A serviced apartment
The annual International Hotel Investment Forum (IHIF) took place in Berlin recently, and the international non-European contingent was back in force, following a more domestically-accented attendance over the previous two years due to the COVID crisis. About 2,600 visitors attended, according to the organisers Questex, outnumbering the previous record attendance of 2019.
A series of presentations laid the performance numbers in the European hotel industry bare. The industry has now almost recovered from the COVID slump, with the key RevPar metric now at 113% of its 2019 value in nominal terms, according to Robin Rossman, CEO of data provider STR. Accounting for inflation, it is still 97% in real terms. Room rates have risen significantly, although occupancy is below pre-crisis levels, except in the budget segment. Germany is lagging the rest of Europe, with price-adjusted RevPar at only 91% of its pre-crisis level.
Michael Lidl of consultancy Treugast pointed out how costs in the hotel industry have risen disproportionately, up 20% since 2019. These cost rises have been outstripping revenues, he said, raising the question as to which operators are so strong financially that they can outlast the increasing drain on their resources. And Ulf Templin, the head of Germany at PKF Hospitality, raised the spectre of all the deferred rents from the COVID period that now have to be repaid out of current income.
The market is increasingly divided between the financially well-backed operators, and those who are struggling and will likely be swallowed up by the stronger players in their bid for growth. There is almost no new building going on at the moment, apart from pre-COVID commitments, so the more ambitious groups are looking at existing properties or smaller portfolios to expand.
Investors were very much in evidence at the convention, but mainly just looking and talking, not yet buying. Less than a hundred hotels were sold in European transactions in this year's first quarter, fewer than in the first Corona lockdown, according to Carine Bonnejean of Christie + Co. Almost none of these were distress sales, she said, but with many asset portfolios up for refinancing this year and next, that situation could change soon enough. Andreas Locher, head of investment management hospitality at one of the more active buyers, Union Investment, said his group was very conscious of the higher returns available in asset classes such as infrastructure, or even government bonds, in the current interest rate environment.
In Germany, what WILL investors be looking at this year? According to René Schappner, head of hotels at Colliers Germany, "In 2022, portfolio transaction activity was almost completely absent in an already difficult environment, at around €275 million, marking a low in both relative and absolute terms," (The record volume dating back to 2016, with €2.4 billion in portfolio transactions alone, still holds.)
Schappner says that investors are starting to eye new sub-sectors, including boarding houses and serviced apartments. In 2020, the share of this type of accommodation suddenly shot up from less than 3% to more than 8%. Since 2017, the investment volume has consistently exceeded the €100 million mark, in some cases also very significantly, and, in some years, even the €200 million mark: ‘The success and especially the crisis resistance are a big plus and make this sub-segment increasingly attractive for investors,’ Schnappner said. ‘In recent years, more transactions have been concluded in this segment. The economic success has also had a positive impact on the creditworthiness of the operators. Institutional investors are increasingly active in this segment.’
Heidi Schmidtke, managing director for Hotels & Hospitality at JLL, agrees: ‘With serviced apartments, we have a few things to watch,’ she said. ‘Even before COVID, serviced apartments were becoming popular because of their efficiency and because they’re close to residential assets, which makes some investors think they’re easier. And, once something becomes acquired by institutional investors in our region, everyone starts to look, it’s interesting, like LaSalle investing in Numa. Serviced apartment operators aren’t just looking at the Big 6, they’re also going into secondary and tertiary locations. They can easily flip into a retail redevelopment, that’s definitely something to watch going forward. I was in London last week and we were discussing a big portfolio of department stores with the owners. The new concept could be transforming empty stores into spaces with a serviced apartment component and/or budget hotel. Some department stores are so sad to watch, this could bring the city centre back to life.’
Another asset class gaining in popularity is 3-star hotels, according to Schappner: ‘Due to the lean cost structure and high quality of overnight stays, coupled with very central locations, this hotel category remains an integral part of the overall market,’ he said. ‘Operators have come through the pandemic economically well and continue to search for locations, and investors see sustainable investment opportunities in these concepts.’
