How Germany's strong economy is hurting hotel profits

Berlin over Tiergarten Park
Berlin Tiergarten Park, photo by bluejayphoto / Getty

Europe's strong hotel performance continued in November with a 9.6 percent increase recorded in total gross operating profit (GOPPAR)—but somewhat ironically, profit levels at hotels in Germany are being challenged by buoyant economic conditions, according to the latest worldwide poll of full-service hotels from HotStats.

Europe's Upswing

In addition to a 0.7 percentage point increase in room occupancy in November, hotels in Europe benefited from a 4.4-percent increase in achieved average room rate, to €146.12, which contributed to a 5.6-percent year-on-year increase in RevPAR to €101.43.

The steady top line growth at hotels in Europe remains led by a balanced base of demand, with year-on-year increase in achieved rate in the residential conference (+7.2 percent), corporate (+7 percent) and individual leisure (+9.5 percent) segments.

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Germany's Rising Costs

In contrast to the positive performance across Europe, hotels in key German cities struggled to grow profit in November as buoyant conditions in the largest economy in the region fueled an increase in costs.

In Frankfurt, hotels had a positive month of top line performance in November, recording a 7.9 percent increase in RevPAR, which was due to year-on-year growth in both room occupancy (+0.4-percentage points), to 79.0 percent, and achieved average room rate (+7.3 percent), to €151.83.

But despite increases in some non-rooms revenue departments, TrevPAR growth was slight at just 0.7 percent. Furthermore, the marginal total revenue growth was cancelled out by escalating costs, which included a 1.6 percentage point increase in Payroll, to 29 percent of total revenue.

Despite the challenges to costs, 2017 has been a good year for hotels in Frankfurt, supported by several months of exceptional growth as a result of events hosted in the city, including the IAA Motor Show, which attracted approximately 810,000 visitors across eleven days in September.

As a result, and in spite of the decline this month, in the 11 months to November 2017 hotels in Frankfurt have recorded a 5.8 percent increase in GOPPAR to €58.80, equivalent to a profit conversion of 36.3 percent of total revenue.

“Frankfurt remains a robust hotel market, underpinned by corporate travel and a strong MICE market and has been further buoyed by the expansion of the Messegelände in 2016,” said Pablo Alonso, CEO of HotStats. “Furthermore, top-line performance at hotels in Frankfurt has remained strong, in site of significant additions to stock in the last 18 months.

“However, payroll costs are on the rise as the jobless rate in Germany is at a record low and a 4-percent increase in minimum wage was implemented in January 2017. Additionally, inflation rates in Germany are at their highest level since 2013, which is driving up cost of sales.” 

Supply & Demand in Berlin

For hotels in Berlin, in spite of achieving a record high in overnight stays in 2016, significant additions to hotel stock are diluting demand levels, which is affecting revenue and profit levels at properties in the German capital.

Related: The International Hotel Investment Forum is March 5-7, 2018, at the InterContinental Berlin. Find out more at ihif.com

November represented one of the most significant year-on-year declines in room occupancy in 2017 at hotels polled, dropping by 6.2 percentage points, to 75.8 percent. In addition, hotels in Berlin recorded a 1.7 percent drop in achieved average room rate, to €141.03, which contributed to the 9.1 percent drop in RevPAR, to €106.91.

With such a significant drop in volume, a decline in other revenue departments was inevitable, and as a result, TrevPAR at hotels in Berlin fell by 10.5 percent in November to €180.09.

In addition to declining revenue levels, profit levels were further depleted by increasing costs, which were led by a 3.9-percentage point increase in payroll, to 31.7 percent of total revenue. As a result, GOPPAR at hotels in Berlin fell by 21.3 percent in November to €55.52. This is equivalent to a profit conversion of 30.8 percent, and 4.2 percentage points below the same period in 2016, at 39.2 percent.

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