Holiday hotels enticing operators and institutional investors
By Sara Seddon Kilbinger, Senior Reporter, REFIRE
More and more attractive year-round destinations are creating new prospects for operators and investors
Holiday hotels in Germany are bucking the trend, catching the eye of both operators and institutional investors alike who are keen to latch onto an asset class that is holding up well, despite the challenging economic environment.
One group which has been particularly active on the expansion front is budget chain B&B Hotels, which has opened eight new hotels in Germany in the second half of this year. It is also making a concerted push into the UK, with the aim of opening around 100 hotels there by 2035 by both developing and leasing properties and acquiring and converting others. The capital comes from majority owner Goldman Sachs.
B&B has ‘the potential to become the most represented brand in the German hotel market and displace Best Western from the number one spot’, according to an analysis by consulting firm PKF hospitality group. The French chain operates nearly 160 hotels in Germany or 500 worldwide. The plan is to operate around 400 hotels in Germany by 2030 and 3,000 properties globally. According to PKF, the British Premier Inn group is moving even faster: between 2020 and 2021, it opened 13 new hotels in Germany, according to the study.
B&B CEO Max Luscher is also expanding into vacation areas in Germany, with B&B hotels planned for Willingen and four other vacation regions. The community of Willingen in the Sauerland region, with a population of 7,000, is known as a leisure region because of its winter sports. Operations are scheduled to start there in December. The other locations are Mittenwald, Bad Kreuznach, Idar-Oberstein and Wernigerode.
Institutional investors launch luxury holiday hotel funds
Institutional investors are also getting in on the act. Engel & Völkers Asset Management and Düsseldorf-based investment manager 12.18 Investment Management are two such investors, having launched a European luxury hotel fund aimed at institutional investors earlier this year with a target investment volume of €500 million. The EV Leisure Hotel Fund 1 seed portfolio consisted of three properties: the 7 Pines Resort in Ibiza, the 7 Pines Resort in Sardinia and Roxburghe Castle in Scotland. The properties all originated from the portfolio of investment partner 12.18., which also acts as developer and operator of the luxury hotels.
‘The desire to travel is unbroken despite the pandemic,’ said 12.18 CEO Jörg Lindner. ‘The fact that many people are longing for time out in a first-class vacation destination is also shown by our business figures for the past season: 12.18. was able to increase rates at all its properties and at the same time benefit from high occupancy rates. Therefore, we are convinced that the launch of the luxury hotel fund holds great potential.’
The institutional German hotel market was worth €55.7 billion at the end of 2021, a rise of 6.9% y-on-y, according to Union Investment and bulwiengesa: ‘The growth rate has returned to the pre-pandemic average,’ said Andreas Löcher, head of investment management hospitality at Union Investment. ‘There are encouraging signs of recovery in the German hotel market, with above-average growth in segments that are traditionally considered more crisis-resilient, in the budget/economy segment, in branded hotels and also among operator models such as serviced apartments.’
However, as Löcher notes, ‘for many years now, institutional investors have been looking at the issue of vacation property, but without actually investing’. Historically, vacation hotels have been dominated by family-run businesses and investment volumes are typically relatively small.
‘New concepts and the ongoing professionalization of the operator landscape are increasingly making vacation hotels an investment target for institutional investors,’ said Martin Schaffer, managing partner MRP Hotels. ‘More and more attractive year-round destinations are creating new prospects for operators and investors.’
Ambitious expansion plans despite shaky economy
Another chain keen to expand is Hamburg-based hotel group Novum Hospitality, which signed contracts for new projects in Germany, Austria and the Netherlands last month. Two hotels in Hamburg will be operated under the Yggotel brand and one property in Passau under The Niu Hotels brand. The handover is scheduled for 2024. ‘It's a good sign for me that despite restraint in the real estate market, the hotel industry has continued to impress as an attractive investment partner and is seen as such,’ said Novum CEO David Etmenan. ‘Our goal is to secure 35 more hotels over the next four years. We're focusing on countries where we already have a presence, which is Germany, Austria, the Netherlands, Spain and the United Kingdom.’
Berlin-based group Leonardo Hotels Central Europe is making a splash in Austria. Last month, it took over eight existing properties from the Austrian Star Inn Group in Vienna, Salzburg and Linz, as well as a hotel project on Linke Wienzeile that has not yet opened. The group plans to complete 20 projects in 2022. The company is backed by the Israeli Fattal Hotel Group, which operates more than 250 hotels in Europe and Israel. Over in Munich, the Motel One chain has expanded rapidly this year, growing its portfolio by eight to 85 hotels with a total of 24,260 rooms by June 2022. According to management, another 24 hotels with around 6,340 rooms are in the pipeline.
Investment volumes down on 2021
Nonetheless, the market has still not recovered from COVID. Nine months into 2022, the investment volume was the lowest since 2013, with just €1.2 billion invested in hotel properties in Germany. According to JLL, the figure was 17% lower than the previous year. The ten-and five-year averages were undercut by 43% and 47%, respectively. Predictably, the ECB's interest rate hike is making financing more expensive and potential buyers are unwilling to pay pre-COVID prices. In addition, many sellers do not want to accept discounts and are playing for time: ‘The difficulty of pricing, with a significant gap between sellers' expectations and achievable prices, is slowing market momentum’, said Stefan Giesemann, head of hospitality at Cushman & Wakefield.
Hotel transaction volumes across Europe exceeded €7 billion during the first six months of 2022, with 319 properties changing hands, according to Cushman & Wakefield. Last year paints a better picture: European hotel transaction activity stood at €16.14 billion, 61% above the previous year, albeit still 36% below the €25.32 billion reported in 2019, according to Savills. The big shift in the investment market in 2021, and which continued this year, is that Spain now outpaces Germany in terms of transaction activity, according to Savills. The biggest hotel market remains the UK, accounting for 47% of activity in 1Q 2022. Second was Spain, where volumes increased 95% y-on-y in 1Q 2022 to total €751.5 million, 58% above the pre-pandemic quarterly average. The rising emergence of Spain has been helped by the quicker recovery in leisure demand but also by the greater availability of stock brought about by pandemic uncertainty, previously a challenge to historical activity due to the dominance of private owners.
While total European activity remains relatively subdued against pre-pandemic levels, there remains significant capital targeted at the sector, highlighting its strong longer-term fundamentals. As a result, the weight of capital has meant the shift to secondary markets has been much quicker than usual. This has already been seen in the UK with private equity money looking beyond London to grow their platforms, which has also been supported by quicker operational recovery in some regional markets, particularly those with a significant leisure demand component.
Average prime yields for leased assets across the European cities reported a 14 bps compression y-on-y in 1Q 2022, according to Savills. While average prime leased hotel yields remain 11 bps above pre-pandemic levels (1Q 2020), there are a number of markets that buck this trend. For example, average prime yields for leased assets in the UK, Iberian Peninsula, Italy and Nordic markets are at or below pre-pandemic levels. Germany, in contrast, has prime yields of at least 25 bps above 1Q 2020, a reflection of weaker operational performance and transactional activity, according to Savills.