German Hotels Viewpoint 2015

German Hotel Investment Market - Climbing to New Heights

​Setting the Scene

Compared to a large majority of European countries, the German economy has recorded above average growth within the Eurozone over the past years. Its GDP growth in 2014 was 1.6% compared to 0.9% on average in the Eurozone. Despite the difficult economic situation in Europe and political circumstances in Ukraine and Russia, the German economy performed very well in the fourth quarter of 2014 and was even able to gain significant momentum before the turn of the year 2014/2015. GDP growth in Q4 2014 was 0.7%. The country benefitted from the recent fall in oil prices and the depreciation of the euro against the US dollar and other major currencies, which fuelled exports as German goods became more affordable for foreign buyers. Moreover, growth was driven by the continuously decreasing unemployment rate, increasing real wages and salaries, strong domestic consumption driving capital expenditures, a positive economic climate, record exports and record stock market results. It is therefore no surprise that Germany remains a top priority on investors’ radar.

 

Germany not only showed strong  performance on an economic level; on a tourism level, travelers continued their love-affair with Germany in 2014, as the country’s tourism arrivals and overnight stays grew for the 5th consecutive year  [fig. 1]. 

 

Total overnight stays reached a record of 424 million, up 3% on the previous year, fuelled by 6% growth in international arrivals and a 3% increase in domestic visitation. Occupancy grew in all ‘Top 7’ cities (Munich, Hamburg, Frankfurt, Düsseldorf, Cologne, Stuttgart, Berlin), while Average Daily Rate (ADR) reported growth in all cities except for Frankfurt and Cologne. 

The German market  has witnessed continued, positive RevPAR growth in the first three months of 2015. Country-wide occupancy has grown by 3.0% to reach just under 62.0%, while the ADR grew by 4.0% to reach approximately €98.00. Cologne and Munich witnessed particularly strong growth in the first quarter with RevPAR increasing by just under 20.0% and 15.0% respectively.

Gross Operating Profit Per Available Room (GOPPAR) growth was positive in all locations reviewed, as illustrated in the graph below [fig. 2], and sits above pre-crisis levels, which is not the case in a lot of other European markets. In general, year-on-year GOPPAR growth averaged 5.0% (nominal), illustrating that hotels have benefited from increased revenues and cost control to grow profits. Going forward, we envisage continued scope for GOPPAR improvement in Germany as ADR in the country still lies significantly below that of its neighboring countries and demand continues to grow, although the new minimum wage laws may counterbalance some of this growth. 

​who were the buyers in 2014?

Hotel investment in Germany reached a new record in 2014 of €3 billion. It even surpassed the previous, pre-crisis peak in 2007 of €2.2 billion by more than a third [fig. 3]. Compared to the 2014 levels of €1.7 billion, the transaction volume grew by an astounding 74% or €1.3 billion. As an overall real estate asset class, demand for hotels has risen significantly and the share of hotel investment compared to that of the overall commercial real estate market in Germany lies at 8% compared to only 6% in 2013 [fig. 3].

 
Unlike in 2013, foreign investors dominated the German hotel market in 2014, contributing €1.7 billion and achieving a pro-rata share of 57% of the total. The most active international investors originated from France, the United States and the United Kingdom. Investors generally see the German market as a safe-haven within Europe, given the country’s strong underlying economic fundamentals. US investors additionally benefited from the weak Euro, making investments in Germany more attractive. Inversely, the percentage of German investments dropped from 55% to 43%. However, in terms of absolute values, investment volumes rose by 35%, from €955 million to €1.3 billion. 


Private investors and family offices were particularly active in 2014 and have identified hotels as an attractive asset class where they can secure higher returns than leaving their money in the bank. Private investors poured around €728 million into hotels in 2014, up 110% on 2013 levels and now make up 24% of the total investment pie. Some of the major transactions by private investors included Asklepios Kliniken and Dr. Broermann Hotels & Residences joint purchase of the five-star Atlantic Hotel Kempinski in Hamburg from Octavian Hotel Holding. Octavian Hotel Holding sold a further hotel, namely the Taschenberg Palais Kempinski in Dresden, for €73 million to private investor Erwin Conradi. In the last quarter of 2014, CBRE Hotels advised on one of the largest single-asset transactions, the Hilton Frankfurt, which was sold by London & Regional to a private investor.

Insurance and pension funds showed considerably more interest in hotel real estate in 2014, which was an asset class that they previously considered to be too risky despite the wide availability of fixed leases, making hotel investments particularly attractive through the cycle [fig. 4]. Given the low interest rate environment and low returns on alternative investments, however, the incorporation of hotels with strong underlying performance fundamentals, into a larger real estate portfolio is now more attractive to these investor groups, given that yields of hotel investments subject to fixed leases tend to be 50 to 100 bps above those of comparable offices buildings. An example includes the purchase of the Hampton by Hilton development in Frankfurt’s Europaviertel by the Württembergische Lebensversicherung for around €19 million. Furthermore, the Landesärzteversorgung Hessen purchased the Holiday Inn Berlin City East side. The increasing size of institutional funds, such as the open-ended funds run by the likes of Union Investment and Deka Immobilien, is also putting pressure on the hotel investment market.

 
While single asset transactions still accounted for the bulk of transactions at 62%, portfolio transactions expanded their market share from 30% to 38%. In May 2014, Accor acquired a portfolio of 67 hotels in Germany that had been operated by Accor under variable-rent leases. The price tag for the portfolio, which also included 19 Accor hotels in the Netherlands, was €722 million. The portfolio was sold by two Moor Park investment funds, which had originally acquired the portfolio from Accor in 2007. This reflects Accor’s buy back strategy/asset-right strategy and reversal from their asset-light approach a few years ago. Another large portfolio deal involved Apollo Global Management’s acquisition of the 18-hotel SITQ portfolio from Ivanhoé Cambridge. The 11 German hotels make up most of the value of this Continental European portfolio. The hotels are operated under the IHG brands of Crowne Plaza, Holiday Inn and Holiday Inn Express.

The momentum of 2014 has spilled over into 2015. The transactions volume in the first quarter of 2015 totalled €643 million, three times higher than  in the same period in the previous year. Five portfolio deals in particular, contributed to the increase in transactions volume, including the acquisition of the 22 German hotels by the French REIT Foncière des Murs from the Carlyle Group for €128 million.  A second larger deal was that of nine Motel One properties that were sold for €34 million to Foncière des Murs, a visibly very active player in the first three month-period. Accor also recently announced the sale of 29 hotels in Germany and the Netherlands for €234 million, including ibis budget, ibis, Mercure and Novotel hotels, which will contribute significantly to the transaction volume of Q2 2015. Of the 29 hotels sold, 27 were acquired in June 2014 as part of the acquisition of the Moor Park portfolio. The two other assets, an ibis budget in Germany and a Mercure in the Netherlands, were previously owned by HotelInvest.

 

​​looking into the crystal ball

 The stable development of the German economy, robust labor market figures, historically low financing conditions, decreasing oil prices, a dropping Euro exchange rate, as well as a significantly recovering global economy and growing tourism numbers are all factors that positively impact the performance of the German hotel market and increase the attractiveness of hotel investments in the country. Given this optimistic outlook, economic forecasts have been revised upwards since the beginning of the year. Now real GDP growth in Germany of almost 2% appears to be realistic for 2015. Interest rates are expected to continue to be low, leading money to flow towards property where investors can generate a higher return, including hotel assets. 


Who will the buyers be and where will they come from?

Private equity funds are flush with cash and have a need to deploy capital, motivating to push forward with deals. It is expected that American and Western European private equity firms will be particularly active and that alongside the US and the UK, they will continue to look at Germany as a prime destination in which to place their money. Given the lack of undervalued or distressed assets on the market in prime German cities, which private equity funds initially sought out post the 2008/09 crisis, these buyers are likely to move to slightly riskier and potentially lower-quality assets in B and C cities. Moreover, they may also show greater interest in assets in need of asset management and/or that offer scope for refurbishment, which they can then sell off to more cautious buyers post renovation.

We also envisage insurance and pension funds to continue to invest in real estate given the low interest rate environment and low returns on alternative investments. We believe that insurance and pension funds will continue to become more adventurous as market fundamentals improve. Until now, they have focused on core properties in gateway cities in order to minimize their risk; however, they may start looking towards smaller markets and slightly less pristine assets, subject to a fixed lease, given the lack of the former on the market. Hotel real estate is an ideal asset class for insurance companies diversifying  their portfolios; however, fixed leases seem to remain the best fit for these types of investors. Fixed income lease terms are often considerably longer than those of other asset types, and yields currently si​t above those of traditional real estate segments, even in prime locations.

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“Asia” is the buzz word of 2015 within the real estate investment landscape. Particularly Chinese investors are expected to play a more important role in the German hotel real estate market as restrictions on outbound investments have recently been eased. Prior to 2 December 2013, Chinese companies seeking to invest overseas had to obtain approval from at least three governmental authorities. This was then amended a few months later and only investments exceeding $1 billion had to be approved. On 6 October 2014, this process has become even more decentralized and the most recent change in regulations state that even investments above $1 billion only require filing rather than approval of outbound investments, unless it is a sensitive country or sensitive industry. The time frame of the approval process has also been shortened to between 20 and 30 days. 

Although Asian capital normally goes to prime assets in some of the world’s most cosmopolitan cities, such as New York, London and Paris, this might change going forward and Germany is likely to begin to attract a larger portion of the pie. While there have been limited investments in German hotel real estate by Asian buyers in the past, they are now screening the top cities in Germany for potential future hotel investments.

Chinese insurance companies have so far become a main investor on the international market. They are currently in the process of purchasing the Waldorf Astoria in New York City for $1.95 billion, which would mark a new record in terms of single asset hotel transaction in the United States. In Europe, the Shanghai-based Jin Jiang International Holdings purchased the French budget hotelier Groupe du Louvre. Furthermore, Kai Yuan Holdings, a Hong-Kong based real estate investor, purchased the Marriott Champs-Elysées for €344 million from Abu Dhabi Investment Authority (ADIA), which equated to €1.8 million a key. The Chinese have also been involved in multiple Merger and Acquisition (M&A) deals in Europe. In Spain, the HNA Group, the parent company of Chinese carrier Hainan Airlines, acquired an additional 8.3% equity stake in Spanish hotel management company NH Hotel Group from Italian bank Intese San Paolo. Additionally, Fosun International  acquired Club Méditerranée in the Paris bourse’s longest-ever takeover battle for €939 million (€24.60 per share). CBRE’s research shows that the hotel sector is attracting much more attention than in the past years, with Asian investor preferences increasing for this asset type from just 1% in 2014 to 12% in 2015.

​What type of assets will investors look for?

Trophy assets will never lose their appeal to investors, especially those looking for assets with an emotional pull. However, as investors seek out higher yields, we expect budget and mid-market assets to continue to be sought after, along with potentially growing demand for lifestyle hotels. This trend has already been reflected by Foncière de Murs’ (FDM) recent purchase of nine Motel One hotels throughout Germany as well as FDM’s strategic partnership with Meininger Hotels, in which they are planning on investing approximately €400 million in hotel assets, which Meininger  would then lease from them for their own operations.

We also see continued demand for higher-yielding opportunities in regional markets as hotel performance fundamentals are strong. The continued yield compression in Germany’s top seven locations along with the willingness to increase risk should drive investment liquidity in Class-B cities. Generally, investments in B locations benefit from a higher yield (around 50-100 basis points), reflecting lower liquidity compared to prime locations. This may start putting some downward pressure on yields for good quality assets in B locations during 2015. 

A second trend we observe is the increasing interest in serviced apartments in Germany. Investors are beginning to understand the benefits of serviced apartments, which generally stem from their lean cost structure and high GOP. In addition, a market that has traditionally been dominated by owner-operators is now seeing an increase in branded product. Some of the players, like the Toga Group with its highly successful brand Adina, are offering attractive lease contracts appealing to German institutions. We therefore envision growth in investor interest in serviced apartments over the next 12 to 24 month period.

​​Lastly, investment in development projects will continue to increase as investors are willing to take more risk and as prices for existing hotels continue to rise much above development cost levels. This is also fuelled by the fact that commercial banks have now returned to providing debt competitively in the hotel space and there is the opportunity for lending across the full hotel debt matrix including for development in good locations. There are currently around 350 hotel projects planned or under construction in Germany, offering around 53,000 additional hotel rooms by 2016 according to www.hotelier.de. These additional hotels are likely to increase the pressure on non-refurbished, privately run hotels, which will either have to close down or refurbish to adapt to the needs of the modern traveler. Yields tend to be higher for development projects, given that the investor undertakes the developments risk, as well as the performance risk upon completion of the asset. However, this may be the investors’ only chance into a market and they are therefore willing to take this risk.

is there further room for yield compression?

Everything in life is relative – particularly pricing for real estate. Investors around the globe are struggling to attract returns. Real estate as an asset class benefits from being relatively cheap (ie. considerably better returns) compared to bonds, and low risk relative to equities. This has led multi-asset managers and other investors to start considering real estate as part of their investment portfolios over the past years. For some investors this may be a short-term approach and they may move away from real estate again as soon as other allocations prove to once again become more appealing. However, a large number of investors, including institutional investors, are likely to stay active within the real estate market, given the continued low interest rate forecast by economists and the flight from cash to higher yielding investments. 

Additionally, Asian investors are sitting on substantial levels of cash that they are waiting to deploy in the real estate market. This will most likely lead to continued yield compression in the core segment.

Over the past 12 months, yields in Germany have sharpened considerably and currently sit at around 5.0%-5.25% for hotel properties subject to a lease, although yields can be significantly sharper for prime assets in top locations, depending on the type of buyer [fig. 5]. The increase in investor appetite for the German market is a further indication of the confidence that investors have in the country. As investors continue to be cash rich, interest rates are likely to remain at low levels for longer – particularly in continental Europe, and as demand exceeds existing supply, prices are expected to continue to increase, probably leading to further yield compression. In the past 24 months, yields for hotel assets decreased more sharply than yields for prime offices. Going forward, we envisage that the yield gap between prime offices and hotels will potentially decrease further to as little as 50 basis points, down from 50 to 100 basis points last year.

​​conclusion

Seven years after the onset of the global financial crisis, both national and international investors have for the most part regained their confidence in the real estate market, particularly in the hotel market. The positive economic fundamentals in Germany, especially when compared to other EU countries, generally low interest rates, high international capital mobility and the search for real estate assets classes that will provide higher returns, is expected to continue to drive the demand for hotels. Moreover, the strong tourism fundamentals in Germany, reflected by the country’s 5th consecutive year of growth in terms of tourism arrivals and overnight stays and hotel GOPPAR levels above the pre-crisis peak in all of Germany’s seven large cities, will help support hotel investments decisions in Germany. 

​To conclude, we want to leave the reader with thoughts that will inevitably define the German hotel real estate market in 2015:

  1. The outlook for the German hotel industry remains strong for 2015, with many investors flush with cash and thirsty to tap into the hotel real estate market. Yet the real question is, will there by enough willing sellers to quench this thirst? Many hotel real estate owners are currently holding on to their assets given the lack of higher return possibilities elsewhere.

  2. Will demand for those assets that do come onto the market in Germany be so high that yields will compress further? 

  3. Will the German hotel real estate market be impacted by the ongoing crisis in Russia and the Ukraine and how will this affect investor sentiment? ​

selected german single asset transactions 2014


 

​Selected German hotel portfolio transactions 2014