Investor Profile: Union Investment’s long-term approach to hospitality

In November 2022, Union Investment Real Estate, the real estate fund manager of the Union Investment Group, inked a hotel acquisition which was a little different from its usual target. The purchase of a Marriott Bonvoy Autograph Collection boutique hotel on Lake Tegernsee in Germany marked the firm’s first move into the resort market, following significant analysis and ultimately inspired by shifts in demand post-pandemic. Says Andreas Löcher, head of investment management hospitality at Union Investment: “The resort hotel sector has experienced decades of growth. It has shown itself to be crisis-proof and demonstrated its resilience again during the Covid-19 pandemic.”

Following the Tegernsee deal, the fund manager also picked up the Grand Palais Steigenberger on the island of Usedom in the Baltic Sea in May 2023. The 120-room property is one of the few hotels on the island in the luxury segment and includes two restaurants, a bistro, conference centre and wellness area with indoor and outdoor pools. Union Investment is adding another 10 rooms for its relaunch in 2025.

However, Löcher notes that for now, these two deals mark a diversification play rather than a major shift in strategy. “Out of 90 hotels in our portfolio, to date two are resorts,” he says. “The majority of our holdings are still city centre hotels which today are able to capture business and leisure travel, which we find a compelling investment prospect.”

Indeed, while for many years the fund manager ostensibly focused on business travel for its city centre hotels, it has welcomed the recent shift to Bleisure trends, and the overall importance of leisure stays in hospitality’s post-Covid comeback. The firm notes that many  operators, also in the light of generational changes, have also become more institutional.

“The ‘revenge of tourism’ trend has been powerful,” he notes. “Leisure-focused properties benefitted from the sense of people having a ‘right to travel’, even in times of inflation, and inspired to do so more than ever post-Covid.”

Evolution of an investor

While the investor is certainly an historic investor in hotels – active in the sector for over 50 years – the firm has not been afraid to shift its strategy to capture changing opportunities.

Formed in 1965 as  Co op Immobilienfonds Verwaltung and later renamed DIFA, before becoming Union Investment in 2001, Löcher notes that the asset class “was an important sector” for the firm virtually since day one. However, the last decade in particular has seen the group’s hospitality investments expand rapidly to a €7 billion portfolio today across 90 assets, in ten countries. “Hotels represents around 13 percent of our entire real estate exposure today,” he adds.

While for many years, the fund focused primarily on German hotels, there has been significant geographical diversification in the past 10-15 years as the firm started investing in gateway European cities and markets. “Then, around eight years ago, we moved into the US where we now own nine hotels spread all over the country,” he says.

Growth has been contingent on identifying the right partners for expansion. “We were the first institutional investor in Motel One, and they have grown together with us,” he notes. “Our successful fund UII Hotel Nr.1 has focused heavily on Motel One properties.” Founded in 2013, the budget-focused fund, which has grown to around €360 mln, has now reached maturity. Tens of other hotel properties, spanning some 46 operators in total, are held in mixed-asset funds, including UniImmo: Global and UniImmo: Deutschland.

The firm’s institutional structure does mean that it is limited by Germany’s finance laws as to the lease types it can propose. “We can only offer lease agreement models to hotel operators, which guarantee us a fixed rental income,” he stresses. “We can’t work with management agreements where the income is variable and dependent on performance.

“Many Anglo-Saxon operators are predominantly undersigning hotel management agreements, such as Intercontinental, Marriott and Hyatt. However, there is a way to still work together through a sandwich lease structure, particularly under a franchise agreement, with an experienced operator in the middle, a so-called white label operator.”  

Segment diversification

This legal aspect has also driven the firm’s German  focus, where management-style agreements are still few and far between. Notes Löcher: “Germany has been a very good market for us; it is decentralised in nature, and we have many strong second markets in the country.

‘Coming out of the pandemic, notably, secondary markets have been quicker to come back vs the large, business-oriented markets. We have also had success in Germany investing into aparthotels, working alongside brands such as Adina and Adagio, as well as micro-living formats, although the latter doesn’t fall under my remit.”

In the past, Union Investment has occasionally punted on mixed-use projects with hospitality elements, but Löcher describes that as “more opportunity driven”. Furthermore, the firm’s historic appetite for development has subsided a little in the current climate. “We are already investing in a very selective way at this point in the cycle, and development deals would be lower on the list.”

Deal rationale

As an open-ended fund manager, Union Investment needs to be sure to keep some “dry powder” for investment opportunities because there is always the risk that cautious investors in its funds may want to make withdrawals at some point. Furthermore, Löcher is wary of the current, tricky operating environment. “While the KPIs for hotels are encouraging in both the business and leisure segment, expenses like personnel and energy are quite challenging, while index-linked leases can squeeze operators still further in case leases are logged in at a too high level. But we see that particularly budget hotels as well as full-service hotels with certain USPs remain fairly resilient, even in this context.”

Booming geographies, such as the lease-dominated Spanish market, also continue to appeal. “We bought our second hotel in Barcelona last year – the Hotel Barcelona 1882 – and that’s a very interesting market. The city recovered quickly and currently has a moratorium on new hotels. We would also consider leisure hotels in the south of Spain, but on a case-by-case basis.” What about the rest of southern Europe? “We are monitoring Northern Italy but it’s not a focus,” he says.

ESG concerns also feature highly in the strategy, with the firm “revising the assets in the existing portfolio step-by-step”. “It can’t happen overnight, but the wheels are in motion. It is an important factor when doing due diligence pre-acquisition,” he notes.

Overall, however, Löcher thinks it’s an interesting time to be weighing up further deals. “Investors certainly have less competition for assets than they did in 2019, largely due to the current cost and availability of debt. Prices are adjusting downwards. So, while we are exploring potential buys we are also thinking about selected disposals.” He concludes: “Overall, we take a long-term view of the sector and it’s an industry that we will continue to back.”