A healthy combination of strong feeder markets, diverse capital, strong transactions volumes and stable politics is helping Germany remain Europe’s brightest star, despite some performance declines.
REPORT FROM GERMANY—Do not be worried by slight decreases in hotel performance numbers for the rest of this year and perhaps next, for German industry fundamentals remain in fine fettle, according to sources.
Stefan Giesemann, SVP of hotels and hospitality at business consultancy JLL, said investment volumes in Germany in the first half of 2017 reached €1.8 billion ($2.2 billion) driven by the strong increase in single-asset transactions. The figure, though, reflected a decline of 8% compared to the same period last year.
“Last year witnessed a number of large portfolio deals. Despite that not being the case this year, the German hotel investment market has shown strong results in the first six months,” Giesemann said.
He pointed to five recent portfolio transactions that helped to boost those numbers:
- French real estate investment trust Foncière des Murs bought the Interhotel portfolio of nine German hotels and 4,131 keys from Starwood Capital Group, in what Giesemann reckoned to be the largest transaction of 2016, despite the fact that the price was not disclosed.
- Swedish hotel firm Pandox bought a portfolio of seven hotels, four in Germany, from Invesco Real Estate for approximately €415 million ($489 million).
- Swiss Life Asset Managers Real Estate France bought 10 hotels in Germany from LFPI Hôtels Gestion in a sale-and-leaseback deal, the price of which was undisclosed.
- For an undisclosed sum, Texas-based TPG Real Estate bought Berlin-based A&O Hotels & Hostels, which has 31 leased and owned assets with more than 20,000 beds.
- Thai company U City bought Austrian hotel firm Vienna House for approximately €330 million ($389 million), which Giesemann said still counted as a German transaction because about half of its 24 assets are in Germany, including eight purchased from German investment and development firm Warimpex.
Giesemann said market sentiment remains “pretty good,” adding that “everyone is trying to get into Germany, owners and brands.”
“We will see more consolidation. International investors are interested, and operators are following,” he said. “There probably will be fewer portfolio deals, but more single-asset ones. As long as activity remains high, sentiment will remain very good.”
Florian Kollenz, chief development officer of 25hours Hotels, said his company and the industry in general benefit from a healthy transactions market, Germany’s sound economic development and the constant growth in demand that come with those. Though 25hours Hotels owns no assets, it has seven properties in Germany, as well as one in Austria and two in Switzerland.
“Since the increase in demand outpaced supply growth in the major German cities—Berlin, Munich, Frankfurt, Hamburg, Cologne and Düsseldorf—over the last five years, we saw a rise in occupancy levels as well as an (average daily rate) growth above inflation,” Kollenz said.
Strong fundamentals are behind the improvements in the market, Kollenz said.
“The strong hotel transaction market surely has incentivized developers to shift their focus from other asset classes to hotels,” he said. “Financing for hotel projects is available, hotel groups are desperately looking for new projects, and take-out investors have plenty of cash to spend. Thus, hotels can currently be sold easily on the basis of forward purchase agreements during the development phase.”
25Hours plans to open hotels in Munich and Düsseldorf in October 2017 and March 2018, respectively.
“Both (of these hotels) already changed hands prior to completion. The increased interest of real-estate developers in hotel projects is currently resulting in a stronger pipeline, which will eventually lead to a slowdown in occupancy and ADR growth,” Kollenz said.
According to year-to-date data for June from STR, Germany has posted occupancy of 69.2% (+1% over the same period in 2016), a 1.9% increase in average daily rate to €101.03 ($119.16) and revenue per available room of €69.88 ($82.42), which represents a 2.9% rise. (STR is the parent company of Hotel News Now.)
For full-year 2016, those numbers were: 68.5% occupancy (+2.2% over 2015); ADR of €99.17 ($116.97; +0.4%), and RevPAR of €67.92 ($80.11; +2.6%).
In Frankfurt, Germany’s pre-eminent convention market, occupancy for year-to-date 2017 was 68.7%, a decrease of 2.2% over the same period in 2016. ADR for the same period fell 1.9% to €124.47 ($146.81), while RevPAR dropped 4% to €85.60 ($100.96).
For full-year 2016, Frankfurt showed a 2.9% increase in occupancy to 70.3%, but decreases in ADR of 4.7% to €126.83 ($149.59) and in RevPAR of 1.9% to €89.10 ($105.09).
Year to date, Germany showed a 1% increase in supply and 2% demand growth. In Frankfurt, supply increased 4.6%, and demand grew 2.3% year to date, while for full-year 2016, the market saw demand growth outstrip supply growth 7.2% to 4.2%, respectively.
Christian Strieder, STR’s market manager for Germany, Austria and Switzerland, said the German market “is mainly driven by demand for business travel in general and trade fairs in particular.”
Strieder noted that the absence of conventions (the Achema World Forum, and Leading Show for the Process Industries) from the June calendar resulted in a drop of 15.1% in RevPAR compared with the same month in 2015. Likewise in September, the world’s largest car show (the Internationale Automobil-Ausstellung, also known as the International Motor Show Germany) did not take place, resulting in a 10.8% decline in RevPAR compared with the year before.
“For this year, the growing supply certainly has an effect as it outpaces demand growth. The increased competition puts occupancy and ADR under pressure. Otherwise, (there are) no real major external changes to the market,” Strieder said.
Debt and destinations
The strength of Germany’s primary, secondary and even tertiary cities—many of which are anchored by the presence of the headquarters of major companies—is allowing a multitude of operational and real-estate deals to flourish, according to Giesemann.
“We’ve seen an increase in the number of vacant possession sales; companies buying smaller hotels and platform deals with international companies; and the increase in private equity, owner-operators and international capital looking at Germany,” he said.
He added that there also is potential for management agreements, in a nation that largely adopts the lease structure.
“It is very liquid, with a lot of new players entering the debt space in the last few years. Debt is available from all ends, and banks are getting more familiar with hotel investment. The key players all have hotel teams,” Giesemann said.
Operators, though, must do their homework.
“Overall, we believe that it has become more difficult for hotel groups to secure projects in Germany,” 25Hours’ Kollenz said. “However, we have not been very aggressive on projects in the German market since we … already have trading hotels or developments in the six major German cities and currently are concentrating on our growth outside of the German market.”
Political stability also is helping matters—with most sources saying the German general election in September is unlikely to bring surprises—as is the weaker Euro in comparison with U.S., Hong Kong and Singapore dollars.
“Capital is coming from everywhere, although most is domestic and European. Everyone is getting more familiar with Germany, and whoever wins in September, both sides are pro-Europe,” Giesemann said.
But, he added, all this good news might still result in poorer figures.
“To be honest, most of the big-portfolio transactions have happened now, so the numbers might go down and, instead, more single-asset transactions will occur. It will level out; and with lending being liquid, I do not see any real threats. Supply is still healthy as demand is outweighing it,” Giesemann said.
Brexit also might benefit Germany, he said, although it is impossible now to quantify that. Frankfurt has been long talked about as a European financial base to rival that of London, he said.