German holiday hotels see yields rising back to pre-COVID levels

While hotels have been a notable casualty of the coronavirus pandemic, not all segments of the market have been equally badly hit. The market for leisure and holiday hotels has held up well, while constraints on business travel have put city business hotels under sometimes unsustainable pressure.

City hotels have experienced the most suffering, due to the lack of trade fair visitors, business travellers and international guests. According to Martin Schaffer, managing director of consultancy MRP Hotels, the big cities including Berlin, Hamburg, Frankfurt, Munich and Vienna, continue to operate in crisis mode.

"International guests, trade fairs, congresses and events were absent or reduced to a minimum in 2021 until the summer. This was massively reflected in the number of overnight stays, which over the summer were still on average around 50% below 2019 and only slightly above 2020," Schaffer said, indicating that he's not expecting a turnaround anytime soon.

By contrast, domestic tourism into tourist regions has seen a boost from the COVID pandemic. "We see that the Baltic Sea region in particular is booming and large hotel complexes are being planned, with significantly more rooms than is usual in other tourist regions such as Bavaria or the Black Forest, for example," he said.

A recent study on the sector confirms the greater enthusiasm for the holiday hotel sector. The hospitalityInside Investment Barometer, carried out at the end of 2021 by consultancy holidayInside and fund giant Union Investment showed the index rising to a level not seen since 2019.

Core properties were a clear winner from the study, with 41% of respondents expecting a return of yields as early as this year. For core-plus properties, the majority expect a return of yields in 2023, for value-add hotels even later. Yields in leisure hotels are expected (by 60%) to return to pre-crisis levels for core and core plus properties as early as 2022. Value-add business hotels will only manage this after 2023, according to 65% of respondents.

Andreas Löcher, head of investment management for hospitality at Union Investment, says: "The majority of respondents expect an earlier recovery of holiday hotels than the business hotels. This also corresponds to our assessment. Hotels, especially on the German North Sea and Baltic Sea, have achieved record results in terms of RevPAR this year (2021). In our view, the scarcity of staff as a resource and sharply rising operating costs are the biggest challenges hoteliers now face in the short to medium term."

Within Germany, traditional holiday spots have actually seen some of their occupancy rates performing even better over the last two COVID years than in the - itself record-breaking - year of 2019. In August of last year, according to Federal Statistics Office Destatis, the number of overnight stays was 3.1% below the level of August 2019 at about 56 million, but this was up 13% on the first coronavirus year of 2020. Accounting for only domestic visitors, the number was even higher than in 2019.

Julia Scharf of Sotheby's International Realty for Sylt/Schleswig Holstein, which traditionally markets top-end properties, says her partners are detecting a clear trend "back to Germany" when it comes to taking holidays. "Many clients who used to move around the Mediterranean before the pandemic are now being drawn back to their home countries. The decisive factor is the easier accessibility in the face of possible travel restrictions, greater flexibility and more freedom."

A side benefit of this is that many popular coastal destinations are taking advantage of their current popularity to further improve their infrastructure, reinforcing the positive effects that they're enjoying and offering even better holiday experiences. This is being noticed by investors, according to a new study just brought out by MRP Hotels in conjunction with Engel & Völkers Asset Management, which highlights how investors are more clearly delineating between different hotel segments.

Anton Tjoonk, managing director at Engel & Völkers Asset Management, says that "while investors are still hesitant about city hotels, the holiday hotel industry is performing much better. Investments in holiday hotels are increasingly attractive." He cites falling yields and an improved operator market for his view, along with the wider range of investment-grade products coming on to the market.

Martin Schaffer of MRP Hotels also sees opportunities in the sector for investors and operators expanding internationally. "We're expecting to see new operators conquering leisure markets, breaking new ground in brand conception and further developing their holiday hotel products," he says.

Assets likely to perform well, in Schaffer's view, include "upscale and luxury hotels in remote locations with attractive natural surroundings" as well as "properties with a direct link to nature and exceptional scenery", which could benefit from a pandemic bounce-back. Return expectations are at a significantly higher level than for already established city locations and already fully-developed tourism regions. "This opens up investment opportunities for opportunistic investors, particularly for new tourism destinations in more rural areas."

With hotel investments in German in general having seen a surge of renewed interest in the final quarter of 2021, with more than €1bn flowing into the sector, the best quarter by far since the start of the pandemic, most brokers dealing with hotels are optimistic a trend reversal is well under way.

Last year, top prices were paid above all for high-quality properties in excellent locations with good concepts, or operators with strong credit ratings. According to René Schappner, the head of hotels at Colliers, the investment climate for hotels has improved notably, with the activity not only composed of a few large deals. "The segment of smaller hotels, which were sold for prices of ten million euros or less, was also very active. Approximately half of all transactions in 2021 fell into this price segment."

The focus among investor types has also changed. Recently, more and more family offices and corporates are viewing themselves as strategically operating investors, and are entering into market segments they haven't been previously strong in. They are taking advantage of the current exceptional situation to specifically enter the hotel market and to position themselves conceptually for the time after Corona, many of the brokers confirm.

Two factors, however, do seem to be hindering even further growth in the leisure hospitality market - the shortage of staff, and the shortage of bank financing.

Due to staff shortages, numerous holiday hotels have had to deliberately reduce their occupancy rates and frequently limit themselves voluntarily to 70% occupancy or less, according to Götz Hufenbach, the CEO and owner of Benchmark Real Estate, a Berlin-based hotel developer. Justifying the renewed investor interest in the sector, Hufenbach says, "The number of overnight stays is rising. If it weren't for the corona-related staff shortage in many accommodations, the nights booked would probably soon be back at the level of 2018/2019."

Naturally, for developers like Benchmark, the market has experienced major disruption over the past two years. In Germany in 2020, more than 20,000 new hotel rooms were completed. By February 2021, only 680 of the 34,000 rooms originally forecast for last year (2021) had been completed, with the rest of the year also seeing plunging completion levels, according to the study Hotelneubau in Deutschland 2021 (Benchmark Real Estate and Bulwiengesa).

According to the study, most hotel rooms were no longer being built in the so-called A-cities in 2020; rather, the market share in B, C, D and holiday locations had increased to around 66% of all hotel rooms (2019: 61 per cent). The study's authors make the assumption - correctly - that hotels in the German holiday regions will become even more of a focus for project developers in the future - away from the city, trade fair and airport locations that have been severely affected by the pandemic. About every tenth hotel in planning or under construction with an expected completion by the end of 2022 is located in a holiday region, according to the study.

"The hotel market is developing again to what it already was a few years ago: a market for specialists. Those who are looking for profitable hotel investments in the long term must know the individual submarkets, the hotel concepts and the operator landscape in detail," says Martin Hantel, managing partner at project developer Benchmark.

On the financing front, too, investors are likely to increasingly be putting financing packages together from alternative sources other than the banks, who are currently very averse to lending to the sector, except for the very top and tightly-secured assets.

One group taking advantage of the rising interest in holiday hotels is budget chain B&B Hotels, where in addition to its city hotels it has also launched its first holiday hotels in tourist regions in France and Italy, with Germany now on the agenda for at least two or three new projects annually, according to Deutschland CEO Max Luscher, in a recent interview with business daily Handelsblatt.

The hotels will be recognisably B&B hotels, with the addition of facilities such as bicycle washrooms and lockers for sports and leisure gear, open lobbies and outdoor seating. Likely future destinations for between 15 and 25 hotels, says Luscher, will be the Alps, the Harz region, villages along the Mosel river and the Rheingau. "But everything on the water is very interesting", he says.