7 July 2020
Investable hotel market in Germany hit all-time high in 2019 – consolidation expected
• Record due to consistently high new build activity and strong performance of existing properties
• From economy to upscale: rising market values across all segments
• Ratio of transactions to market size approaching 10 per cent mark
• Coronavirus will stop high growth for at least one to two years
The investable hotel market in Germany has grown to EUR 61.1 billion over the last 12 years. Even during the financial crisis of 2008/2009 the market expanded slightly overall. The latest calculations by Union Investment and bulwiengesa show that the investable hotel market in Germany increased in value by around 6.3 per cent compared to 2018 (EUR 57.5 billion). As in previous years, growth in 2019 (prior year: +9.5 per cent) was due to sustained strong new-build activity in the hotel sector (= quantity effect) and increasing asset values (= performance effect), reflecting the excellent tourism and property market environment in Germany in 2019.
"With coronavirus now dominating the headlines, it’s easy to forget that tourism has been one of the fastest-growing industries over the past 12 years."
“2019 was an outstanding year, with nearly half a billion overnight stays in Germany. Up to and including last year, city hotels benefited significantly from trade show and conference business, for which Germany offers excellent infrastructure as one of the world’s leading destinations for trade fairs and exhibitions. On top of that, the holiday hotel sector recorded an unprecedented level of domestic demand in 2019”, explained Freitag.
The performance of hotels in cities and holiday areas in Germany was correspondingly strong in 2019. Of the 81 German cities with more than 100,000 inhabitants, 14 recorded over two million overnight stays. This explains why many new hotels, hostels and serviced apartments were built in these locations, as well as elsewhere in Germany. According to the findings of recent studies, hotel development projects in Class A cities in Germany have more than trebled within ten years. In Frankfurt alone, the number of hotel beds increased by nearly ten per cent inside a year.
Given this extensive new build activity, Union Investment and bulwiengesa have now identified an investable universe of around 405,000 guest rooms, which are split across cities and holiday destinations throughout Germany. Almost a quarter of these rooms are in cities with fewer than 100,000 inhabitants. Some of these smaller cities have seen a sharper increase in the number of overnight stays than the major cities. In Flensburg, for example, the number of overnight stays doubled over a period of less than ten years.
“We monitor trends like these very carefully, including keeping a close eye on the performance of our own hotel portfolio. We therefore invest selectively in secondary locations and particularly in properties operating under brands such as Hyatt House, which are designed for long stays,” said Martin Schaller, head of Asset Management Hospitality at Union Investment Real Estate GmbH.
The investable range of hotel properties comprises traditional business hotels and holiday and apartment hotels, as well as various mixed-use concepts featuring co-working and co-living components. The performance of the operator is hugely important for investors, particularly in terms of identifying redundant organisational structures, which has led to the branded hotel segment capturing a substantial share of the offering and thus of the hotel market in Germany. In 2019, the branded hotel segment share increased from 50.4 to 52.1 per cent, measured by the total stock of rooms in hotels (including bed-and-breakfast hotels) in Germany.
“As welcome as this further increase in value in the hotel sector is for property holders, we are naturally aware that the 2019 market volume figures are unlikely to increase much over the next one to two years due to the current situation. However, projects currently under construction should have a positive impact on the next survey,” said Martin Schaller.
“As far as our portfolio is concerned, we are well positioned both in terms of locations and operators. Nonetheless, we are working closely with our leaseholders to structure suitable solutions and provide them with the best possible support.”
The value of a hotel room in Germany is now around EUR 150,800, which is approximately EUR 5,600 more than in 2018. Luxury hotels achieve an average value per room of around EUR 265,000, while budget/economy hotels come in at approximately EUR 109,000.
Over the entire period covered by the survey from 2007 to 2019, the economy and midscale segments recorded the highest gains in percentage terms. This was due to the presence of branded concept hotels in this area of the market, which have expanded rapidly across Germany through brands such as HIEX, Ibis Styles and Super 8, and also to the good performance of these segments. According to benchmark provider MKG, average RevPar of EUR 60 was achieved in the economy segment in 2019. Of the investable room market in Germany, approximately 19 per cent can be attributed to the economy segment and some 45 per cent to the midscale Segment.
Proportion of transaction volume approaching 10 per cent mark
The growth in the size of the institutional hotel market in 2019 coincided with a transaction volume of around EUR 5 billion (2018: approximately EUR 4 billion). Whereas in the prior year some 7.0 per cent of the calculated total market changed hands, the proportion in 2019 was 8.2 per cent.
“Union Investment will continue to invest in hotels. However, the creditworthiness of operators and the sustainability of lease conditions will become increasingly important in the context of valuations. It is now up to all stakeholders to cooperate professionally in order to ensure that confidence in the hotel asset class which has been built up over many years is consolidated further despite the crisis,” said Martin Schaller.
Market growth on hold
The coronavirus pandemic has brought market growth to a halt for the time being. The impact to date has been much greater than that experienced during the financial crisis, but is not due to economic factors. All existing properties are reporting major shortfalls in revenue due to the lockdown and many development projects have been postponed for now. “It’s too early to predict the size of the market for 2020. That will partly depend on how quickly the economy recovers and how soon trade show and events business picks up again. Provided there’s no second wave of the virus, then at least the holiday hotel market might hope for a reasonably satisfactory second half of the year,” commented market analyst Dierk Freitag.
The Union Investment and bulwiengesa market value model is based on data from companies, official statistics and hotel associations. It enables a comparative analysis of the institutional hotel market for the years 2007 to 2019.
For Union Investment Real Estate GmbH
Head of Real Estate Marketing, Communication
For bulwiengesa AG