Hotel investment plummets to lowest level in 13 years

Investment in Germany’s hotel market has plummeted to the lowest level in 13 years, according to BNP Paribas, with just €573 million transacted in the first 9 months of the year.

Few sectors have suffered more in recent years than hospitality, from lockdown closures and staffing crises to inflation and crippling energy bills: ‘Despite the very low transaction volume, an increase in buyer interest has nevertheless already been observed recently, which is, not least, due to the now high occupancy rates again,’ said Alexander Trobitz, managing director and head of Hotel Services at BNP Paribas Real Estate. ‘However, the price discovery process continues to be dynamic, which is why sales are currently being realized primarily in the small-part segment. Accordingly, after the first nine months of the year, as in the same period last year, no major portfolio transaction has yet been recorded.’

While the result from the previous year was undercut by slightly more than half, the decline compared to the ten-year average is even more pronounced: it’s down by 73%. In a sign of just how bleak the market is looking, there were just 16 transactions totalling €155 million in the last quarter, 48% of which were either value-add or opportunistic buys. Interestingly, two thirds of the deals took place outside the Top 7 cities, according to CBRE.

For the first time since 2012, no transaction with a volume in excess of €100 million was completed in the first three quarters and there was also only one transaction in excess of €50 million. The average lot size has shrunk massively, to €11.2 million today, down, from €16.7 million last year, which was already just half the ten-year average (2013 to 2022) of €30.6 million.

‘Financially strong hotel operators such as Premier Inn and Leonardo, as well as private equity investors, came into play here,’ said Josef Filser, Head of Hospitality Germany & Austria at C&W. ‘Purchases or sales of core properties with long leases were the exception.’ 

The largest hotel deal in the last quarter was the acquisition of the 150-room Holiday Inn Mannheim, part of the mixed-use office and hotel development "No.1", for €75 million to Hamburg-based investment and asset manager Fondsgrund. The seller was Adler subsidiary Consus. The 190-room Pentahotel Berlin-Köpenick  was also sold to operator Leonardo Hotels. The hotel is soon to be renovated and repositioned under lifestyle brand NYX. Essential by Dorint Hotels in Cologne-Deutz and the nh Hotel in Magdeburg, with a total of 260 rooms, were also sold to the Alchemy Step Hotel Group. The hotels will be renovated in the coming months and integrated into the Marriott system via franchise agreements.

Deal volume expected to hit around €750 million by year-end

‘By the end of the year, we expect an investment volume in the hotel real estate market of three-quarters of a billion euros,’ said Helena Rickmers, associate director of hotel investment at CBRE. ‘There are still large-volume transactions on the market, which - should they be completed before the end of 2023 - could lift the volume above the one-billion-euro hurdle. The hotel investment market reflects the general wait-and-see attitude in the real estate investment market, although operator numbers are positive. Accordingly, we also see many operators currently acting as buyers.’

Whitbread, the parent company of hotel operator Premier Inn, accounted for more than 10% of the total volume, with three transactions completed so far this year. Nonetheless, open-ended real estate funds continued to be the strongest buyer group, accounting for 29.1% of deals, Institutional investors continued to be active, albeit much more selectively than before.

However, some international investors are banking on the market turning around. Indian hotel group Taj Hotels has made its foray into the European space. Indian Hotels Company Limited (IHCL), which operates the brand and is part of the Tata Group, has signed a 20-year lease on the Grandhotel Hessischer Hof in Frankfurt from Peakside Capital Advisors. Peakside acquired the hotel in December 2022 from the House Foundation of the Princely House of Hesse for its Real Estate Fund IV. IHCL, which is a listed company, has been in existence since 1903 and manages more than 270 hotels in eleven countries on four continents. It is India's largest lodging company by market capitalization. Managing director and CEO Puneet Chhatwal has called the planned opening in Frankfurt ‘a milestone in expanding our international footprint in the so-called gateway cities’.

The hotel is expected to reopen in the first quarter of 2025 after undergoing a sizeable refurbishment. In total, 134 rooms and suites are expected to be available, about a dozen more than before. The building offers approximately 13,000 square feet of gross floor area. It was built in 1952 to replace the war-damaged City Palace by Wolfgang Prinz von Hessen. Due to its location opposite the main access to the trade fair and close to the banking district, it was particularly popular with business travellers. In the fall of 2020, the Prinz zu Hessen group of companies announced its closure after the building had not accommodated any guests for several months due to the pandemic.

Prime yields expected to rise yet further

Predictably, prime yields have also shifted and now stand at around 5%, compared to 4.9% at the end of the second quarter this year, according to CBRE. As such, prime yields in the Top 5 have risen by 1.25% since the first quarter of 2020: ‘We expect yields to continue to rise, albeit somewhat flattened, in the coming months,’ Rickmers said.

So which chains dominate the German hotel market? B&B Hotels has the most hotels in Germany, with 165 properties (up from 151 last year), replacing Best Western, according to the recent annual survey by PKF hospitality group. Best Western (including Plus and Premier) takes second place with 151 hotels (previous year: 154). As in the previous year, Mercure is in third place with 94 hotels. The TOP 10 is followed by ibis (81 hotels), ibis budget (74), Motel One (59), Leonardo including Royal and Boutique (56), Holiday Inn Express (52), NH including Collection and nhow (50) and Premier Inn (47).

In terms of rooms, Premier Inn has grown the most, beefing up its room count by 2,275 more than last year and now has 8,430 rooms on offer. B&B Hotels also grew by 1,696 to 17,649 rooms, Agate by 1,683, Holiday Inn Express by 1,270, Moxy by 1,189 and niu Hotels by 868 rooms, according to the PKK study.

‘The transaction volume has probably bottomed-out and prime yields have almost reached their peak,’  Filser said. ‘In view of the economic situation, further interest rate hikes appear increasingly unlikely, which should lead to greater stability and certainty in the transaction market. Added to this is the continued very good operating situation with strong demand and good performance figures in almost all major hotel markets. In addition, the challenges in the office sector are leading to an increased willingness among many market participants to invest in alternative assets such as hotels.’