Are the good times coming to an end in Germany? The latest report suggests that the hospitality cycle may have already reached its peak and started its descent. The country’s hotel sector reported a 20-percent drop in transaction volume year-over-year in 2017 to €4.1 billion. According to CBRE's "Germany Hotel Market 2017" report, the fall can be attributed to lack of supply because investors remained hungry for the market, despite the exit of some yield-hungry parties to other European locations.
The fall continued into the first quarter of 2018, with a volume of €661 million, down 41 percent. In 2017, the broker said that single-asset deals accounted for 66 percent of transaction volume. Bidding for increasingly scarce product had intensified, the company claimed, as private and institutional investors were expanding their investment spectrum to asset classes including hotels.
The relative share of capital invested in hotels in relation to the total commercial investment volume grew from 5 percent in 2010 to just under 20 percent in 2016, but in 2017 fell to 7 percent due to lack of supply.
“Previously, in Germany, we had a yield gap between offices and hotels,” said Olivia Kaussen, head of hotels Germany, CBRE. “Now, yields have decreased across all the commercial assets, but that gap has also decreased. Demand for hotel properties in Germany remains high, but there is a shortage of supply. Investors are sitting on capital, and there is no loss of interest. The opportunistic and yield-driven international investors are now looking in other European regions such as Eastern and Southern Europe for better yields. In Germany, we are seeing mainly domestic German investors and some French and UK investors, who can buy at low prices. The low yield is not deterring them.”
The country has seen prime yield for hotels fall 175 basis points since 2012 to 4 percent at the end of 2017 for properties operated subject to fixed leases.
The country’s secondary cities also grew in popularity, but have been hit by lack of supply in the past year. CBRE said that the share of money flowing into secondary locations fell from 53 percent of total investment volume in 2016 to 37 percent in 2017.
While the hotel sector has moved into the mainstream in the minds of investors, those same investors may look to other sectors for returns. “The attractiveness [of Germany] is the safe haven and the long-term perspective,” Kaussen said. “Sometimes investors are looking at alternative use, such as conversion from commercial to residential. In comparison to some countries, capital values in Germany are still relatively low and some investors think that Germany still has a way to go.”
It is not only the price of hotels that is on the rise. “Land prices are now very expensive and building costs are rising, so any projects which have not been contracted and financed may have trouble being built,” Kaussen said.
For brands such as the UK’s Premier Inn, which has made Germany a key expansion target, convincing developers to put a budget hotel in an expensive site may prove a challenge, with rival brands such as Motel One, which has hotels with room counts closer to 500, making more economic sense. Most recently, Premier Inn acquired a portfolio of 19 hotels from Foremost Hospitality—a deal that gave it an operating platform, but no real estate, in contrast to its strategy in the UK. For other brands that have to be in the country, other such digressions may be required.
Katherine Doggrell is an editor at Hotel Analyst, the U.K.-based news analysis service for hotel investors.