The front desk of a hotel
Valuation for the investable German hotel market have now rebounded so strongly that major sector investor Union Investment and their researchers Bulwiengesa have now revised the figures for the full-year 2022. They are now putting that figure at €61.6bn, up 9.9% on the previous year's €56bn. This brings the overall marketable volume in the sector back up to pre-COVID levels.
The boost to valuations is largely a result of the both the increase in hotel occupancy as well as room rates throughout 2022, or the so-called 'performance effect'. This saw the average room rate in the German chain hotel industry for the first ten months of 2022 rising to over €100 per night for the first time, about 8% higher than in 2019, largely reflecting inflationary pressures.
Germany's Federal Statistics Office provides further evidence of a recovering market. Last year German overnight stays by travellers numbered 451 million, an increase of 45% over 2021, and only 9% below the pre-crisis year of 2019, with operators passing on the higher room rates to guests.
Meetings and conventions also recovered strongly, with about 50% more events being held in 2022 than in the previous year, according to the Meeting and Event Barometer.
Notable in the latest figures is the rising relevance of the resort hotel industry, which contributed strongly to the increase in market volume. Given the decline in new construction generally, and in hotels in particular, the absence of new-built hotels is compensated for by a rise in conversions and refurbishments of existing properties, with a declining emphasis on big-city locations in favour of attractive vacation regions. This trend is being reinforced by much more professionalism and transparency in the management and marketing of vacation hospitality venues in recent years, previously a somewhat neglected niche.
The investable hotel business (i.e. largely branded hotel names) in Germany now numbers more than 400,000 hotel rooms and serviced apartments, or about 50% of the total supply. About a quarter of these are now located outside large and medium-sized German cities, where tourist overnight stays have been growing more briskly than pre-2019. Additionally, building costs for extension or refurbishment are lower than in the bigger cities, often providing more direct value for investment.
Although the total market volume is at or about 2019 levels, the calculated RevPar, or revenue per room, at around €144,800, is down 2.5% on 2019. Union Investment and Bulwiengesa expect that figure to have risen in 2023, given this year's rising tourism figures and the almost non-existent new building activity. This RevPar figure varies widely depending on age and location of the hotel asset, but ranges from about €129,000 for a budget hotel to €265,000 in the four- and five-star category.
Despite the improving overall picture, investors are still largely sitting on the sidelines, rattled by inflation and high interest rates. At the recent Hotel Real Estate Congress 2023, taking place just opposite the European Central Bank in Frankfurt, the mood was subdued, with few transactions or new project development to offer guidance as to which way the wind is blowing for the sector.
It was obvious from the conference that, while project development in the sector is not dead, the traditional closed cycle of land acquisition to the construction phase to the entry of an investor barely exists any more. Hotel developers are extremely cautious, and all the more so the less equity they have.
ECE Work & Live, a traditional developer, said it was now focusing almost exclusively on existing properties, mainly vacation hotels that can be repositioned and restructured. Union Investment itself, with its deep pockets, has recently bought the Grand Palais on the island of Usedom, following up on its purchases of a hotel on the popular Tegernsee and a city hotel, the 25hours Hotel in Copenhagen, last year. Union's head of investment management for hospitality Madeline Groß said while Union was still holding back, it was still active. The hotel industry did not have a structural problem, she stressed, and there was plenty of latent demand out there to acquire assets at the right price.
Frankfurt-based Arbireo Investments and its Austrian partner Value One is specifically targeting older establishments with a maintenance backlog, to then adapt them to meet ESG requirements. They plan to invest up to €750m over the next 3-5 years in such hotels.
Theodor Kubak, managing partner at Arbireo Hospitality Invest
Theodor Kubak, managing partner at Arbireo Hospitality Invest, pointed to changed consumer behaviour, a shortage of suitable skilled labour, and increased operating and building costs as fundamentally new challenges on the way to ESG-compliance for many investors. "For informed capital on the investor side right now, this does however mean the hotel sector is of great importance. Traditionally, it has always paid to invest in a market that is characterised by sustainable changes. The historic opportunity for investors today is that three changes at once are clearly on the horizon. These three trends are sustainability, digitalization and the repositioning of existing properties," he said.
"The lessons learned from the pandemic have changed our industry more in the long term over the past two years than the decade before. At the same time, the recent rapid recovery of the tourism industry have also confirmed a decades-old trend. We humans have an urge to travel. We will continue to find ways not to be deprived of that experience," said Kubak.
In the long run, Kubak is sure to be proved right. And for those with a very long-term horizon, there will be plentiful opportunities. But for now, last year's investment volume in the German hotel sector shrank to €1.8bn, the weakest year since 2013 and well down on the peak year of 2016, which saw transactions in German hotels of more than €5bn. This year's first quarter has seen only €255m invested - hardly auguring well for the rest of the year.
