Hotel market dominated by single asset sales; serviced apartments becoming more popular
By Sara Seddon Kilbinger, Senior Reporter, REFIRE
Portfolios are becoming increasingly rare
Hotel portfolios were once a staple of Germany’s hotel market but today they are becoming increasingly rare.
The German hotel investment market got off to a very subdued start in the new year, recording its weakest first quarter since 2014, with just €194 million of hotel deals spread across 13 single transactions, according to JLL, marking a steep decline of 57% compared to the same quarter last year, when 19 transactions generated a volume of almost €460 million. This also marks a drop of 69% compared to the quarterly 5-year average. The size of the average deal has also fallen by 38% to €15 million.
However, that’s not to say that portfolio transactions have completely disappeared: ‘As we speak, there are indeed quite a few portfolios in Europe in the market, amongst them also two in Germany,’ Heidi Schmidtke, managing director of Hotels & Hospitality Group at JLL, told REFIRE, declining to give further details. ‘I think there will be more activity to be seen on the portfolio side once financing conditions improve or at least stabilize, which we hope will be around the third quarter. The German hotel transaction market lacked momentum at the beginning of the year because the last quarter of 2022 was already quite quiet across all asset classes. Many buyers and sellers took a wait-and-see approach during the first quarter to continue monitoring the geopolitical and macroeconomic situation for the time being.’
Some of the biggest deals in the first quarter included Investhotel’s sale of the Mercure Hotel in Heilbron to Whitbread/Premier Inn for an undisclosed sum. The hotel is scheduled to open this summer after expansion to 140 rooms. Whitbread/Premier Inn also acquired the Premier Inn Hotel development in Köpenick. The construction phase is expected to start later this year, and completion of the 3-star hotel is scheduled for completion in 2025. The seller was Project Immobilien Wohnen und Gewerbe GmbH.
Union Investment also purchased the Steigenberger Hotel in Dortmund as part of the Westfalen-Center from the Swiss AFIAA Investment Foundation for Real Estate Investments Abroad. Steigenberger Hotel GmbH is the main tenant of the property, accounting for about 22% of the rental space. Quadoro Investment GmbH bought the Holiday Inn Express Offenburg, a 3-star hotel with 149 rooms that was sold by Hospitality 1 Offenburg, a joint venture between Oxalis REIM GmbH, Zeitgeist Estates GmbH and Property3 Group GmbH.
Hotel operators most active buyers
Hotel operators were the most active buyers, accounting for 43% of acquisitions (€84 million), outpacing institutional investors with a 28% share (€54 million). They were followed by private equity buyers with 17% (€33 million) and private investors with 7% (€14 million). As in most cases in recent years, German investors accounted for the majority of investment, or 61% (€119 million).
‘Despite continuing uncertainties in the banking sector and capital markets, we see quite a lot of activity and thus also clearly positive signals, so that increased transaction activity can be expected in the coming months,’ Schmidtke noted. ‘However, the €2 billion mark for the year as a whole has receded into the distance for the time being with this first quarter. Most of the capital is in the core-plus and value-add segments and is hoping for new opportunities on the basis of the good performance results in combination with fallen prices. These could arise in particular from upcoming refinancing and strategic portfolio adjustments.’
However, what we are witnessing now is essentially an extension of a shift that started last year. Last year, single transactions accounted for 80% of the total, up from just 54% in 2016, according to René Schappner, head of Hotels at Colliers Germany: ‘In 2022, portfolio transaction activity was almost completely absent in an already difficult environment, at around €275 million, marking a low in both relative and absolute terms,’ he said. The record volume dating back to 2016, with €2.4 billion in portfolio transactions alone, still holds.
In addition, the weak year-end rally also left clear traces on the German hotel investment market, according to BNP Paribas. At just under €1.9 billion, the full-year investment volume remained at a very low level. The previous year's figure was missed by about a quarter and the 10-year average by almost 45%. The main driver of this development is the persistently low volume of portfolio transactions at just €231 million. As a result, this value is 77% below the long-term average.
Serviced apartments soaring in popularity
So what can we expect this year? Investors are starting to eye new sub-sectors, according to Colliers, including boarding houses and serviced apartments. In 2020, the share of this type of accommodation suddenly shot up from less than 3% to more than 8%. Since 2017, the investment volume has consistently exceeded the €100 million mark, in some cases also very significantly, and, in some years, even the €200 million mark: ‘The success and especially the crisis resistance are a big plus and make this sub-segment increasingly attractive for investors,’ Schnappner said. ‘In recent years, more transactions have been concluded in this segment. The economic success has also had a positive impact on the creditworthiness of the operators. Institutional investors are increasingly active in this segment.’
Schmidtke agrees: ‘With serviced apartments, we have a few things to watch,’ she said. ‘Even before COVID, serviced apartments were becoming popular because of their efficiency and because they’re close to residential assets, which makes some investors think they’re easier. And, once something becomes acquired by institutional investors in our region, everyone starts to look, it’s interesting, like LaSalle investing in Numa. Serviced apartment operators aren’t just looking at the Big 6, they’re also going into secondary and tertiary locations. They can easily flip into a retail redevelopment, that’s definitely something to watch going forward. I was in London last week and we were discussing a big portfolio of department stores with the owners. The new concept could be transforming empty stores into spaces with a serviced apartment component and/or budget hotel. Some department stores are so sad to watch, this could bring the city centre back to life.’
Another asset class gaining in popularity is 3-star hotels, according to Schappner: ‘Due to the lean cost structure and high quality of overnight stays, coupled with very central locations, this hotel category remains an integral part of the overall market,’ he said. ‘Operators have come through the pandemic economically well and continue to search for locations, and investors see sustainable investment opportunities in these concepts.’
Nonetheless, uncertainty in the market remains, according to Katharina Preiss, managing director Germany at mrp hotels, who observes continued uncertainty in 2023 in both the investment and operator markets due to the large number of external factors that are difficult to control, some of which have contradictory effects: ‘Consolidations of operating companies, new distribution alliances and strong investment collaborations are driving growth in the guest sector on the operator side,’ she said, noting that the vacation hotel market is on a strong upswing, while serviced apartments were also convincing on the capital market.
Budget and luxury segments faring better than mid-market hotels
Despite ongoing challenges at both the customer level and for hotel operations, the entry of international brands such as Rosewood strengthens the hotel markets in the DACH region, according to Preiss. At the same time, established brands and operators are bringing new brands or concepts to the market, and established budget brands such as Motel One, B&B, Premier Inn and apartment operators such as STAYERY and numa have expanded at a fast pace. ‘Germany remains the focus of international players,’ she said. ‘At the same time, we are experiencing a split in the quality spectrum: while the budget and luxury segments are growing, strengthened by advancing digitalization, it is becoming more difficult for the mid-range segment in some cases.’
With an average stay of nine days and an occupancy rate of around 85%, the STAYERYs in Berlin, Bielefeld, Bremen, Wolfsburg, Cologne and Frankfurt are all in the black, helped by a high degree of digitization and lower personnel expenses than in a classic hotel, and thus around 60% lower costs than in the hotel industry, according to the chain.
‘The bottom line is that this leaves more attention for the guest and community building,’ said Jan Winterhoff, head of Real Estate Development at STAYERY. ‘Even in a location like Cologne, with only 30 apartments, there is someone who is exclusively looking after the guests and not the laundry. The success of STAYERY shows how digitization is changing our lives even in areas we don't even perceive as digital. We are digital when we pay for our after work drink with our smartphone and then use an app to arrange to meet for a game or soccer night. STAYERY works because all of this is natural for our target group.’ The group has 514 apartments live and a secured project pipeline of more than 500 additional apartments.
STAYERY announced today (19 April) that it has signed a lease with Kreer Development GmbH for a new construction project in the Ehrenfeld district of Bochum at Bessemerstraße 100. The property has already been acquired by Catella Residential Investment Management via a forward deal. The building with 90 flats is expected to be completed and opened by mid-2025. Bochum is an attractive market for the group due to its medium-sized economic structure with around 15,000 companies and around 60,000 students.
Last month, STAYERY signed a lease with LIST Develop Commercial for 100 serviced apartments in Osnabrück. Originally, LIST had planned a double brand with two hotel concepts at the former Sinn-Leffers site in the city centre. However, as a result of the changes in travel behaviour accelerated by the pandemic, the original idea was abandoned in favour of a concept with longer stays in connection with remote work.
However, it’s still too early to determine just what will happen on the transactional side this year: ‘After the first very weak quarter, it’s hard to say what the transaction volume will be this year but I hope we can slightly exceed last year and go towards the €2 billion mark,’ Schmidtke said. ‘A lot of things need to happen first and things can still go wrong.’