As the economical heavyweight of Europe, Germany has upheld its reputation as a stable political power and safe haven for investors. In 2015, property investment amounted to roughly €82 billion.
Things have only improved due to the confusion caused by Brexit. In the three months following the referendum, Germany overtook the UK by about €3 billion as Europe’s leading destination for property investment, according to Real Capital Analytics.
Indeed, Germany remains a high performer compared with most countries on the continent, having had €1.15 billion of hotel deals in the first quarter of the year, showing an increase of 55% from the same period in 2016. This is according to figures from CBRE, which reveal a 14% drop to €3.92 billion for the rest of Europe during first quarter of 2017. If these projections are accurate, Germany will finish the year on approximately €4 billion in hotel deals.
A 2017 report from Christie & Co shows that Germany is a popular destination for domestic investors. There has also been significant interest from the US – thanks to a strong dollar against the euro – and European and Asian funds. Germany has grabbed the attention of investors and international operators as a result of the impressive growth shown by the RevPAR increase of 3.4%, which is in excess of the overall 1.9% rise in GDP. Many hotel sector players are making their German debuts or expanding their portfolios.
Market debuts and portfolio expansions
New Century, a Chinese group, made its European debut in Frankfurt-Offenbach, while UK chain Premier Inn opened its first German hotel in Frankfurt. Moxy Hotels entered the market with a property at Munich airport, followed by others in Eschborn and Berlin. Max Brown Hotels followed suit by launching urban residences in Düsseldorf and Berlin.
Operators that already have a stake in the market are expanding. InterContinental Hotels Group has signed eight new hotels under the Holiday Inn brand in Germany, while Althoff’s Urban Loft Accommodations, Centro’s Ninety Nine Hotels, Lindner’s me and all, the Soulmade by Derag, ARCOTEL’s MOOONS Leonardo’s NYX, Ascott’s Lyf and Hilton with Tapestry and Hyatt’s The Unbound Collection are expanding their offering.
“The contract is the first hurdle that makes entry difficult for foreign operators,” says Ulf Templin, managing partner at hotel, leisure and tourism consultancy PKF hotelexperts. Germany, he quips, is known as the ‘lease country’ where developers and investors continue to prefer lease contracts, despite international operators moving away from this approach.
In Germany, operators who want to enter the market need to sign a lease contract – preferably with a fixed lease – which Templin considers to be an essential factor for making hotel development financially feasible.
“If you decide to enter the German market as a foreign hotel operator, you have to be ready to accept this kind of contract,” Templin adds. “Many hotel operators do, but some say ‘it is new for us’ and they need to think about it or are having some difficulties with the document.”
Despite the contractual ‘hurdles’, there is plenty of room in the market for new and foreign operators to make a dent, according to Kay Strobl, director at Christie & Co. “We have a lot of individual hotels, and the market penetration of chains and brands is not as important as in other countries,” she says.
Claiming a stake
Two and three-star hotels are of particular interest, says Strobl, who also heads the organisation’s advisory and valuation services in Germany. This segment is attractive to brands that want to enter the market and gain a decent share in a short space of time. Of course, the predictable patterns of the bell curve dictate that the mid-segment does better than the outliers of budget and luxury.
However, it is sometimes the case that these properties are struggling with financing or are stuck in an “innovation backlog”, says Strobl, who adds that independently owned properties might also suffer from generational schisms. Parent owners are unable to convince their adult children to take over the operations of family-run hotels.
As the old adage goes, one person’s problem is another’s opportunity. These struggles give investors a way into the market by acquiring hotels and integrating them into existing portfolios or rebranding them.
The independent-family hotel model is becoming antiquated in an age of branding, but it is just one aspect of a far greater shift in the industry. Indeed, much has changed since Templin founded his company two decades ago. “We have already finished the big transformation from being a former production and farming country to favouring new technology.”
Volkmar Pfaff, chief operating officer Central Europe at Accor, says, “Disruption is the key word. We have to look at it in a positive way.” He talks specifically about a “digital tornado” that has transformed the industry, bringing disruptive business models to mind, including online travel agencies, aggregator sites and Airbnb. However, there are subtler changes occurring in the German hotel market.
According to a second report that was published by Christie & Co this year, institutional hotel investors are trying to overcome the limited supply of properties by focusing on Germany’s coastal cities.
Focus is being diverted from A-list destinations and big cities, with visitors looking for new ventures in places such as Flensburg, Kiel, Bremerhaven, Rostock and Lübeck.
They are all growing in popularity among holidaymakers, city tourists and business travellers, leading to a rise in developments that is higher than the national average.
UK-based INTERNOS Global Investors recently acquired the Steigenberger Hotel in Kiel and the German branch of French fund LFPI Group purchased the Hotel Excelsior in Lübeck. The report suggests demand for vacant or long-term lease properties remains high.
A tale of many cities
This trend is driven, in part, by decentralisation. Unlike countries such as the UK and France, which have two markets – the capital and everywhere else – Germany has its 'top eight cities’: Berlin, Stuttgart, Hamburg, Munich, Frankfurt, Cologne, Dusseldorf and Dresden. This is “very interesting from a leisure and business perspective,” says Strobl.
Starting with business, the International Congress and Convention Association ranked Germany as the best country destination in Europe in 2016, with Berlin sitting in fourth place on the list of best cities.
“We are generating a lot of demand from huge and partially one-off events that have a lot of prestige, and this is also driving the average daily rate,” states Strobl.
The statistics do not show annual growth, but this is because some major events happen once every three or four years. “Twenty years ago, we didn’t even have 60% occupancy and now we are above 70% for the whole of Germany, so it is really good.”
Capital gains
Having multiple cities that are worthy of capital city status means infrastructure is well developed in all of them. This makes organising conferences and meetings much easier than it would be in other destinations.
Not only is it easier to organise events, it is also a country that has easily accessible destinations from most parts of the world.
This is one of the reasons behind the rising number of leisure travellers visiting Germany.
It is not uncommon for business travellers to add a few days onto their trips to turn them into leisure experiences. Last year, city trips accounted for 41% of leisure holidays, according to Pfaff, with numbers to Dresden, Berlin, Freiburg, Frankfurt, Munich and Cologne increasing.
While growth is positive, it is, in part, being driven by the terror threat. Places where Germans have traditionally sought to travel are no longer safe to visit. Instead, they are staying at home to enjoy the Alpine and coastal regions, including the Baltic and North seas. Only 18% of all overnight stays are generated by foreigners.
An interesting consideration is that Germany has also suffered at the hands of terrorists. However, incidents in Munich, Cologne and Berlin have not affected the German hotel market. Pfaff attributes this to having a “thriving domestic tourism market, which is growing in strength even as the threats outside the country worsen. People are frightened to go abroad.”
The strong domestic market is a huge asset, according to Templin, as it makes Germany somewhat “independent from international demands”.
Adapt and thrive
This independence was also seen in the wake of the financial crisis. Many countries floundered as the recession set in, but things were different in Germany. With a diverse range of high-performing industries – including the automotive, manufacturing, chemicals and food sectors – the country managed to soften the impact of the finance sector’s implosion. “Almost all markets broke down in Europe and overseas, apart from the German markets, because of this diversification,” says Templin.
From a risk perspective, Germany’s economy, and the hotel market as a consequence, is sound. It is able to adapt to disaster, and change. Sidestepping the financial crisis played a significant role in the buoyancy of Germany’s hotel market, but other factors have ensured consistent growth.
A robust economy, decentralised-city structure and relative insulation from terrorist threats make Germany an attractive destination for investors, operators and travellers.
International operators have to choose whether to develop their own product or align with existing smaller operators through mergers or buy-ins; whatever route they choose, players in the hotel industry will do well to put their money on the heavyweight.
