Although cost pressure and financing as well as a shortage of employees are placing heavy demands on operators in Germany, the outlook for the hotel industry is improving. However, despite the fact that the flight of investors from the asset class so much feared during the pandemic did not materialize, there is currently little movement on the market. Hospitality Investor investigates why.
Financing expensive to impossible
Despite the current macroeconomic uncertainty, hotels remain popular with investors. The main obstacles are the gap between buyers and sellers in pricing and the tighter financing conditions due to rising interest rates.
“Banks now demand at least fifty percent and more equity capital. Just two or three years ago, it was 20 to 30 per cent. There are exceptions, of course: Top properties with top operators are still financed,” says Martin Schaffer, managing partner at MRP Hotels.
Otherwise, only expensive mezzanine financing is an alternative, which, is often much too expensive for most hotel properties. As a result, market participants are waiting and postponing their investment activities until at least to Q 3/2023, hoping for falling prices. In addition, the development pipeline has slumped by around 20 per cent.
Hotel transactions at a very low level
2022 was not a good year for the transaction market. At €1.9 billion, the volumes in Germany were the lowest of the last eight years. The Russian invasion of Ukraine, inflation, banking turmoil, and rising interest rates all put a damper on optimism. At just under four per cent, the share of the total commercial transaction volume was also lower than ever before, according to René Schappner, head of hotels at Colliers Germany.
Since reunification until the beginning of 2020, the hotel industry in Germany and with it the investment market had mostly been on an upward trajectory - despite a profound structural change. Many small and medium-sized businesses are now selling up, and hotel groups are increasingly entering the market in major cities. However, private hotels still have the largest share of the German hotel market, accounting for 60 per cent of all rooms.
The period of restraint
The first quarter of 2023 was also disappointing with transaction volumes of €200 million, 56 per cent below the prior-year figure. The ten-year average was around 70 per cent below the average. These were exclusively individual transactions with an average value of €15 million, mostly smaller, operator-free properties with value-add opportunities and core plus properties in good locations.
In the core segment, on the other hand, there were only a few purchases due to the turnaround in interest rates and price adjustments. An interesting fact: There were no portfolio sales at all. By comparison, the share was 20 per cent in 2020 and 46 per cent in 2016. On the buyer side, German investors dominated with 40 per cent, followed by British investors with 36 per cent, and 21 per cent from Israeli Investors. Surprisingly, nearly half of the investors were hotel operators, with institutional investors making up 20 per cent. Private equity firms were well behind in third place at 13 per cent, according to Cushman & Wakefield's analysis.
Changing financing costs and diverging price expectations
It was primarily the rising cost of financing that caused yields to rise abruptly and slowed the investment market so sharply. Prime yields in the first three months of 2023 rose 0.4 percentage points year-over-year to 4.65 per cent but remained stable compared to the final quarter of last year.
"Compared to other asset classes, prime yields for the hotel asset class have adjusted upwards earlier and more strongly in the wake of the pandemic," says Jan Linsin, head of research at CBRE in Germany.
Experts are certain that the slow transaction market will continue until buyers and sellers have finally found a new price equilibrium. For the next few months, the industry is therefore hoping for a convergence of purchase prices and thus more lively transaction activity. The wait-and-see approach also has to do with the fact that there is still a high degree of uncertainty about price levels due to the lack of benchmark deals.
"We expect an increase in market activity in the second half of the year. There are numerous hotels, including portfolios, for sale, which will probably lead to a higher closing rate and investment activity from the third quarter onwards," says Josef Filser, Head of Hospitality Germany & Austria at Cushman & Wakefield.
However, banks and many investors are still risk-averse. Sven Nötling, head of hospitality at Commerz Real AG, says there are definitely interested buyers on the market, but many are no longer willing to pay developers more than the factor twenty of the annual rent. For top properties in premium locations, this may still be still possible with high-net-worth individuals, but not for open-end funds. However, many properties are still associated with rather high expected prices on the part of the sellers. It is difficult to find interested parties for them.
Difficult topic: new hotel buildings
Currently, many hotel projects are delayed due to supply bottlenecks. In addition, complaints are being heard that reliable costing of new projects is almost impossible due to constantly changing financing requirements and construction costs. Compared to previous years, there will be a lower supply of forward or new construction transactions in the market, according to Schnapper.
The feared distress sales on a larger scale have not yet occurred, according to analyses of research companies. Over the year, however, it is expected that, on the one hand, due to declining new construction activity and, on the other hand, due to possibly increasing distressed properties on the market, the prices of existing homes will come under pressure.
Hotel market: new players, new ideas
Although much is uncertain at present, the German market is nevertheless interesting both for established hotel operators such as Motel One and B&B, but also for newcomers such as Premier Inn, Stayery, Numa and Limehome. The degree of digitalisation is increasingly playing a role, as they can reach beak-even even with lower occupancy rates, as they are significantly less staff-intensive and therefore incur lower operating costs.
Newcomers like Josef Vollmayr, Co-Founder & Managing Director of Limehome, Hannibal Dumont-Schütte, Founder and Managing Director of Stayery and Dimitri Chandogin, Founder and Managing Director of Numa Group see this as the biggest advantage. "We have digitized all of the processes, such as check-in and check-out and room pricing. And we use machine learning methods for site selection. This makes our model scalable and interesting for investors,” Vollmayr says. Looking at the projects: one-third would come from existing properties, one-third from development (mixed-use buildings), and one-third converted space, such as former office or retail space.
Despite all the multiple challenges, hotel experts expect the transaction market will improve the coming year, as the industry has learned to adapt to changing market conditions and to react flexibly accordingly. And so, investors and hotel operators are both relying on the same principle of hope.
A selection of transactions
- Mercure Heilbronn (136 rooms) Buyer: Whitbread/Premier Inn Group. Seller: hotel investor and operator Investhotel. As part of the acquisition, the property will be renovated and partially remodeled starting in May.
- Holiday Inn Express Offenburg (149 rooms) Buyer: open-end mutual fund Quadoro Sustainable Real Estate Europe Private. Seller: joint venture of Oxalis REIM, Zeitgeist Estates and Property3 Group. The property is under long-term lease to franchisee Tristar.
- Hotel-Development (257 rooms) in Berlin (Treptow-Köpenick in Berlin) Buyer: Premier Inn Group. Seller and developer: Project Immobilien. Opening is scheduled for 2025.
- Stays by friends Hotel Bochum (177 rooms) Seller: Anter Group, Buyer: ASHG, an investment platform of Alchemy and Step Partners: repositioning planned.