Surge in demand for German hotel investments

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It’s been a blistering start to the year for the German hotel sector, which has veered right back into the cross-hairs of institutional investors after a lengthy period of being decidedly out of fashion. At €596m in new deals this year, that’s a rise of nearly 400% on the same period last year, making it the best performance since 2007.

The first quarter alone has seen nearly half of last year’s total transaction volume of €1.3bn reached in Germany, as investors scramble to get their hands on assets. One major deal stood out – the €300m sale of the Queens Moat portfolio to the Israeli Fattal Group (which included Holiday Inns, Best Westerns and Queens hotels) – but even without that, it’s been the strongest start for five years. €250m of the total volume was accounted for by 12 single-asset transactions, including the sale-and-manage-back of the prominent Fairmont Four Seasons Hotel in Hamburg by Farimont Raffles to the Dohle Group.

Most of the broker groups are confidently predicting an above-average full year for the sector, even if subsequent quarters are – as expected – at a less breakneck pace.

The reason for the surge in interest in the sector, particularly from international investors, is the current availability of good hotel assets – and possibly the dearth of comparable office properties. In a sector report, Jones Lang LaSalle’s Head of Hotels & Hospitality Germany, Ursula Kriegl, commented: “We are optimistic that the German hotel transaction market will sustain this good beginning, with single assets as well as portfolios currently on the market supporting this forecast. Last year’s volume will be achieved without a doubt, and may even be exceeded.” Investor interest is found in almost all segments, with a slight tendency towards upscale and budget hotels, she added.

Property adviser Colliers reports that the largest group of buyers, at about €321m, were corporates and owner-occupiers, followed by private investors and family offices (€97m), pension funds (95m), and open-ended property funds and Spezialfonds (€50m).

Frederik Schwappe, head of hotels at CBRE in Germany, sees the low interest rates, the ongoing strength of the German economy and renewed foreign interest in the sector as all helping to bolster demand. Premium hotels were still offering initial yields of more than 5%, he said. His colleague Olivia Kaussen added that there was considerable interest by particularly doctors’ and other occupational pension funds among German investors for exposure to the sector, with 4-and 5-star hotels strongly favoured.

Geographically, the demand is largely focused on the Big Six cities of Berlin, Düsseldorf, Frankfurt, Hamburg, Munich and Cologne, which together account for 70% of turnover nationwide.

A number of very prominent German hotels are nonetheless still on the market, and for various reasons, which have been scrutinised closely in the German press, may prove to be only for the very hardy. The magnificent Grandhotel Heiligendamm on the Baltic coast – scene of G7 summit meetings in the past – is a classic trophy asset that has cost its owners untold millions, but may yet find another group of idealistic investors, who see only opportunities in its isolated location.

Fund manager Commerz Real is another seller, looking for buyers for its two top-end Rocco-Forte-run hotels in Frankfurt and Berlin. Investors looking to buy the Land Fleesensee complex up in the beautiful Mecklenburg Lake District between Berlin and Rostock will be warmly welcomed, particularly if they bring Swiss Francs. The picturesque resort, ideal for golfing and fishing, went bust a couple of years ago after arranging its financing in the Swiss currency, which then moved the wrong way against it.

The business fundamentals do however look good for the German hotel industry, trophy assets aside. A report on the sector by industry research group STR Global showed the German hotel industry performing well on a European comparison. Year-to-date through February, Germany’s occupancy increased 0.3% to 59.3%; average daily rate grew by 1.3% to €93.34); and revenue per available room was up 1.7% to €55.40.

The country has seen double-digit growth in visitor arrivals from the Gulf region, Russia and China, making it less dependent on its struggling European neighbours. A further 380 hotels are in the pipeline for opening in the next three years as developers look to capitalise on the robust market.

A report published in December last year by Luisa Pott and Arlett Oehmichen of London-based hotel consultancy HVS concluded that there was plentiful financing available for German hotel investments, where the fundamentals of location and management are sound. “We can certainly confirm that our survey of German banks indicates a healthy appetite for hotel investments,” the authors said in the report. “Financiers are not giving the money away and remain sensible/prudent, but for the right transaction a proper amount of debt is available at the right price.”

Hotels operating under a lease agreement are seeing LTVs of 60% to 70%, according to the HVS survey. Further, banks surveyed identified personal guarantees (cash, lien on equity or other assets) as the most necessary factor that must be in place in determining the success of getting a hotel loan.

Munich-based pbb Deutsche Pfandbriefbank, for example, only entered the hotel-financing sector last year. Oliver Gruss, senior director at the bank, said that the bank had noticed an increase in the number of loan applications for the hotel sector, and that “We are happy to provide funding for hotels on a selective basis as long as the parameters match our conservative risk profile.” Obtaining loan to value of about 50% should be feasible, he said, and borrowers could avail of interest rates of 3% to 4%. “However, as is always the case, the market prefers transactions where the financials show a robust historic performance and the operator can demonstrate a proven track of performance,” he added.

“As a country with strong economic performance, Germany still counts as an attractive location for the hotel industry,” he said. “Performance, not only in the top locations, is promising. We expect that to continue on though 2013.”