Germany’s investable hotel market hits record high

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The size of Germany’s investable hotel market has hit a record high of €57.5b, marking an increase of almost 10% last year, according to research published this month by Union Investment and Bulwiengesa.

For 2019, Union Investment is forecasting further growth of 7%, due to the sustained high level of new-build activity in the hotel sector as well as increasing asset values.

‘Market conditions for hotels in Germany remain good,’ said Dierk Freitag, departmental head and partner at bulwiengesa. ‘Overnight stays experienced stronger growth in 2018 than at any time in the last ten years, rising by 4% compared to 2017. In the case of approximately 80% of top hotels, revenues increased compared to the previous year. In terms of value growth, our forecast from the previous year was exceeded by 4.5 percentage points,’ he added. 

Gains were particularly notable in the upscale segment, with revenue per available room of around €91.Of the total 396,400 rooms across Germany categorised as investable by Union Investment and bulwiengesa, nearly 44% are in the upscale hotel segment. 

‘The increases in value in the upscale segment are an endorsement of our strategy of boosting investment in existing properties, with the 5-star superior Steigenberger Hotel in Hamburg and the InterContinental in Berlin being current examples,’ said Martin Schaller, head of asset management hospitality at Union Investment Real Estate.

German cities with between 100,000 and 500,000 inhabitants saw a greater increase in the size of the investable hotel market last year than cities with over 500,000 inhabitants, excluding Berlin, Frankfurt, Hamburg and Munich. 

Across Germany, the average value per room in 2018 was approximately €145,200 or €4,700 higher than the previous year, according to Union Investment. The average value for a 4-star hotel room was around €165,000, while the figure for a 2-star or budget hotel was around €119,400. 

Hybrid spaces gaining ground

Co-working and co-living concepts are also filtering through to the hotel market, in particular the growing trend of developing hybrid schemes that combine hotel rooms, serviced apartments and student housing alongside office space, to combine co-living and co-working facilities, according to Heidi Schmidtke, executive vice president advisory of JLL Hotels & Hospitality Group.

‘UK-based The Collective and Dutch-based The Student Hotel, who are both developing this concept in Germany, are active in this field and I expect other operators or developers to become active as well,’ she said. ‘The beauty of these developments is that they don’t need to be in the city centre as long as there are decent transport links. They’re combining different demand drivers, which helps to fill beds. It’s mainly focused around the long-stay segment but, at the same time, they are flexible and can rent rooms by the night. I think we will see more projects like this.’

For Niels Berl, director of The Collective in Germany, the goal is to boost the group’s co-living and hotel spaces to 10,000 rooms in Germany, up from around 1,400 today, over the next four-to-five years. ‘Our three spaces in Germany – in Berlin and Frankfurt – all have a hotel component, which we operate,’ he said. ‘Our latest scheme in Canary What in London will offer 50-50 long and short stays and that’s a model we’d like to have in Germany, too.’

Ultimately, The Collective is tapping into young people’s desire for flexibility, which also translates into their living spaces, said Berl. ‘We can offer accommodation for a day or a year,’ he said, although for co-living, the minimum rental term is for three months. ‘In Germany, we are targeting ‘Big 7’ cities but also other promising cities such as Leipzig, which has a growing number of young start-ups and a big student population. Any city with more than 100,000 inhabitants can be right for us. We’re also looking at Amsterdam, Lisbon, Barcelona and Madrid.’

Düsseldorf leads development pipeline

Interestingly, the number of hotels in Germany has not increased significantly in the last ten years, according to Detlef Kaiser, director of hotels at Colliers Germany, although that is now changing.

More and more investors are buying hotels at the development stage because ‘they don’t have a choice’ given the lack of existing product coming to market, according to Schmidtke.

‘However, institutional investors would expect certain things to be in place, such as for the project to be completed within 12-18 months, the hotel to be in strong primary and secondary markets and for the operator and building permit to be in place,’ she said.

Some cities are actively trying to boost their hotel offerings, most notably Düsseldorf, which has the biggest development pipeline in the country, with plans to add another 6,000 rooms to the city’s existing 16,000 room supply within the next three years – an increase of 40%.

‘There are 33 hotels in the pipeline in Düsseldorf, mostly international brands,’ said Kaiser. ‘There are two main development clusters: near the Hauptbahnhof and near the airport. The Hauptbahnhof area is the most important cluster. About 2,700 rooms will be developed there over the next few years. About 65% of the projects in this cluster are branded. In addition, 2,000 rooms will be developed in the airport cluster, of which around 85% are branded. It is remarkable that the numbers of hotels without any brand will decrease due to the high number of branded hotel projects which will be brought to the market.’

The biggest examples are HIEX (Central Station, 455 rooms), NIU Tab (438 rooms) and NIU Hub (Airport, 427 rooms). ‘As more branded product becomes available, smaller and less centrally located hotels with a high maintenance backlog will disappear because they won’t be able to invest in the same way,’ Schmidtke warned. 

Companies and the trade fair in the city are driving demand for more hotel space. Other cities with a strong development pipeline include Hamburg (+37% by 2022) and Munich (+33% by 2022) – often on the outskirts and sometimes close to the airport, according to Schmidtke.

‘There’s still room to grow,’ she said. ‘Frankfurt also has a strong development pipeline (+33% by 2022). After some very strong years, Berlin has gone down a bit (+11% by 2022). Cities like Cologne haven’t seen much development and despite new supply entering the market, there is still a lack of trendy, boutique hotels. Even secondary locations like 

Nuremberg have a lot of supply but still show room for more.’

Düsseldorf has the highest share of international guests in Germany, more than Frankfurt or Berlin, according to Kaiser, partly because it can’t really be classed as a ‘single’ destination but rather as part of a bigger area that includes Cologne, Dortmund and Essen where, combined, there are around 20 million inhabitants, or 25% of the country. 

‘It’s very interesting to both hotel developers and investors because of the big Asian community,’ Kaiser said. ‘Asian hotel developers are particularly keen on having a presence there because of the huge Japanese population. The most active developers at the moment are the GBI AG, Kondor Wessels (Reggeborgh & Delta Projektentwicklung & Kondor Wessels), and the BEMA Group.’

Hotel transaction volumes falls

The market is shifting, though, and is becoming increasingly characterized by two trends: the purchase of properties in the development stage due to the scarcity of existing properties for sale and the absence of large portfolio transactions, according to JLL. 

In the first quarter, the transaction volume was €592m, 7% below last year’s level and 5% lower than the five-year average, according to JLL. In total, 18 single-asset deals were transacted in the period with a combined volume of around €496m, up from €458m in the same period last year, marking an increase of 8%. Eight of the sales involved properties that were still under development, according to JLL. The average transaction size amounted to €29m, which was 30% higher than the average for 2018 (1Q 2018: approx. €22m). 

One of the biggest single asset sales was that of the Marriott Hotel at the World Conference Center Bonn (WCCB) in March to Art-Invest Real Estate as part of a sale-and-lease-back deal. The purchase of the 336 room hotel was made on behalf of Art-Invest’s Hotel-Manage to Core-Fonds. The hotel was sold by Bonn-based group DevelopVisio Real Estate. Although the purchase price has not been disclosed, the hotel is likely to have sold for less than €100m, according to those who track the market.

Last year, there were around €4b of hotel deals in Germany. ‘The only issue this year is the lack of supply but I expect to see a similar deal volume this year,’ Kaiser said. (ssk)