Germany’s hotel market is poised to open up for business after lockdown, while investors are already easing back into the market.
With its federal approach to managing the pandemic, some regions in the north of the country are already seeing hotels open for business, as other regions maintain restrictions. But with covid-19 figures falling, there is an expectation that the sector will soon open up. And with the upcoming Pentecost holiday, hotels are hoping for a spike in domestic tourist bookings.
“The market sentiment is getting better, at least we have some positive signs,” said Benjamin Ploppa, head of German hotels at Christie. With funds from government support schemes now being paid, most businesses have been able to navigate their way through enforced closure periods.
Jorn Fingerhuth, hotel expert at law firm Pinsent Masons, told Hotel Analyst that most hotel landlords and operators have come to an agreement over rent relief during the periods of enforced closure, based off the legal concept of disruption of contract. That led to the proposal of a 50% rent reduction during such periods, “and this is becoming the essence of court rulings – but the large funds have already come to this.” Most took the view that a few months of reduced rent were preferable to finding a new tenant. However, Fingerhuth said the most proactive agreed the reduction in return for lengthening leases, securing an additional bonus in negotiations.
According to the inventory of investible German hotels, checked annually by Union Investment and Bulwiengesa, the market saw a total value drop of around 10% last year to EUR54.3bn, after twelve years of continuous growth.
The pandemic-driven downturn wiped out the 2019 rise of 6.3%, while transaction volumes fell too, to around EUR2bn. That represents around 4% of the market, compared with close to 9% traded the year before.
“Three months of complete lockdown cast shadows on the market,” said Dierk Freitag, partner at Bulwiengesa. “During the lockdown and corona months, the number of overnight stays fell very sharply in many places – with a clear impact on the performance of the hotels”.
As elsewhere, the summer season saw good occupancy in holiday destinations, while Frankfurt and Hanover, traditionally reliant on large trade fair business, saw tougher times. According to the analysis, the budget sector held up well, with values barely changing, while in contrast luxury hotel values fell by around 14%.
The report notes that budget and select service brands are poised to expand further in Germany, with Whitbread and B&B looking for sites, while DH is looking to grow its Zleep brand and Hilton is pushing its new Motto.
Three quarters of market value is in the eleven largest German cities, says the report. Rooms in such destinations, which have a tourist and business draw, are on average worth 43% more than hotel rooms in urban centres of less than 100,000 inhabitants.
“We expect that the early movers among investors will send clearer signals towards summer to return to the stage,” said Andreas Löcher, head of investment management hospitality at Union.
Union recently declared itself back in the market, after a six-month pandemic break. In April, it agreed a EUR137m forward purchase deal on a two hotel development in Stuttgart, being undertaken by Strabag Real Estate. The 21-storey block will be completed for early 2022 opening, with Premier Inn leasing the lower floors for a hotel and Adina taking floors seven to 21 for its extended stay product.
Union will hold the asset within its Germany-focused open-ended real estate fund. “The pandemic has passed its peak, so now is the perfect time for us to re-enter the market, enabling us to secure a strong position,” said Löcher. “We are planning to expand our high-quality portfolio of some 80 hotels and are focusing on core products with resilient concepts and operators. In this context, we consider the premium budget segment and apartment hotels to be particularly interesting.”
Fingerhuth said that while there have been restructuring deals and some distress, “it has not been the same amount we feared – the banks have not pushed people.” And thanks to “fierce competition around distressed assets,” there has been little depression of prices.
Of the few distress-related deals, one saw Invesco Real Estate sign Westmont to manage a portfolio of IHG-branded hotels, after the demise of the leaseholder. And Whitbread cherry picked 13 additions to its German pipeline, as German operator Centro sought to reduce its property commitments.
According to a recent Savills market report, yields in Germany remain tight: “German cities, despite some outward pressure across more MICE-exposed markets, remain comparatively sharp owed largely to a strong domestic visitor profile and economic outlook. Leased hotel yields in Berlin and Munich, therefore, remain competitive at 3.75%.”
Ploppa confirmed: “We were active in the agency market last year, but the expectations of buyer and seller did not match – we don’t see a substantial discount, if the package is right. I think the real bottleneck is financing for new investments.” And at the smaller end of Germany’s famously fragmented hotel market, “it’s the time for owner operators”.
One other issue for those getting into the German market is the strong development pipeline in many German cities. But with development finance tight, many schemes are being delayed, while others at early stages could be redesigned: “We are working on several projects where hotels may be converted,” said Ploppa.
HA Perspective [by Andrew Sangster]: There are a lot of reasons to be optimistic about the German hotel market, both long and short term. The near-term optimism centres around the strength of the German domestic tourism economy; and the longer-term revolves around the potential for the German economy, Europe’s biggest, to move further towards an experience economy that will drive hotel demand.
Accor is the dominant chain in Germany. With more than 370 properties, it has twice as many as the next nearest chain, Best Western, and three times as many as third-placed B&B. In many ways, the grip Accor has on the German market is for it to lose.
While the German national and regional governments have poured money into certain industry sectors, hotels have not been directly bailed out. Notable among industry sectors receiving government cash are airlines with EUR11bn going to Lufthansa and substantial support for tour operator Tui, topping, including private sector fund raising, EUR4.8bn.
What has kept hotels afloat is the German equivalent of furlough – Kurzarbeit – and rent forgiveness from landlords, which has typically been at 50% (but with some conditions such as lease extensions as we report above).
Given the severity of the downturn, it is remarkable that the value of the market has dropped just 10%. No doubt the weight of money looking for deals is a support factor.
Critical to the German market is how owners adapt to the needs of operational real estate. Open-ended funds in Germany are normally only able to invest in leases and while there has been some innovation at the edges, it is difficult to see this changing significantly.
The German property fund industry has had a good pandemic, helped by regulations that require investors to give 12-months notice to cash out. As a result, there has been no liquidity crisis which has been a factor for many UK funds. And Q2 2020 saw EUR2bn put into funds, about the same as Q2 2019.
If there is going to be an operational real estate play, it is likely to come in the form of leases that allow some participation in turnover or profits of the occupier. Management contracts will remain a tough sell.
Also possible, however, is the growth of third-party management companies that lease hotels and then franchise the brand. This is the main hope for the global major hotel brand companies.
Whether it is enough for Accor to be able to retain its dominant position against Whitbread’s leased push remains to be seen.