Andreas Erben, Managing Director of Colliers International Hotel, comments, “During the first half of the year, the German hotel investment market was not quite able to keep up with the momentum we saw in previous years. This can be attributed to the current shortage of supply, which has been a factor for some time, particularly in the hotel market.”

“Not only are we seeing a shortage in the number of business hotels available for investment in Germany’s Big 7, it’s also portfolios and major deals that are proving scarce as well,” adds René Schappner, Co-Head of Hotels at Colliers International Hotel. 

“The smaller number of major deals that were signed played a significant role in H1 2019 results, falling somewhat short of the exceptional H1 2018 result. This was fueled in particular by the sale of the Hilton at the Berlin Gendarmenmarkt. 

“Nevertheless, high-volume deals did change hands, such as the sale of two Steigenberger hotels in Berlin and Cologne and the Four Terra hotel in Frankfurt,” says Andreas Erben.

Very few portfolios on the market, single-asset deals continue to dominate

Portfolio deals remain scarce and these attractive investment opportunities are almost impossible to come by at the moment. As a result, the share in transaction volumes claimed by portfolios was low, at 12% The Swedish Pandox Group purchased three Dorint hotels in Dortmund, Erfurt and Augsburg for slightly over €100m and the Plaza Hotelgroup acquired five hotels in northern and eastern Germany. Single-asset deals claimed the lion’s share as a result, accounting for more than €1.4bn.

Foreign investors remain hesitant

Foreign investors remained reserved buy-side, pouring slightly more than €600m into hotel assets in H1 2019. Their 37% share in transaction volume came in 14% below the 5-year average. US and Israeli investors were particularly active in H1. 

Foreign investors also proved less willing to dispose of their hotel assets, accounting for a market share of 21% sell-side, down significantly from the 41% recorded in H1 2018. Spanish investors in particular took advantage of opportunities to sell.

Almost half of transaction volume invested outside of Big 7

High yield compression and a lack of products in the Big 7 continue to motivate investors to turn to secondary and tertiary cities. More than €750m was invested in hotel assets outside Germany’s top 7 investment hubs, generating a share of 46%, significantly above the 5-year average of 37%. Examples of deals signed outside the Big 7 include the Dorint portfolio mentioned above, the Mariott Hotel at the World Conference Center in Bonn and the Westin Bellevue in Dresden. 

In contrast, the Big 7 saw investment of just under €900m, or 54% of transaction volume. With yields quite low, business hotels changed hands for particularly high volumes. Yields in Frankfurt and Hamburg experienced another slight drop by mid-year. Prime yields continue to range from 3.70% in Munich to 4.50% in Berlin. “High prices in the Big 7 are prompting investors to perform more extensive analyses before buying assets,” Andreas Erben observes. 

Investors focus on 3 and 4-star hotels, serviced apartments in high demand

In terms of star-rated hotel assets, 4-star hotels held on to their first-place ranking with 47% of transaction volume. 3-star hotels followed in the ranks with a strong 33% and more than €540m in transaction volume with the sale of the Motel One, niu and Hampton by Hilton hotels playing a significant role. Activity around serviced apartments was above average, with this property type accounting for a 10% market share. Almost all of these hotels are located in Germany’s Big 7. 5-star luxury hotels also proved popular with a good example being Commerz Real’s purchase of Four Terra, a high-rise hotel at the Four Frankfurt campus with luxury brand, Klimpton, moving in as tenant.

Open-ended real estate funds and special funds most active sell-side, property developers looking to buy

Open-ended real estate funds and special funds proved the most active during the first half of the year, closely followed by asset/fund managers. Together, they accounted for €1.1bn, or 67% of transaction volume. Listed property companies and insurance businesses trailed at some distance with market shares of 11% and 8%, respectively.

“Traditional institutional investors continue to be under extreme pressure to invest,” comments René Schappner. “With assets currently in short supply, institutional investors are looking to snap up attractive investment opportunities as fast as possible. The current preferred approach is to invest in property developments under long-term leases to well-known hotel brands. More than 40% of capital invested in H1 involved forward deals like these,” René Schappner continues.

Property developers continue to bring new space to the market, claiming a strong 54% share of transaction volume sell-side and selling hotel assets for almost €900m in total. Asset/fund managers and owner-occupiers followed in the ranks sell-side, both accounting for just under €250m, or a 15% share each. 

“Due to the high investment volume targeted at hotel assets over the past few years and the strong increase in attractive products, it’s too early for many hotel assets to be put up for sale again. This trend is also reflected in the current vendor structure,” comments Andreas Erben.

Outlook: High demand faces limited supply, expect annual results to be in line with previous year

“The robust performance of the German hotel investment market in H1 gives cause to expect good annual results. Similar to previous years, the market’s performance over the rest of the year will depend on to what extent the high demand can be met with suitable products. However, because the property development pipeline is full, we expect to see lively investment activity during the second half of the year, putting annual results in line with previous year levels,” concludes Andreas Erben.