Speculative 27 Owner-operator

Hyde Park Corner Peninsula London Speculative 100 Managed

Marble Arch London Marriott Hotel Park Lane (extension) Speculative 12 Managed

Source: AMPM


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 will now open shortly as the first Mondrian hotel

(Morgans Hotel Group) outside of the USA. Industrial ocean liner cabins influence the style of the 359 bedrooms. The hotel

will be presented to a minimalist design. There will be a bar and restaurant together with a 56 screening room. However,

perhaps the hotels main attraction will be the AGUA Bathhouse & Spa which will comprise one of London’s largest spa when

it opens with the hotel. Pre-opening, double bedrooms are being offered from £165 room only and £195 after 30 September

2014.

CONCLUSION

Whilst there is an active pipeline of new hotels set to come into the market, it is difficult to see how these alone are going

to have a material impact on the trading performance.


Business Overview

INTRODUCT ION

The subject hotel was only partly opened during a significant refurbishment through June 2013. Only 38 rooms were in

operation during the capital expenditure program resulting in 2014 being the only year that offers historic profit and loss

accounts.

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.

TR IPADV ISOR COMMENTS

Tripadvisor Reviews about Café Royal date from December 2012 to January 2015. A summary of the quality and the guest

profile is outlined below.

The comments about the hotel illustrate a very consistent theme with 94% indicating excellent or very good experiences.

Guests especially like the location and service. Other positive feedback includes compliments on the décor and cleanliness of

the rooms.

82%

12%

2% 3%1%

Tripadvisor Comments

Excellent Very Good Average Poor Terrible

25%

46%

7%

22%

Guest Profile

Families Couples Solo Business


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 & MARKET ING

The sales and marketing strategy has clearly been very important both prior to the hotel reopening and during 2014.

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.

GUEST DEMAND ANALYS I S

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 the Alrov group

may have not necessarily experienced to the same extent in their other hotels.

COMMERC IAL 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.


MEET ING AND GROUP DE MAND

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.

LE I SURE 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.

NAT IONAL ITY M IX

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.

REV IEW OF F INANCIAL OPERAT ING 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 2014

as well as the 2015 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.


Year Ending 31-Dec 2014 2015 Budget

Number of Rooms

Occupancy Rate

Average Room Rate


Days Open

Total Rooms

Available Rooms

Occupied Rooms

TOTAL SALES 20,698,570 % POR PAR 31,597,869 % POR PAR

BEDROOMS

Sales 13,055,995 63.1% 340.86 82,113 17,557,630 55.6% 444.91 110,425

Expenses 4,710,523 36.1% 122.98 29,626 4,916,657 28.0% 124.59 30,922

Departmental Profit 8,345,472 63.9% 217.88 52,487 12,640,973 72.0% 320.32 79,503

FOOD & BEVERAGE

Food & Beverage Sales 5,938,465 28.7% 155.04 37,349 9,603,702 30.4% 243.36 60,401

Other Income / Room Hire - 0.00% 0.00 0 - 0.00% 0.00 0

Food & Beverage Cost 7,921,574 133.4% 206.81 49,821 7,977,586 83.1% 202.15 50,173

Departmental Profit 1,983,109- (33.4%) -51.77 12,472 1,626,116 16.9% 41.21 10,227

CLUB FLOOR

Sales 780,845 3.77% 20.39 4,911 3,050,033 9.65% 77.29 19,183

Expenses 1,545,937 198.0% 40.36 9,723 2,973,393 97.5% 75.35 18,701

Departmental Profit 765,092- (98.0%) -19.97 4,812 76,640 2.5% 1.94 482

MINOR OPERATING DEPARTMENT

Sales 374,053 1.81% 9.77 2,353 237,663 0.75% 6.02 1,495

Expenses 220,374 58.9% 5.75 1,386 45,142 19.0% 1.14 284

Departmental Profit 153,679 41.1% 4.01 967 192,521 81.0% 4.88 1,211

SPA/LEISURE/GOLF

Sales 549,212 2.65% 14.34 3,454 1,148,841 3.64% 29.11 7,225

Expenses 761,720 138.7% 19.89 4,791 987,661 86.0% 25.03 6,212

Departmental Profit 212,508- (38.7%) -5.55 1,337 161,180 14.0% 4.08 1,014

GROSS OPERATING INCOME 5,538,442 26.8% 144.60 34,833 14,697,430 46.5% 372.44 92,437

LESS EXPENDITURE

Administrative & General 2,342,526 11.3% 61.16 14,733 2,616,341 8.3% 66.30 16,455

Sales & Marketing 2,519,912 12.2% 65.79 15,849 2,663,427 8.4% 67.49 16,751

Utility Costs 953,322 4.6% 24.89 5,996 943,002 3.0% 23.90 5,931

Repairs & Maintenance 903,607 4.4% 23.59 5,683 905,052 2.9% 22.93 5,692

TOTAL UNDISTRIBUTED COSTS 6,719,367 32.5% 175.43 42,260 7,127,822 22.6% 180.62 44,829

GROSS OPERATING PROFIT 1,180,925- (5.7%) -30.83 -7,427 7,569,608 24.0% 191.82 47,608

LESS FIXED COSTS

Property Tax 1,304,454 6.3% 34.06 8,204 1,706,600 5.4% 43.25 10,733

Insurance 317,904 1.5% 8.30 1,999 312,000 1.0% 7.91 1,962

Base Management Fee (% Total Revenue) 0 0.0% 0.00 0 0 0.0% 0.00 0

Incentive Fee (% Adj. GOP) 0 0.0% 0.00 0 0 0.0% 0.00 0

Franchise Fee (% of Total Rooms) 0 0.0% 0.00 0 0 0.0% 0.00 0

Head Office 568,424 2.7% 14.84 3,575 696,000 2.2% 17.64 4,377

Rent 311,277 1.5% 8.13 1,958 450,818 1.4% 11.42 2,835

TOTAL FIXED COSTS 2,502,059 12.1% 65.32 15,736 3,165,418 10.0% 80.21 19,908

NET OPERATING PROFIT (Pre FF&E Reserve) -3,682,984 (17.8%) -96.15 -23,163 4,404,190 13.9% 111.60 27,699

Fixtures, Fittings & Effects Reserve 0 0.0% 0.00 0 0 0.0% 0.00 0

NET OPERATING PROFIT (Post FF&E Reserve) -3,682,984 (17.8%) -96.15 -23,163 4,404,190 13.9% 111.60 27,699

365

159

38303

58035

365

159

39463

58035

302.54

159

444.91349.00

230.34

159

68.00%66.00%

Historic Operating Performance


Although the hotel made a significant loss during 2014, this is projected to become a profit in 2015. Please see below.

It is our opinion that the performance of the hotel could be optimised further than 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.

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:-


C&W Projections 2015 2016 2017 2018 2019

Number of Rooms

Occupancy Rate

Average Room Rate

Average Room Rate Growth


Days Open

Available Rooms

Occupied Rooms

TOTAL SALES 31,261,025 % POR PAR 35,912,267 % POR PAR 38,433,240 % POR PAR 40,468,535 % POR PAR 41,426,012 % POR PAR

BEDROOMS

Sales 18,281,025 58.5% 450.00 114,975 21,832,767 60.8% 495.00 137,313 23,751,752 61.8% 524.70 149,382 25,335,202 62.6% 545.69 159,341 25,968,583 62.7% 559.33 163,324

Expenses 4,600,000 25.2% 113.23 28,931 4,810,286 22.0% 109.06 30,253 4,944,467 20.8% 109.23 31,097 5,081,391 20.1% 109.45 31,958 5,183,019 20.0% 111.64 32,598

Departmental Profit 13,681,025 74.8% 336.77 86,044 17,022,481 78.0% 385.94 107,060 18,807,285 79.2% 415.47 118,285 20,253,811 79.9% 436.24 127,382 20,785,564 80.0% 447.69 130,727

FOOD & BEVERAGE

Food & Beverage Sales 9,000,000 28.8% 221.54 56,604 10,000,000 27.8% 226.72 62,893 10,500,000 27.3% 231.96 66,038 10,847,308 26.8% 233.64 68,222 11,064,254 26.7% 238.31 69,587

Other Income / Room Hire - 0.0% 0.00 0 - 0.0% 0.00 0 - 0.0% 0.00 0 - 0.0% 0.00 0 - 0.0% 0.00 0

Food & Beverage Cost 5,800,000 64.4% 142.77 36,478 6,000,000 60.0% 136.03 37,736 6,228,000 59.3% 137.58 39,170 6,401,426 59.0% 137.88 40,261 6,529,454 59.0% 140.64 41,066

Departmental Profit 3,200,000 35.6% 78.77 20,126 4,000,000 40.0% 90.69 25,157 4,272,000 40.7% 94.37 26,868 4,445,882 41.0% 95.76 27,962 4,534,799 41.0% 97.67 28,521

CLUB FLOOR

Sales 2,500,000 8.0% 61.54 15,723 2,562,500 7.1% 58.10 16,116 2,626,563 6.8% 58.02 16,519 2,692,227 6.7% 57.99 16,932 2,759,532 6.7% 59.44 17,356

Expenses 1,900,000 76.0% 46.77 11,950 1,947,500 76.0% 44.15 12,248 1,996,188 76.0% 44.10 12,555 2,046,092 76.0% 44.07 12,869 2,097,244 76.0% 45.17 13,190

Departmental Profit 600,000 24.0% 14.77 3,774 615,000 24.0% 13.94 3,868 630,375 24.0% 13.93 3,965 646,134 24.0% 13.92 4,064 662,288 24.0% 14.26 4,165

MINOR OPERATING DEPARTMENT

Sales 230,000 1% 5.66 1,447 235,750 0.7% 5.35 1,483 241,644 0.6% 5.34 1,520 247,685 0.6% 5.33 1,558 253,877 0.6% 5.47 1,597

Expenses 45,000 19.6% 1.11 283 46,125 19.6% 1.05 290 47,278 19.6% 1.04 297 48,460 19.6% 1.04 305 49,672 19.6% 1.07 312


SPA/LEISURE/GOLF

Sales 1,250,000 4.0% 30.77 7,862 1,281,250 3.6% 29.05 8,058 1,313,281 3.4% 29.01 8,260 1,346,113 3.3% 28.99 8,466 1,379,766 3.3% 29.72 8,678

Expenses 900,000 72.0% 22.15 5,660 922,500 72.0% 20.92 5,802 945,563 72.0% 20.89 5,947 969,202 72.0% 20.88 6,096 993,432 72.0% 21.40 6,248


GROSS OPERATING INCOME 18,016,025 57.6% 443.48 113,308 22,185,856 61.8% 503.01 139,534 24,271,744 63.2% 536.19 152,652 25,921,964 64.1% 558.33 163,031 26,573,191 64.1% 572.35 167,127

LESS EXPENDITURE

Administrative & General 2,500,000 8.0% 61.54 15,723 2,630,492 7.3% 59.64 16,544 2,716,113 7.1% 60.00 17,082 2,792,814 6.9% 60.15 17,565 2,851,226 6.9% 61.41 17,932

Sales & Marketing 2,500,000 8.0% 61.54 15,723 2,630,492 7.3% 59.64 16,544 2,716,113 7.1% 60.00 17,082 2,792,814 6.9% 60.15 17,565 2,851,226 6.9% 61.41 17,932

Heat, Light & Power 950,000 3.0% 23.38 5,975 987,729 2.8% 22.39 6,212 1,009,355 2.6% 22.30 6,348 1,031,250 2.5% 22.21 6,486 1,045,687 2.5% 22.52 6,577

Repairs & Maintenance 1,000,000 3.2% 24.62 6,289 1,052,197 3.4% 23.86 6,618 1,086,445 2.8% 24.00 6,833 1,117,126 2.9% 24.06 7,026 1,140,490 2.8% 24.56 7,173

TOTAL UNDISTRIBUTED COSTS 6,950,000 22.2% 171.08 43,711 7,300,909 20.3% 165.53 45,918 7,528,027 19.6% 166.30 47,346 7,734,004 19.1% 166.58 48,642 7,888,629 19.0% 169.91 49,614

GROSS OPERATING PROFIT 11,066,025 35.4% 272.40 69,598 14,884,947 41.4% 337.48 93,616 16,743,718 43.6% 369.89 105,306 18,187,961 44.9% 391.75 114,390 18,684,562 45.1% 402.44 117,513

LESS FIXED COSTS

Property Tax 1,706,000 5.5% 41.99 10,730 1,740,120 4.8% 39.45 10,944 1,774,922 4.6% 39.21 11,163 1,810,421 4.5% 38.99 11,386 1,810,421 4.4% 38.99 11,386

Insurance 312,000 1.0% 7.68 1,962 318,240 0.9% 7.22 2,002 318,240 0.8% 7.03 2,002 324,605 0.8% 6.99 2,042 324,605 0.8% 6.99 2,042

Management Base Fee 625,221 2.0% 15.39 3,932 718,245 2.0% 16.28 4,517 768,665 2.0% 16.98 4,834 809,371 2.0% 17.43 5,090 828,520 2.0% 17.85 5,211

Management Incentive Fee 505,368 6.0% 12.44 3,178 726,500 6.0% 16.47 4,569 832,913 6.0% 18.40 5,238 914,614 6.0% 19.70 5,752 943,261 6.0% 20.32 5,932

Franchise Fee (% Total Rooms) - 0.0% 0.00 0 - 0.0% 0.00 0 - 0.0% 0.00 0 - 0.0% 0.00 0 - 0.0% 0.00 0

Head Office Costs - 0.0% 0.00 0 - 0.0% 0.00 0 - 0.0% 0.00 0 - 0.0% 0.00 0 - 0.0% 0.00 0

Miscellaneous - 0.0% 0.00 0 - 0.0% 0.00 0 - 0.0% 0.00 0 - 0.0% 0.00 0 - 0.0% 0.00 0

Rent 450,000 1.4% 11.08 2,830 459,000 1.3% 10.41 2,887 468,180 1.2% 10.34 2,945 477,544 1.2% 10.29 3,003 487,094 1.2% 10.49 3,063

TOTAL FIXED COSTS 3,598,589 11.5% 88.58 22,633 3,962,106 11.0% 89.83 24,919 4,162,921 10.8% 91.96 26,182 4,336,554 10.7% 93.40 27,274 4,393,901 10.6% 94.64 27,635

NET OPERATING PROFIT (Pre FF&E Reserve) 7,467,436 23.9% 183.82 46,965 10,922,841 30.4% 247.65 68,697 12,580,797 32.7% 277.92 79,125 13,851,407 34.2% 298.34 87,116 14,290,661 34.5% 307.80 89,878

Fixtures, Fittings & Effects Reserve 312,610 1.0% 7.70 1,966 718,245 2.0% 16.28 4,517 1,152,997 3.0% 25.47 7,252 1,618,741 4.0% 34.87 10,181 1,657,040 4.0% 35.69 10,422

NET OPERATING PROFIT (Post FF&E Reserve) 7,154,826 22.9% 176.12 44,999 10,204,596 28.4% 231.36 64,180 11,427,800 29.7% 252.45 71,873 12,232,665 30.2% 263.48 76,935 12,633,620 30.5% 272.11 79,457

4 5

524.70 545.69 559.33

447.46

365 365 365 365 365

159 159 159

1 2 3

159 159

70.00% 76.00% 78.00% 80.00% 80.00%

450.00 495.00

10.00% 6.00% 4.00% 2.50%

1.106 1.046 1.046 1.020

58035 58035 58035 58035 58035

40625 44107 45267 46428 46428

315.00 376.20 409.27 436.55


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.

Footfall continues to increase rising to a high over 1,750,000 million during the month of November 2012.

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.125 years and as such this does not have any detrimental

impact on value.

INCOME SECURITY AND TENANT QUALITY

Nespresso are not a proven covenant but their guarantor, 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’s covenant

strength is small though they are in profit.

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.


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 6.25%, assuming our estimate of Market Rental Value - £425 psf ITZA, in the past c. 12 months.

Confidentially, we have heard that there are 2 lettings at higher rental levels currently being negotiated at nearby units

but since these are unsigned have not reflected an increased uplift.

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.

Investment Considerations

INVESTMENT CONS IDERA T IONS

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 non-existent.

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.

POTENTIAL PURCHASERS

There are a number of potential investors were the property to be exposed to the market.

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.


EXPOSURE TIME AND MARKETING TIME

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.

TENURE

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.

OPERATING STRUCTURE

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.


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.

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.

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.

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.

Discounted Cash Flow Valuation

Property: Café Royal

Client: Alrov

Date: 31/12/2014

No of Bedrooms: 159

Risk Adjustment 0.00%

Discount Rate 6.25% 6.25%

Terminal Cap Rate 4.50% 4.50%

Growth Factor 2.00%

Year 1 2 3 4 5 6 7 8 9 10 Terminal

Net Operating Profit 7,154,826 10,204,596 11,427,800 12,232,665 12,633,620 12,886,293 13,144,018 13,406,899 13,675,037 13,948,537 309,967,499

NOP + Term Val 7,154,826 10,204,596 11,427,800 12,232,665 12,633,620 12,886,293 13,144,018 13,406,899 13,675,037 323,916,037

Running Yield 2.86% 4.08% 4.57% 4.89% 5.05%

Net Present Value £254,625,726

Purchasers' Costs at 1.50% 3,819,386

£250,806,340

£0

£250,806,340

Say £250,000,000

Per Bed £1,572,327

NOP plus Growth Factor

Less Purchasers' Costs

Less Cap-Ex

Less Cap-Ex


RETAIL VALUAT ION

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: £2,965,000 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 £4,575 per sq m (£425psf ITZA), giving

a total rental value for the retail accommodation of £2,965,000.

CAPITAL VALUE

Unless stated otherwise, yields are expressed net of notional purchaser’s costs at 5.80%.

Market Value Discount Rate 6.25% 0.00% Data Table

Term. Cap Rate 4.50% 0.00% Data Table

£250,000,000 -1.00% -0.75% -0.50% -0.25% 0.00% 0.25% 0.50% 0.75% 1.00%

-1.00% 324,000,000 317,000,000 311,000,000 304,000,000 298,000,000 292,000,000 286,000,000 280,000,000 274,000,000

-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% -0.25% 0.00% 0.25% 0.50% 0.75% 1.00%

Discount Rate 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

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

Discount Rate

Ter

min

al C

ap R

ate

-

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

350,000,000

-1.00% -0.75% -0.50% -0.25% 0.00% 0.25% 0.50% 0.75% 1.00%

Sensitivity Analysis - Subject to VP

Discount Rate Term. Cap Rate


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 4.15% which results in a net initial yield of 2.32%

The choice of yield is in line with the most recent market evidence on at 181 – 186 Oxford Street for a reversionary

prime retail property which sold in December 2014 at £35 million or 2.64% and the sale of 100 Regent Street to Hermes

Real Estate Investment Management at 3.66% or £64.6 million.

MARKET VALUAT ION

HOTEL

In our opinion, the Market Value of the long leasehold interest in the hotel 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:

£65,000,000

(Sixty Five Million Pounds)

This reflects an equivalent yield of 4.15%. It also equates to £50,741 per sq m (4,714 per sq ft).


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 AGOP - Gross Operating Profit after deduction of base management fees

Administrative and

General

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.

EBITDA Earnings Before Interest, Taxation, Depreciation and Amortisation.

F&B 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.

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.

GOP Gross Operating Profit

Insurance Cost of insuring the building and contents, liability insurance and business interruption premiums.

Internal Rate of

Return (IRR)

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.

Management Fees The cost of management services performed by a management company to operate the property

as a whole.

Net Operating Profit NOP is calculated as Gross Operating Profit less Fixed Charges.

Occupancy Calculated as the number of rooms sold divided by the total number of available rooms throughout

the period being analysed.

Other Income 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.

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 Operations & Maintenance & Energy Costs

Property Tax All taxes assessed against the property by the government.


Repairs &

Maintenance

Includes the costs associated with the payroll, materials and third party costs associated with

maintaining the property and contents at an operational standard.

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 The revenue generated through the rental of rooms and suites to guests.

Sales & Marketing Includes the costs of property specific advertising, centralised/brand advertising costs and payroll

related to Sales & Marketing employees.

Total Revenue The sum revenues (net of sales tax) from all the operational departments, including Rooms

Revenue, F&B Revenue, Room Hire and other revenue.

Undistributed

Expenses

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.

Documents

Cushman & Wakefield LLP W1A 3BG · Cushman & Wakefield LLP 43/45 Portman Square London W1A 3BG Tel 020 7935 5000 Fax 020 7152 5360 20 March 2015 Alrov Property and Lodging The Alrov