Buoyant mood - but falling trend - in German hotel market

As we reported in a recent article in REFIRE, things are cooling down in the market for German hotel investments – at least in respect of portfolio deals, although interest in individual hotel properties remains buoyant.

Our assessment of the market seems to be underpinned by a new “Investment BAROMETER” reading published this month by online trade magazine hospitalityInside.com and giant fund manager Union Investment. Their proprietary index, now in its sixth year, shows a fall in investor enthusiasm, resulting in a drop of 5.9% in their Investment BAROMETER Fall 2018 index, with a sub-index for the privately-owned hotels segment falling less sharply, by 3.9%.

Professional hotel investors visiting the recent Expo REAL in Munich who were surveyed for the study indicated a reasonable level of satisfaction with their businesses, with 79% rating their current situation as ‘good’ or ‘very good’. The rest were mainly ‘satisfied’ with their situation.

Looking ahead, 69% responded that prospects were ‘good’ or ‘very good’, down from 80.6% in 2017. A total of 9% of respondents expected things to get worse over the next six month, down from 0% (zero) last year. The expectation sub-index fell correspondingly by 6.1%.

On hotel developments, after several buoyant years, the "very good" expectations have fallen from 22% to 12% and the "good" expectations from 56% to 39%. A total of 42% expressed themselves "satisfied", while the number of “unsatisfied” survey participants decreased from 8% to 6%. As a consequence, the Development sub-Index saw an overall fall of 6%.

When asked about operations, the participants are also more cautious than a year ago. Only 57% expect a "good" to "very good" development of turnover (2017: 67.7%, one third expects “satisfying” turnover (last year: 29%). A total of 9% expect a “worse” development (last year: 3.2%). Overall, the Operations sub-Index saw a fall of 4.8%.

Asked about transaction volumes, 33% see the rate of decline in volumes continuing, while 42% expect to see the rate of decline accelerating.

The main reasons given for lower transaction volumes are: reluctance of sellers to sell due to lack of adequate alternatives, and the disappearance of the rate of return spread in comparison to other types of investment class. Also given as grounds for caution was the advanced state of the market cycle, and the lack of supply of new properties coming onto the market.

According to Andreas Löcher, Head of Investment Management Hospitality at Union Investment Real Estate, “Hotel real estate with its long-term lease agreements still promises a steady interest return on capital invested. So, large numbers of investors are averse to selling and prefer to profit sustainably from their rental income. Additionally, increasing construction and property costs are also a reason to expect further decreasing transaction volumes. Investors who have developed strategic partnerships, understand developments, and have a deep product understanding for the hotel industry, are nonetheless well positioned for the medium term."

Transaction volume in hotels fell in 2017 over the previous year’s recorded €5.2bn, when 10.2% of properties were sold. In 2017 this figure dropped to 8%, and Löcher’s colleague Martin Schaller, Union Investment’s head of Asset Management Hospitality, predicts the number of transactions will continue to drop.

“Property holders’ willingness to divest themselves of hotel assets has fallen significantly compared to the prior year. The decrease in product availability and rise in prices are reflected in declining transaction figures. Hotels nonetheless remain a highly liquid asset class capable of delivering above-average returns,” he said.

"During this market phase, a sophisticated, long-term investment strategy is required. Options here include forward deals and targeted improvements to existing properties that boost their value, assuming they are to be held in the portfolio for an extended period."

Union Investment also expects Germany's institutional hotel market will grow about 5% this year, corresponding to last year’s level. “Many existing properties are getting rather long in the tooth, which is driving the development of new hotels across all segments and putting huge pressure on privately run hotels. Real estate for temporary living, such as apartment hotels, is likely to profit disproportionately from continuing strong growth in 2018,” said Schaller.