Investors set their sights on hotel developments

Investors are turning their sights to hotel developments in Germany in a bid to access a sector where supply has become virtually non-existent.

‘We have seen the trend over the last two years that there aren’t enough existing hotels, especially not for institutional investors, so more and more investors are buying hotels at the development stage,’ Stefan Giesemann, executive vice president of the JLL Hotels & Hospitality Group, told REFIRE. ‘There are a lot of developers for whom it’s advantageous as it offsets their risk. Competition for assets at the development stage has increased although, for most investors, the operator, lease and building permit have to be in place. We’re also seeing more investors who might only have looked at offices in the past now looking at hotels as well.’

As a result, the German hotel investment market is becoming increasingly characterized by two trends: the purchase of properties in the development stage due to the scarcity of existing properties for sale and the absence of large portfolio transactions, according to JLL. In the first quarter, the transaction volume was €592m, 7% below last year’s level and 5% lower than the five-year average, according to JLL.

Interestingly, there’s not necessarily a yield differential between an existing core hotel and one in the development stage, just because of the scarcity of product, according to Giesmann: ‘Lenders are definitely more willing to lend on hotel development than they were a few years ago but they are still cautious about what a forward deal should look like,’ he said.

Some hotel groups are also wising up to the fact that there is value to be found in the underlying assets. Earlier this month, Germany’s Plaza Hotelgroup acquired eight hotels in Germany and Austria, in cities such as Hamburg and Salzburg for an undisclosed sum, believed to be more than €100m. ‘We don’t just want to be tenants, we want to be owners, because we believe in the long-term that underlying asset value has a great future,’ said Yonca Yalaz, CEO and founder of the Plaza Hotelgroup.

In the first quarter, 18 single-asset deals were transacted with a combined volume of around €496m, up from €458m in the same period last year, marking an increase of 8%. Eight of the sales involved properties that were still under development, according to JLL. The average transaction size amounted to €29m, which was 30% higher than the average for 2018 (1Q 2018: approx. €22m).

One of the biggest single asset sales was that of the Marriott Hotel at the World Conference Center Bonn (WCCB) in March to Art-Invest Real Estate as part of a sale-and-lease-back deal. The purchase of the 336 room hotel was made on behalf of Art-Invest’s Hotel-Manage to Core-Fonds. The hotel was sold by Bonn-based group DevelopVisio Real Estate. Although the purchase price has not been disclosed, the hotel is likely to have sold for less than €100m, according to those who track the market.

On the development side in the last quarter, the Hilton Garden Inn project at Mannheim railway station was sold to an unnamed institutional investor by developer Diringer & Scheidel. The 13-floor hotel with 197 rooms is due to open in late autumn. Also in Mannheim, the Holiday Inn Mannheim was sold by Consus Real Estate aspart of a mixed-use project development to a capital management company from Munich. The office and hotel building, known as ‘No. 1’, was sold via a forward deal for €100m.

However, only two portfolio deals totaling €95m took place in the first quarter: the sale of Iberotel and Dorfhotel in the Baltic sea resort Boltenhagen to Magna Asset Management. The two hotels will be operated on a long-term basis by TUI under the terms of a management contract. The seller was the 12.18. Investment Management group, which also signed a 20-year lease contract with Magna. In addition, a Novotel and Ibis development at Düsseldorf airport were sold to the Austrian investment fund LLB by Langen Immobilienholding. Aurelis subsidiary Ghotel acts as operator and franchisee.

Interestingly, due to high prices and corresponding yield compression in the ‘Top 7’, investors are increasingly turning to locations outside the major hotel hubs of Berlin, Düsseldorf, Frankfurt/Main, Hamburg, Cologne, Munich and Stuttgart, according to Colliers. Although these markets accounted for more than half of all deals in the first quarter of 2018,, their share dropped to slightly over €250m, or 42%, in the first quarter of this year. Prime yields currently range from 3.7% in Munich to 4.5% in Berlin, according to Colliers.

German investors accounted for almost 70% of the overall transaction volume, which corresponds to a volume of €405m across 16 transactions. Institutional investors remained the most active market participants, accounting for around €400m across ten transactions. They were followed by real estate companies with almost €100m across five transactions.

‘Pressure to invest remains high for German institutional investors,’ said Detlef Kaiser, authorized signatory and head of investment at Colliers International Hotel. ‘Open-ended real estate funds, special funds, asset/fund managers and insurance companies were the most active buyer groups in the first quarter...primarily focusing on property developments and recent new-build completions.’

Giesmann is confident that hotel investment will remain robust this year: ‘Numerous transactions are already in the due diligence stage and are likely to be completed in coming weeks,’ he said. ‘However, the average volume for the past five years will not be attained this year, based on the projected volume of about €3.5b. Sentiment is still very good in Continental Europe but the deal volume just depends on how much product becomes available. The trend that has seen many investors funnel their capital into hotel developments will not change in 2019.’ (ssk)