More price visibility expected soon in hotel sector as predators prowl

Germany saw a collapse of 40% of its hotel overnight stays in 2020, despite all the ravages of the coronavirus managing to stay among the top 10 countries in Europe in containing its losses, according to the latest Hotel Market Report Europe 2021 recently published by Engel & Völkers Hotel Consulting (EVHC).

Also hanging on in the top 10 were neighbours Austria and Switzerland. The most resilient market was Liechtenstein with a fall of (only) 32%, followed by Norway and the Netherlands, both down 33%. Worst hit was Malta (down 71%), Greece (down 73%) and Montenegro (down 79%).

According to Andreas Ewald of EVHC, the southern countries bore the heaviest proportional hits, like Spain and Greece. Germany benefited from strong demand for domestic leisure hotel overnights, with regions like the Allgäu, the North Sea, the Baltic Coast and the Bayerischer Wald actually topping the previous year's figures.

But overall the number of overnight stays in Germany fell to about 300 million, a fall of 40% on 2019, and the worst figures since the year 2000. In the Top 7 cities, business-oriented hotels were down 57% and city leisure hotels altogether down 16% despite the summer respite last year.

Hotel investment transactions were 60% down on the previous year at about €2.0bn. Take out the first quarter, and the total transaction volume since the first lockdown was only €700m - and many of these were part of sale-and-leaseback deals and smaller parts of mixed-use portfolio deals, so even there the true picture is a bit skewed.

Clearly there is great uncertainty in the market as to what hotel values are really priced at, and only later this year are we likely to get a certain amount of price visibility. There are too few transactions at the moment to get a clear fix on how bad things have got.

Several prominent hotels have already seen the writing on the wall and have closed their doors permanently. These include nine Holiday Inn hotels operated by Tidal Operations, and other well-loved and well-established hotels such as the Sofitel near Berlin's Kurfürstendamm and the Hessische Hof opposite the Frankfurter Messe.

The pain will be all the greater for many, as nearly 10% of all the hotel beds in Germany's biggest cities changed hands in 2019, with many investors arriving late to a multi-year boom and paying top prices for hotels in all size cities. For ten years in a row, volumes reached record levels every year until the abrupt stop in Q2 2020.

Hotel consulting group Treugast also reports that this year and last saw an additional 200 new hotels coming to join the existing 13,000, with no less than 50 scheduled to open in Hamburg alone by 2026. Some of these can of course be stopped, but often it's too late to repurpose the projects for other uses. And with investors showing a marked preference for city hotels with at least 100 rooms, preferably close to trade fairs and airports, flexibility is often limited.

Casualties are now showing up on a more regular basis. Seven Star Inn hotels in Germany have closed permanently after parent companies Star Inn Hotels Deutschland and Star Inn Hotels Bayern filed for insolvency in December.

Alexander Trobitz, head of hotel services at BNP Paribas Real Estate, said there is a massive demand from private equity investors for hotels which will need restructuring in the short- to mid-term. It'll be more difficult for hotels, including chains, which aren't going to be discounted down and where there is little potential for major restructuring, but which are likewise suffering heavily from the pandemic.

Trobitz said recently that the winners from the pandemic and serial lockdowns were likely to be the budget and mid-scale hotels with low cost structures, along with holiday and boutique hotels. Cities catering to both clienteles, such as Heidelberg, Münster, Aachen, Dresden and Freiburg were better placed to emerge unscathed from the crisis. He said he expected transaction volumes this year (2021) to exceed €3.0 billion.

EVHC also recently hosted an online discussion together with real estate academy ADI and RICS Deutschland. Interest was enormous, with over 400 attendees tuning and listening to Andreas Ewald of EVHC grilling a variety of top hotel bosses.

Ewald himself said that, given Germany's relatively strong performance in 2020, the appetite to invest in German hotels is huge, as investors are convinced of the ability of the sector to recover. "I expect to see only moderate price discounts of the order of 10% to 20%", he said. Germany's strength is also the high percentage of domestic tourism, business or leisure, which supports the sector.

Marc Werner, partner and hotel specialist at lawyers Hogan Lovells, said the likelihood of recovery would very much depend on the type and location of the asset. "We won't see any real hotel distress sales in Germany. However, we will see consolidation among operators. Especially in conference cities like Munich or Frankfurt, it will take a long time to get back to pre-crisis levels. Some operators will not be able to sustain this financially."

He said that the few hotel deals currently happening were more like 'normal' deals and were not arising from distress. He cited the example of the luxury Villa Kennedy in Frankfurt, recently sold by listed company DIC Asset AG on the grounds that it wanted to focus on other asset classes. (Hogan Lovells was DIC's lawyer team on the deal. There is some speculation in Frankfurt that the hotel might even be converted into a luxury senior home for well-heeled pensioners.)

However, Ascan Kókai, Head of Hotels at ECE Real Estate Partners, disagreed with Werner. He thinks there will definitely be opportunities for opportunistic investors with more substantial price discounts: "From the second half of the year, financiers will no longer wait and subject hotels to a revaluation. Then we will also see more distressed sales."

Overall, the participants expect an accelerated change in the German hotel industry leading to fewer small hotels and more large financially-strong chains down the line.

The panellists were agreed that the future of the industry was increasingly in the hands of government policymakers. According to Yoram Biton, managing director of Leonardo Hotels, "Germany came through the crisis well at the beginning of the pandemic, compared with other countries. Now the differences in crisis management are crystallizing. In Israel, hotels are fully occupied again," He also believes that burden sharing is very unequitable. "It is not appropriate and simply unfair that commercial providers such as hotels cannot generate revenue, while the landlord still receives 100% of his rent," Biton said.

The founder and CEO of Heimathafen Hotels, Jens Sroka, pleaded for reliable support guardrails for the hotel industry. "When they reopen, German vacation hotels will also be fully booked again. However, it is important that the openings are reliable and not withdrawn again at short notice. Otherwise, the damage will outweigh any possible benefits." He added that the important liquidity supports have been promised by the state, but for the most part have not yet materialised. "This must change, otherwise numerous houses are headed into serious liquidity difficulties", he added.

A recent report from consultant PwC showed a majority of German hoteliers not reckoning with a return to break-even of 65% occupancy much before end-2023 or 2024 - and that's assuming a return to 'normal' travel conditions.

Meanwhile, acquisitive hotel groups such as Premier inn, Motel One, B&B and Deutsche Hospitality, which owns the Steigenberger chain, have all been given major mandates from their investors to expand aggressively in Germany. Premier Inn, for example, has already snapped up 13 Centro Hotels and a Star Inn, and has already secured another 70 locations with up to 12,000 beds in Germany to add to its existing 23 operational hotels.

As an investor and operator, it plans to invest in at least half of the hotels itself as an owner. This it sees as a means of anchoring stability in the assets, and giving it more flexibility. With sale-and-leaseback models to acquire the assets, it also gives it exposure to the upside valuation as the market slowly recovers, said Premier Inn head of development Michael Hartung recently.