Commerz Real, the asset-management arm of German banking giant Commerzbank, has found a way to ensure that each member of its hospitality team is certain about the hotels they recommend for acquisition. After purchase, the lead on the deal becomes the asset manager of the property, with a mandate to optimise value extraction until the hotel is disposed. As Commerz Real is often buying for a long-term hold, this drives a rather deep due diligence practice, according to Sven Nötling, head of hospitality at Commerz Real.
“At Commerz Real, we have a team of around 10 people covering hotels, and every team member works on acquisitions and asset management simultaneously, so we have a special motivation to transact hotels that will perform,” he affirms. “Most of us are former bankers, from Deutsche Bank, Commerzbank, Dresdner Bank, who moved from the lending to the equity side.”
Banking experience
Commerz Real’s dedicated hospitality team came together in 2015, taking over from what had previously been a “one woman show”, as Nötling puts it. “In the wake of the Global Financial Crisis, it was a good time for hospitality in general, and it became too much for a single person to handle.” Commerzbank has just finished winding down its troubled mortgage bank Eurohypo, and had a wealth of talented bankers with the right knowledge and business to transact real estate. It was also a ”time of opportunity”, something that Nötling observes again today in the post-Covid environment.
“Hospitality has been on a very steep recovery curve coming out of Covid, which is a very good thing for our team,” he notes. “Another strong point is that you can’t ‘virtualise’ the hospitality experience. While retail and offices have suffered due to digitalisation trends, hotels are an experiential asset class – if you want to dip your feet in a pool, you have to actually go there.”
He adds: “We see people wanting to travel, and that means they need accommodation. From a business perspective, there are also negotiations that work better face to face, there are relationships that need to be developed, and all this builds the case for hospitality investment.”
Fund structures
The majority of Commerz Real’s hotel deals are destined for its signature fund, Hausinvest. This huge open-ended fund – one of Germany’s largest – was founded in 1972 and today holds 156 properties across the asset classes of offices, retail and hospitality. As of June 19, it was worth €17.4 billion. According to Nötling, Hausinvest currently holds 21 standing hospitality properties plus one hotel in development, representing 9.6 percent of the fund’s total portfolio – equating to a value of around €1.67 billion. He adds: “On top of that, we have two separate vehicles: a Commerz Real hotel fund and the European hotel fund, both dedicated for institutional investors. The latter is a cooperation with Deutsche Hospitality.” Deutsche Hospitality is the umbrella brand of German hotel company Steigenberger, and the European hotel fund only targets Steigenberger hotels.
However, that particular brand is also interesting for Hausinvest, which recently purchased the 4-star hotel Steigenberger Hotel de Saxe in Dresden. The 185-room property includes a restaurant, a lobby bar, a spa and wellness area, as well as conference rooms.
Says Nötling: “This recent deal exemplifies the sort of property we like in general – hotels which have appeal from both a leisure and business perspective.”
While Nötling firmly believes that “business travel is going to recover”, even if leisure has to date bounced back better, his team’s favoured asset types tend to straddle both niches. He adds: “Dresden has been a little bit under the radar but it’s a very interesting market. It has strong fundamentals, it’s a prime location for leisure travel, and great prospects for further business expansion. The city has one of the best technical universities around and an interesting cluster of tech facilities are growing up around that.”
While the Dresden deal – which was closed at the start of June – signals that Nötling’s team is actively acquiring, he concedes that the last 12 months haven’t provided the best dealmaking environment. “We really aren’t seeing a lot of transactions,” he says. “Financing conditions are not optimum, and there simply hasn’t been a lot of supply in the market. Like others we don’t want to fire sale our assets – we don’t need to get anything off the shelf. However, we are in negotiations on a couple of properties which I hope to close in due course.”
Country focus
Unsurprisingly, perhaps, Commerz Real’s main focus remains the German market, which Nötling describes as an “exciting” arena for hospitality investment. “Of course, there is a lot of competition and it can be difficult at times. Cap rates were pretty compressed pre-pandemic – deals were happening at 3.5 percent, which might have been reasonable at the time, but today is basically the ECB rate.”
Other markets the firm is looking at include Spain and Portugal, and Italy to a certain degree -- what Nötling calls “the European sunbelt”. He adds: “Post Brexit, the UK is challenging, and we see that the economy is struggling. Ireland is potentially an interesting play, but it’s a very small market, concentrated on Dublin.” On top of that, the firm looks opportunistically at other markets, including the Netherlands, Poland, and the Nordics.
In terms of asset type, one interesting subsector is aparthotels, with Commerz Real investing in products operated by the likes of Adina. “Coming out of the pandemic, that was one of the segments with good cash flows and seems to be developing nicely. People had certain reservations about how they mixed with others and aparthotels offered a solution.”
On the topic of pandemics, how does Commerz Real’s hotel team prepare for other ‘black swan’ events that might arise in the future? “A black swan, by definition, is hard to take into account,” Nötling notes. “We of course try to model in, where appropriate, if a hotel would hold value in a downside scenario. Can we really put a figure on that? Not always, but I don’t think our competitors can either – unless you are talking about the likes of Blackstone.
“We also have certain regulatory requirements which mostly preclude us from tackling significant value-add investments. But overall, the view is that hospitality is a cyclical business, you will always have ups and downs – hopefully in our investment choices there is sufficient leeway in the case of future challenges.”