Amid declining profits, hotel investors still rosy on Germany

Frankfurt, Germany. Photo credit: iStock / Getty Images Plus / ake1150sb

While Germany's hotels are facing a profit decline, it's not all bad news for the country's hospitality sector. The booming economy has driven costs increasingly higher—but insiders still see a light at the end of this tunnel.

The Decline

Despite more hotels coming onto the market, investors and operators have not been deterred, with investors drawn to the country’s reputation as a safe haven. According to HotStats, while hotels in Europe overall were buoyed by a reduction in costs—which helped hotels in the region to record a 9.6-percent increase in GOPPAR to €50.26—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.

For hotels in Berlin, in spite of achieving a record high in overnight stays in 2016, the company said that additions to hotel stock were diluting demand levels, which was impacting revenue and profit levels at properties in the German capital.

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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 ADR 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 10.5 percent in November to €180.09.

“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,” Pablo Alonso, CEO, HotStats, said. “Additionally, inflation rates in Germany are at their highest level since 2013, which is driving up cost of sales.”

Room for Hope

But taking a longer view, the picture was less bleak, Thomas Emanuel, director of business development at STR, said. “Over the past five years, Germany’s GOP margin has actually risen slightly, up from 34.1 percent in 2012 to 35.5 percent in 2016,” he said. “Total revenue grew 10.7 percent over the period, keeping it above costs. Labor costs accounted for most of the increase in expenses, up 12.7 percent, while departmental expenses rose 9.4 percent. Raw materials and the overall cost of F&B sales have actually decreased.” 

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“It’s become very competitive,” Tom Walsh, founder & CEO aparthotel company Staycity, which is due to make its Berlin debut next year, said. “We have a good pipeline of prospects and we do expect to sign a deal or two this quarter. We’re not trading there yet and we have to be aware that wage inflation and cost inflation is strong. The asset prices are very high, but the fund managers are comfortable with lower yields. We make sure that we can deliver profits.

“We’re constantly looking at automation where we can and tightening back office systems. We’re less vulnerable to wage inflation than traditional hotels—but we’d rather focus on good service than squeezing every last drop out of our labor line.”

For the investors, who have made Germany one of Europe’s most popular deals destinations in recent years, the concerns were not offputting. “I don’t see investors looking elsewhere,” Lukas Hochedlinger, managing director central and northern Europe, Christie & Co., said. “Prices have increased, rents have increased, costs have increased. Germany is at almost full employment and this only supports further the fact that, in Germany, the engine is working. Investors are looking for a safe haven and Germany is attractive.

“For those opportunistic investors who are looking for lower prices and lower costs, there is Southern or Eastern Europe and there have been those investors, including private equity groups, who are looking in Romania or Bulgaria, but they have been looking elsewhere than Germany for the past year or two. There is still great interest in Germany.”

While in Brexit Britain rising costs as a result of a weak currency and wage increases are applying pressure, in Germany they are proof of success. 

Katherine Doggrell is an editor at Hotel Analyst, the U.K.-based news analysis service for hotel investors.