Fast expanding Whitbread has struck its largest deal yet in the German market, signing a 403 room Premier Inn in Berlin. The off-market deal sees Schroders Capital buy a hotel and hostel block in the German capital, rejigging three properties within it.
The seller Azure Hotels has agreed a long term leaseback on its 124 room One80 Hostel within the property. The other two franchised hotels currently operating within the asset, a Holiday Inn and Indigo, will lose their branding after contracts ended, and after a refit will return to the market as one hotel, the largest Premier Inn yet in Germany.
The move comes as the German hotel market picks up after restrictions were lifted. As in other European countries, coastal hotels enjoyed a strong summer, but now city centre properties are starting to see trade lift, too.
In Berlin, the city recorded just 2.5 million overnight stays during the first half of 2021, 61% down on an already depressed 2020 figure. But, as Covid restrictions eased, some pent-up tourist demand has been unleashed. During August, hotels in the city averaged 66% occupancy, well above 2020 figures but still lagging the peaks of the previous year.
Thomas Lengfelder, who heads DEHOGA Berlin, told local media that bookings tend to be last minute, giving little ability to plan ahead.
According to figures from MKG Consulting, German cities that rely on international and business arrivals, such as Frankfurt, Berlin, Düsseldorf and Munich underperformed this summer, with RevPAR levels between 25% and 50% off previous regular trading years.
Elsewhere coastal hotels have benefited from additional staycation business. Summer revpar for German coastal hotels was reported at 13.8% ahead of pre-Covid levels, as occupancy beat 80%.
As agent CBRE noted in their most recent German market report, the country’s hotels see more than 80% of their business from domestic stays, putting them less at the mercy of the post pandemic return of international travel. A largely consensual approach to the handling of lockdown revenue losses has left owners and operators in reasonable shape. “We expect an increasing number of hotels on the market in the later part of the year,” they warned, adding: “The demand for hotels, especially in top locations, is still high and the number of assets on the market is very limited.”
We’re quite attracted by Berlin,” said head of investments at Schroders Capital, Stéphane Obadia. His team is seeing the market across Germany pick up: ‘We’re starting to see hotels doing a lot stronger in the last three months, particularly in September. There are promising signs for the rest of this month – it seems people really need to get travelling for business.”
Schroders operates a number of funds, with investors targeting different outcomes. Earlier this summer, the group gathered EUR525m of funds from a variety of investors to deploy buying operating hotels across Europe. Their first move in July was to spend EUR93m on the Grand Hotel Central in Barcelona. Obadia says this operating fund is looking for core-plus properties: “It is similar to what the Reits are doing in the US,” avoiding the recovery plays that might attract a private equity player.
The Berlin deal was acquired for the group’s Capital France Hotel fund, which despite the name already owns the Westin Palace Milan and Saint Regis Venice as well as French properties the Pullman Bercy Paris, Radisson Paris Boulogne and Marriott Monaco Cap d’Ail.
For Whitbread, the signing builds on its already strong pipeline in Germany, where it currently lists 31 hotels open, including one in west Berlin. A further six are taking bookings, ahead of opening in the coming months, while a further 37 have been signed. The group has said it will consider all ownership or rental options, as it seeks to build strong traction in the market. Speaking recently to Property Week, international managing director Mark Anderson said the German market could support 60,000 Premier Inn rooms. And he hinted that, should an acquisition portfolio come along with sites in adjacent countries such as Poland or Italy, that too could create an attractive springboard.
“We’re still very much in acquisition mode for our fund,” Obadia told Hotel Analyst, with his team having completed the off-market deal in just five weeks. “It’s not a distressed market, you have to be sensible. But we have the capacity to transact in 4-6 weeks – you need a strong team, but we know how to do it, and they are waiting for more opportunities.”
Asked if Schroders would do further deals with Whitbread, Obadia commented: “Yes, why not? We’re strong supporters of how they operate, we think they are very well positioned.”
HA Perspective [by Chris Bown]: Whitbread always stresses it will not overpay for hotels – but word reaches Hotel Analyst that it is being more aggressive right now, in Germany. And with good reason – opportunities such as the Berlin site rarely pop up, and hardly need the lengthy deliberations of an investment committee, if they are to be grabbed. Whitbread’s own team previously admitted they had, perhaps, dithered over taking the plunge into the German market. The pandemic has offered them a fast track to catch up on those lost years.
And in Schroders Capital, they may well have landed a great expansion partner. The investor has gathered its funds, has a team that can execute deals quickly, and in Whitbread has found a leasing partner it is more than confident in. Obadia was unstinting in his praise of the operator, its direct booking model and the way it appears set to replicate its UK success in a new market. But Schroders won’t just be restricting its European purchases to Premier Inn sites – it really likes the look of the European hotel market right now, at several levels. Step forward, hard-up landlords with the banks on your back – cash waiting!
Some German city markets are, according to pipeline figures, looking like they are set to be awash with new hotel product, in the next three years or so. Yes, that’s worrying at the macro level. But sharp operators will know how to handle that, and strong brands can soon outfox lesser incumbents. Expect developers, too, to flip schemes to other uses, such as student accommodation or co-living projects – also in-demand sectors in German markets.
Additional comment [by Andrew Sangster]: At its last full-year results presentation, back in April, Whitbread headed a slide on the German market: “A platform to outperform and take market share”. It is pretty clear what the company’s gameplan is.
Whitbread is an unusual beast in that it appears to be looking well beyond the next results presentation and it is focusing on long-term value creation. It believes it achieves this by vertical integration – owning the distribution, the brand, the operations and controlling the property either through direct ownership (61% as at April) or leased (the other 39%). And Whitbread really owns the distribution – just 1% of its rooms are sold through OTAs.
The company has previously shown a willingness to take apparent short-term profit hits to grow its brand. It stuck with a single price strategy under its previous CEO Alan Parker for years while analysts pointed out that money was being left on the table. Parker’s argument was that it was more important to establish trust in the brand with consumers.
The current yield management strategy is a relatively recent adoption – dynamic pricing was only launched across the estate in 2010 under then CEO Andy Harrison.
Whitbread is prepared to go against the grain, to challenge prevailing orthodoxy, if it believes in its bet. And it looks to have strong belief in the German bet and the desire to become the number one budget hotel operator in the country, a position that will most likely make it the leading hotelier there too with more time.
There are big challenges to German success but Whitbread’s willingness to take on leases is a clear advantage against any global major hotel brands wishing to stop it. Accor, as the current German market leader has the most invested here.
Alongside leases, Whitbread’s pig-headed refusal to contemplate using OTAs while a short-term cost is a long-term plus. It is hard to see any franchisor being able to resist the siren call of the OTAs – and if they tried, the franchisees would surely revolt.
The German situation will be updated at the end of this month during Whitbread’s interim results. But it will not be clear how well it is going until something like six years from now, and certainly not the last six months.