Hotel market falls short of EUR1bn deal volume in 1H 2022

Germany’s hotel market continues to feel the pinch in the wake of the pandemic, with investment volumes continuing to fall.

In the first half of 2022, investment in hotels fell by around a quarter year-on-year to around €755 million across 32 transactions, meaning that the German hotel investment market remained below the billion euro mark at the half-year point for the first time since 2013, according to JLL. The ten and five-year averages were also down by 44% and 49% respectively.

“Between April and June, investment activity in the German hotel investment market was very restrained with only €298 million and the first half of the year was mainly dominated by small-volume transactions,” said Heidi Schmidtke, managing director of Hotels & Hospitality Group at JLL. “While the volume decreased, the number of transactions increased from 28 to 32 in the first six months. The optimism of the operator business about a strong booking situation this summer is contrasted with the more difficult economic and political market environment, which fundamentally affects the investment markets.”

Uncertainties in the market, which are being exacerbated by the changing market environment and rising financing costs, have put a dampener on investment. Both buyers and sellers are displaying more caution, particularly regarding project development, within the first half of the year, the share of project developments in the transaction volume was ten percentage points lower than in the same period last year and amounted to 16%, according to CBRE.

However, gross prime yields remained consistent throughout the quarters dominated by COVID-19, although there was an upward correction in the second quarter due to increased financing costs. The average for the top seven locations is 4.25%, up from 4% previously, according to Colliers. Some of the discounts currently being discussed in negotiations are lower than in other asset classes. Foreign investors are also more notable for their absence, accounting for less than 20% of overall hotel investment in Germany, their lowest level to date.

German investors dominate market

In the first quarter of the year, German investors accounted for 63% of hotel investment, followed by Austria (18%), the U.K. (10%) and the U.S. (4 %). Private equity investors were the most active investor type, behind 43% of deals. Institutional investors, who were the leading investor group prior to the COVID-19 pandemic, contributed only 27% of the total. Private investors or family offices accounted for 23%, followed by real estate companies with 5% and developers with 3%, according to Cushman & Wakefield.

Recent deals include the acquisition of the A&O Hostel Berlin Hauptbahnhof by the hostel chain A&O, which has already leased the property with almost 1,000 beds since 2010 and will continue to operate it in the future. The purchase was financed by Deutsche Kreditbank (DKB). Radisson Blu Hotel Cottbus was also acquired by the previous operator RIMC Hotels & Resorts last month for an undisclosed sum. RIMC plans to modernise the 236-room hotel and continue to operate it as part of its own portfolio. The seller was a private individual. Another notable sale was that of the recently reopened Meininger Hotel Bremen Hauptbahnhof as part of the mixed-use property Higheleven by developer Buhlmann Immobilien Gesellschaft. The property was purchased by the first closed-end special fund of Magna Asset Management and Hansainvest las month for an undisclosed figure. After six portfolio transactions totalling around €493 million in the same period last year, the market recorded only one package sale of €50 million this year, according to JLL.

Financing environment putting dampener on market

Nonetheless, some advisors remain confident that there will be an uptick in the market: “Despite the rather restrained activity in the first quarter, we expect increased demand for hotel assets in the coming months, including in the corporate segment,” said Stefan Giesemann, head of Hospitality Germany & Austria at Cushman & Wakefield. “The reasons are the lifting of the COVID-19 restrictions and the improving hotel performance. We are already seeing a lot of product on the market. This is supported by yield compression in other asset classes, but also by the increased willingness of institutional investors to reinvest in hotels, although the hurdles and requirements remain very high. The biggest obstacles continue to be the difficult financing environment and rising interest rates.”

Schmidtke agrees: “The very positive demand for overnight stays strengthens the interest in the hotel asset class, which was recently hit particularly hard by the pandemic,” she said. “In addition, there is a high surplus due to liquidity accumulated in the past two pandemic years. However, there is a high degree of volatility and changing financing conditions are reflected in investors' buying assessment across asset classes.” In this context, investors are coming under more pressure to justify the expected return in line with the risk profile compared to alternative capital market investments.

That’s not to say that interest isn’t there. According to the trade association IHA, around €22.4 billion is available in the industry for new hotels, double what was available ten years ago and €1.5 billion more than in 2019. This sum is earmarked for the next three years to build 807 more hotels with a total of 111,270 rooms. U.K. budget chain Premier Inn has 38 contracts for additional location in Germany, whereas Munich-based rival Motel One has another 10 hotels in the pipeline. The H-Hotels chain is also planning new hotels in Erfurt, Eschborn and Mainz following its two recent openings in Düsseldorf.

“An outlook on the further course of the year is difficult at the moment; the expectation that the transaction volume will increase compared to the previous year is cautious in any case, especially due to the more difficult pricing,” Schmidtke added.