Recovery in hotels sector continues apace, led by branded groups

As early as the Hotelforum IHIF gathering back in Berlin early May, it was clear that the hotel real estate professionals were itching to get back to their traditional Congress haunts in person, after the devastation of the last two Corona-plagued years. That event was practically at the level of the last regular event in 2019, before the curtains came down.

Last week, more than 550 hotel professionals showed up for the Deutsche Hotelkongress in the Europapark Rust near the Black Forest, organised by DFV Conference Group. It was clear from the mood of the delegates that the industry is re-booting itself for better times, even if the number of overnight stays in Germany is still well short of pre-pandemic times.

Figures for May show that hotel bed occupancy was 13% below the 2019 average, with those hotels strongly dependent on trade fairs and congresses suffering disproportionately. From an operator's perspective, the positive aspect is the higher room rates achievable as hotels try to compensate for the lower occupancy rates.

For example, the average daily rate ADR in May was 4% higher than in 2019, but revenue per available room capacity (RevPar) was a tenth lower than three years ago. Particularly in vacation regions, consumers seem to be accepting higher room rates at the moment. People want to travel and also accept rates that are now higher than those of 2019, several speakers stated confidently, and this trend looks sustainable.

Several companies presented very bullish expansion plans, among them Hilton, B&B, Motel One and Premier Inn. In particular B&B and Premier Inn (part of British group Whitbread) took advantage of the depressed sector to hugely build out their German portfolios.

Further evidence is emerging of lenders returning to the sector, with debt providers starting to view hotels as an appealing asset class again as occupancy rates pick up again across Europe. Speaking on a panel discussion organised by Real Estate Capital Europe recently, Jonathan Jay, a partner at real estate advisory firm Conduit Real Estate, said that hotel transactions have picked up massively, as problematic debt in hotel portfolios had come a long way towards being resolved, with lenders and sponsors reaching a wave of new compromises.

Speaking at the same event, Britta Dexler, a principal at US investment firm Apollo Investment Management, said that the buoyant recent transaction figures, along with stable asset values, had stymied many investors hoping for bottom-fishing opportunities when the market was at maximum desperation. Lenders were also returning to the sector. Budget hotels and resorts were proving particularly resilient, she said, and sponsors who had a long and robust track record were finding credit for development.

The evidence of recovery is underpinned by figures from both brokers Savills, and for the German market by fund giant Union Investment in new research carried out by bulwiengesa.

After a dry spell of one and a half years, the European hotel sector is definitely emerging from 2021 with renewed strength. According to Savills, €3.5 billion was invested in hotels in Q1 2022, 29.9% more than in the corona-ridden prior-year quarter, but where the trend of recovery was already becoming apparent.

The market volume of German institutional-quality hotels calculated by Union Investment and bulwiengesa was around €55.7 billion at the end of 2021, up 6.9% on the revised prior-year figure of €52.1 billion.

After a significant decline in 2020, the value of "investment-relevant hotels in Germany" rose again last year. According to Union Investment, the rate of increase of 6.9% is once again at the average level before the pandemic. According to Andreas Löcher, Head of Investment Management Hospitality at Union Investment, the German hotel market is showing encouraging signs of recovery, with disproportionate growth in the traditionally more crisis-resistant segments, in the budget/economy segment, the branded hotel industry and also in operator concepts such as serviced apartments.

In addition to the growth in new hotels and serviced apartments, many of which are branded, a key growth driver is the growing interest of institutional investors in properties outside major German cities. "Around every second hotel room in Germany is now on the radar of institutional investors", says Dierk Freitag, partner at research specialists bulwiengesa. There is still a notable reluctance to buy, as the situation in the hotel industry remains taut, with a low occupancy rate, rising operating costs and a lack of personnel, all of which are causing problems for numerous hotels. In addition, geopolitical risks are slowing down the planning and construction of new hotels.

In 2021, as to be expected, only a few hotels performed well due to the pandemic. Across Germany, RevPar was well below pre-Corona levels. However, Union Investment said it clearly sees a positive trend in its own properties and is looking for hotels with strong brand loyalty both in Germany and internationally. The focus is on existing properties in major cities with operators with strong credit ratings and sustainable concepts, as well as on vacation regions with high domestic demand. According to Union Investment, positive impetus for European destinations from international tourism could only be expected with a time lag from 2023 due to the war against Ukraine.

Based upon actual 2021 volume and 'performance effects', the value of a hotel room in Germany averaged around €138,400 (+5.7%). This is still around €10,000 less than in 2019, but 7,500 euros more than in 2020. The theoretical value range of a hotel room extends from an average of €127,500 in the budget/economy segment to €235,500 per room in the upper end of the scale.