Niche segments thriving in hotel sector as yields compress further

As we reported back in November, the Latin American hotel chain is currently scouting locations for its concept hotels in Germany, which are targeted at the millennium and digital nomad generation.

After its European launch in Porto, Portugal, the brand now intends to expand to large German cities like Berlin, Hamburg, Leipzig, Dresden and Munich, as well as the Black Forest region. Selina said it is planning a fresh fundraising round in 2019, after raising $95m in April last year.

The Panama-headquartered chain focuses on existing hotels in “trendy locations” that can be rebranded within a period of 90 to 120 days. Selina is looking for leases with terms upward of 20 years. The company plans to talk to investors and local partners in Germany to get the hotel brand established quickly, it said then in a statement.

The brand was created in 2014 by two founders from the real estate industry and has recently completed a round of financing for $95mn. The most notable investor is WeWork founder Adam Neumann.

Niche markets in the hotel sector in Germany are doing well at the moment, against a background of rising hotel investment turnover, which was more than €4bn last year, according to Colliers International Hotel GmbH, a figure that was 7% above its five-year average. The hotel segment as an asset category represents a stable 7% of the entire German real estate investment market.

A lack of supply of hotel portfolios has been pushing the amount of individual property transactions to the fore, particularly in Germany’s largest cities. Last year the portfolio share of overall turnover fell from 31% in 2017 to 16% last year, almost a halving, to €650m, while individual transactions made up €3.4bn.

Last year German investors became the dominant force, carrying on from 2017, with market share rising from 54% to 57%, or €2.3bn. Foreigners’ buying fell back from 46% to 43%. On the sellers’ side, domestic-based sellers made up 71% or €2.9bn, while foreign-based owners made up 29%.

The leading segment in the sector was the four-star category, at 46% down from the 52% a year previously. The category made up €1.9bn. The top luxury category of five-stars rose from 10% to 17%, with over €650m deal turnover.

The open-ended funds and Spezialfonds, long the leading investors in the hotel segment (at 22%, down from 28%) ceded their dominant position as buyers to wealth managers, according to Colliers. On the selling side, as expected, were project developers, making up 29% of sales, unchanged from the previous year.

Peak yields in the hotel sector saw further compression, ranging from 3.75% in Munich to 4.7% in Berlin.

Recent figures from industry association ZIA show that the number of arrivals in the German hotel industry rose by 3.8% last year to 185.1m and the number of overnight stays by 3.9% to 477.6m, representing a new record. Berlin with 32.6 million overnight stays was particularly strong.

All the more reason for the buoyant level of new hotel building – in the Big 7 cities alone the current volume of project developments is 1.2 million sqm, while the need for additional beds by 2021 is put at nearly 80,000 new beds.

New research from JLL equally shows strong demand at the European level, with cross-border investment reaching €4.32bn in 2018, a figure expected to be matched at least this year.

JLL's Hotel Investment Outlook 2019 projects that overall investment volumes across Europe, the Middle East and Africa, are expected to soften to $21.2bn this year from $22.9bn in 2018.

In JLL’s view, the tourism and business fundamentals still warrant optimism despite gathering political clouds. According to Philip Ward, head of the hospitality group EMEA at JLL, 'Political uncertainty and the volatility in equity markets will test investors’ sentiment throughout the year. However, we expect hotel investment volumes to hold steady on 2018 levels owing to hotels’ attractive yield profile compared to other sectors,'

The report predicts that the hotel market will be driven mostly by single-asset deals, with portfolio trades expected to decline, as described above, in line with the patterns seen over the past two years.