According to the latest analysis from Union Investment, the investment arm of Germany's DZ Bank Group, and German consulting firm Bulwiengesa, the investable hotel market in Germany increased in value from €52.6 billion to €57.5 billion between 2017 and 2018, or approximately 9.5 percent growth. This is a new record for the market, coming on the heels of 2017's 5.1 percent growth.
Union Investment and Bulwiengesa credit the increases to the sustained high level of new-build activity in the hotel sector and increasing asset values, reflecting a further improvement in the economic situation of many hotels in 2018.
“Market conditions for hotels in Germany remain good. Overnight stays [reported] stronger growth in 2018 than at any time in the last 10 years, rising by 4 percent compared to 2017. And in the case of approximately 80 percent of top hotels, revenues increased compared to the previous year,” Dierk Freitag, departmental head and partner at Bulwiengesa, said in a statement. “In terms of value growth, our forecast from the previous year was exceeded by 4.5 percentage points.”
Gains were particularly notable in the upscale segment, which saw good performance in 2018 with revenue per available room at around €91. Of the total of around 396,400 rooms across Germany categorized as investable by Union Investment and Bulwiengesa, nearly 44 percent can be attributed to the upscale hotel segment.
“The increases in value in the upscale segment are an endorsement of our strategy of boosting investment in existing properties, with the five-star superior Steigenberger Hotel in Hamburg and the InterContinental in Berlin being current examples,” said Martin Schaller, head of asset management hospitality at Union Investment Real Estate GmbH.
In the future, both companies anticipate greater increases in capacity and value across the budget and midscale segments as branded hotel companies focus on these segments outside Germany’s major cities.
“Potential for strong growth can be seen in numerous secondary and tertiary cities in Germany,” said Schaller. “We intend to enhance our portfolio through the targeted acquisition of development projects ... in Oberhausen, Dresden and Eschborn, involving traditional formats as well as [extended]-stay concepts.”
The market value model shows that German cities with populations of between 100,000 and 500,000 saw a greater increase in the size of the investable hotel market in 2018 than cities with more than 500,000 inhabitants (excluding Berlin, Frankfurt, Hamburg and Munich).
Across Germany, the average value per room in 2018 was approximately €145,200, around €4,700 higher than the prior year. The average value for an upscale hotel was approximately €165,000, while the figure for a midscale or budget hotel was approximately €119,400.
High Demand, Tight Supply
The growth in the size of the institutional hotel market in 2018 contrasts with a slight fall in transaction volume from around €4.2 billion in 2017 to approximately €4 billion. During the previous year, around 8 percent of the calculated total market changed hands, compared to 7 percent in 2018.
“Supply remains tight, chiefly because comparatively few portfolio managers are disposing of their properties” said Schaller. “As returns in many other asset classes are still very low, increasing numbers of investors are turning their attention to hotels. Due to strong demand, yield compression in the hotel market continues.”
“Rising property prices are reflected in the leases for new hotels,” added Freitag. “Expensive leases necessitate high room rates, which in Germany can only be achieved in selected locations, in conjunction with special occasions such as a major event or trade show, or by hotels with a distinctive offering. Accordingly, the investable hotel market is becoming ever more varied.”
Branded Hotels as Growth Drivers
Alongside city hotels, investors increasingly can choose from holiday and apartment hotels and mixed-use developments. The branded hotel segment is particularly investable, with a market and guestroom share in Germany of approximately 56 percent, measured against all rooms in all hotels, including bed-and-breakfasts.
In 2019, Union Investment and Bulwiengesa expect further growth of around 7 percent in the institutional hotel market.
The Union Investment and Bulwiengesa market value model is based on data from companies, official statistics and hotel associations covering the institutional hotel market from 2007 to 2018.