Hotel investment down, even as occupancy and fundamentals recover

While there is plenty of evidence of a strong recovery in most segments of the hotel industry, the investment market is still on a dodgy footing, with the increased cost of money being the major impediment to a strengthened transaction market.

Last year's transaction volume in Germany was about €1.9bn, down about a quarter on the previous year and a whopping 60% below the average over the past 10 years. There WERE deals, but the bulk of them were individual transactions (€1.48 bn). Only four portfolio transactions were recorded.

The news from the industry was generally good. Both business and leisure travel increased significantly, occupancy rates at hotels stabilized, and overnight rates even rose. There was very strong demand for vacation hotels. Earlier fears of a wave of insolvencies failed to materialise. In particular, large hotel chains such as Motel One, Premier Inn and B&B are expanding throughout Germany.

Heading the list of last year's biggest deals was the €116m sale of the five-star Sheraton Berlin Grand Hotel Esplanade in the first quarter. The 394-room hotel was sold by Archer Hotel Capital and Event Hotels to Deutsche Finance in partnership with Cells Group. Another big deal was the purchase of the five-star A-Rosa Sylt hotel by family office Wirtgen Invest in the last quarter. The 177-room vacation hotel was sold by Deutsche Immobilien Invest and will continue to be operated by DSR Hotel Holding under its own A-Rosa brand in the future.

But for this year, investors are sitting cautiously on the sidelines, waiting to see how markets and prices develop. Heidi Schmidtke of JLL's Hotels & Hospitality group says she does not expect much fresh action until after the second quarter, while Josef Filser of Cushman & Wakefield said investors were continuing to expect rising yields and would be observing the sector for a while yet, particularly in anticipation of further interest rate rises.

The institutional sector is becoming more comfortable with investing in leisure and vacation hotels, along with classic business hotels, according to Olivia Kaussen at CBRE. She says the vacation sector has recovered fastest from the pandemic and in many cases provides secure rental income. With the boom in vacation hotels, deal activity has shifted from the big cities to holiday regions. According to CBRE, the share of transaction volume in A-cities was only 45% last year, down from over 70% in 2021.

Figures from BNP Paribas Real Estate show that the number of hotel overnight stays has effectively reached its pre-Corona level, as well as the occupancy rates (nearly 70% in October). The figures also show how popular the holiday regions - such as the Baltic Sea, the North Sea, the Allgäu, and Mecklenburg-Vorpommern - have become, as well as city tourism in the Big 3 cities of Berlin, Hamburg and Munich.

As to who's buying, the most active investor groups were institutional investors and private investors or family offices, with a combined share of 58%. They were followed by private equity investors with 19%. The big hotel operators still accounted for a tenth of the transaction volume with their acquisitions, grabbing assets to boost their brands and profile, and building up their resistance to future crises through larger critical mass, they say.

At the end of the year, peak yields had increased from 4.25% at the halfway stage for hotels with long operating leases in the Top 5 cities to 4.65%. This brought the gap to peak yields in the office space sector to under 100 bps, and to logistic assets to less than 50 bps.

And who won't be happy to see the return of the great Hessische Hof in Frankfurt, which Peakside Capital Advisors has bought and plans to renovate and re-open, with €31m in financing from Hamburg Commercial Bank? This deal was typical of last year's acquisitions in Germany, according to BNP Paribas Real Estate, in which 37% of all deals lay in that sweet spot of €25-50m for assets that might have had operating difficulties, but nonetheless had a strong image, tradition, location, and fundamentals.