German hotels now second most popular asset class after residential

There has been so much interest in German hotel deals this year that this issue of REFIRE will have to report on even the most recent deals in a series of separate articles here.

Several studies have appeared on our desks over the past quarter explaining the surge of interest in the sector, and how changes in the marketplace are leading to the arrival of several new investors and hotel groups, and how incumbents in the industry are repositioning themselves to take advantages of new opportunities.

Additionally, the monthly Deutsche-Hypo Index, which tracks sentiment in the German real estate industry and which we report on regularly in these pages, now includes hotels for the first time.

The German Property Association ZIA confirms that German hotels have been the second most popular asset class this year after residential for institutional investors, particularly hotels in the three-star category. In its Hotel Investment Survey, carried out for the association by audit firm Deloitte, the head of ZIA's hotel property platform, Matthias Niemeyer, said that 70% of the 106 respondents expect 2016 to again see above-average demand for German hotels.

Investors no longer see hotels as a risky operator-run business, but their long-term lease contracts now actually make them attractive as an asset. “Hotels have emerged as a serious asset class in the property segment over the past years. The image of hotels has significantly improved”, he said.

Business hotels are what investors are looking for, rather than leisure hotels, given Germany's strength in the trade fair and conference business, says the Deloitte report. Budget hotels are showing the most growth, with 51% of respondents planning to invest more in 3-Star, 46% in 2-Star, 43% in 4-Star and only 17% in 5-Star hotels. In the future, 57% plan to invest in A-cities and 49% in B-cities.

The "Investment Barometer" published by research group HospitalityInside on behalf of German real estate fund group Union Investment confirms the euphoric mood within the German hotel sector. The latest index reading is at its highest-ever level, and shows increased willingness to invest in the hotel sector, with project developments particularly in favour.

Even in the last six months the mood has improved strongly, with 86.7% of investors viewing their business prospects in the hotel sector as "good" or "very good", an increase of fully 9% since the last survey six months previously. Union Investment's hotel specialist Andreas Löcher confirmed that investors were preparing to take on more risk, looking at many more non-core assets and hotels needing significant refurbishment.

Next year should see 193 new hotels opening their doors, offering an additional 23,300 beds in the two-star and above hotel categories. Over the next five years the number is likely to be closer to 500 hotels and 80,000 beds. While the number of beds rose by 0.5% in 2014, the number of operating hotels fell by 2%, as reported in new figures published by Tophotelprojects, the Rotenburg-based analyst group.

Among the lesser-known German companies alone, two groups expaning rapidly are Hamburg's Novum Group, which recently jumped from 41 to 60 hotels and has been actively buying prime pieces of land for new hotel developments. Michael Zehden from Berlin is also buying up a lot of land to expand his Hotel Holding Albeck & Zehden from 4 to 14 properties through a management takeover.

Even in the non-business sector, demand for German hotels is soaring, with demand for beds not just being driven by increasing numbers of German overnight guests, but also by growing numbers of foreign holidaymakers. Compared with the rest of Europe, prices are viewed as low and offering good value. The trend is towards larger hotels.

A new study just released by broker and financier LB Immowert confirms that Munich remains the most attractive German hotel market, although the gap to other cities is narrowing. The LB Immowert scoring model rates factors such as guest arrivals, overnight stays, length of stay, number of beds, bed usage, operations, projects and room utility rates to arrive at a final overall score.

Munich's high rating means that yields on its hotels are only 5.1%. It is followed by Berlin, where hotels yield a gross 5.7% initially despite much lower room rates and rapidly-growing competition. Only Cologne offers higher initial yields, of 5.85%, with the other big cities somewhere between Munich and Berlin.

An exception is Stuttgart, whose relative position has disimproved, making it the least attractive location, largely due to a large number of newly-built hotels coming down the pipeline. The widely-watched metric of RevPar (revenue per available room) improved in all the big German cities except Düsseldorf, which had a poor year for trade fairs.