German hotel investment at €3bn sees record volume

It was long looking clear that 2014 was shaping up to be a record year for investment in the German hotel sector, but when the final figures came in, they were still a cause for surprise. According to property advisers JLL, the transaction volume of €3bn exceeded the boom years of 2006 and 2007 (both around €2.3bn) by nearly a third (30%), and well above the 10-year average of €1.2bn.

In the last quarter of 2014 alone, hotel deals of nearly €1bn were transacted. The primary driver behind the surge in investment were international investors and other internationals who had not previously been involved in the sector.

The solid German economic climate, low interest rates, the willingness of banks to finance, as well as the low euro helped to drive more investors into real assets, the brokers say. Yields of 50 to 100 basis points above comparable investment in offices meant that fund investors as well as insurers and pension funds were often adding hotels into portfolio buys to raise overall returns. (Figures from CBRE suggest the peak hotel yields fell over the last twelve months by 50 basis points to 5.25%.)

JLL says another strong year lies ahead in 2015, although a survey it took in November raised warning flags about a notable shift in sentiment ahead. “In 2015 we expect another good year for the hotel investment market, though not necessarily a repeat of record year 2014,” said JLL’s Head of Hotels & Hospitality Group Germany, Ursula Kriegl.

JLL recorded 70 transactions across the market, 15% more than in 2013. Off those, 57 were single deals – up by 70% on the previous year to €1.8bn. “In 2014, potential buyers were provided with a lot of large single assets,” said Kriegl. A dozen transactions exceeded €50m, against only three in 2013. Helping to boost the figures was the average transaction volume for single assets, which rose to €31m from €21m.

Trade in luxury hotels certainly lent the market wings, tripling in value to €965m. Among the largest deals were US REIT Host Hotels & Resorts buying 90% of the Grandhotel Esplanade Berlin for €81m from Blackstone, the sale of the Atlantic Hotel in Hamburg, and Deutsche Asset & Wealth Management acquiring the Jumeirah Hotel in Frankfurt as part of the €800m Palais Quartiers from Rabobank. Portfolio transaction volumes more than doubled to €1.2bn in 11 deals with 124 hotels and two mixed-use transactions. The largest was French hotel operator Accor, buying 67 hotels from Moor Park for €450m.

The most active buyers were institutional investors, high net worth individuals, hotel operators and private equity firms. The share of domestic buyers fell to one third from 58% in 2013. French and UK investors were responsible for €625m in volume, US investors for €116m.

JLL surveyed 600 hotel experts in November about their forward views. In contrast to a similar survey six months before, the number of optimists had fallen from 77% to 58% - noticeably more so than for Europe at large, and at odds with stated global perspectives.

Frankfurt was seen as particularly vulnerable, along with Berlin and Hamburg, along with Düsseldorf which is particularly prone to volatility given the 2-3 year cycle of some of its biggest trade fairs. Munich was seen as the most favourable market.

The investors surveyed showed clearly that their intentions are shifting, from buying existing hotels to project developments, buying refurbished properties, or converting existing properties into hotels. Ursula Kriegl of JLL believes that this is being driven by the low yields currently achievable and the difficulties, particularly in Munich, of buying existing properties.