Solid start to the year for the German hotel investment market

FRANKFURT, 12. April 2021 - In the first quarter of 2021, the German hotel investment market* surpassed the preceding three quarters by recording a transaction volume of almost €500m across 14 transactions. In a direct comparison to the first three months of 2020, a period that was unaffected by Corona and positively impacted by the takeover of TLG by Aroundtown, the gap of -50% remains considerable. Similarly, albeit at lower double-digit levels, the difference to the five- and ten-year averages was recorded at -39% and -11%, respectively.

“The operational hotel business is still precarious with the ongoing lockdown continuing to result in drastically low room occupancy and an equally severe collapse in revenue per room. Considering this, the current transaction volume reflects a solid result. The outcome is certainly a consequence of overlaps, i.e. transactions that could not be concluded in the last few weeks of the previous year and were subsequently completed at the beginning of this year. In comparison, Q1 2021 outperformed Q4 2020, which would traditionally have been the strongest quarter, by 70%”, says Heidi Schmidtke, Managing Director of the JLL Hotels & Hospitality Group. Schmidtke continues: “Discussions with investors show that the hotel market does not lack interest or capital. It is rather the gap in pricing between buyers and sellers that remains challenging and is further exacerbated by the current conditions. Owners are not willing to sell at any price. We have also experienced a surge in off-market activity, allowing owners to test investment sentiment without attracting the market's full attention or alluding to the impression of a distressed sale. In some cases, this approach presents buyers with a highly attractive product that often includes a development or conversion upside, thereby aligning the price expectations between the parties.”

In the first three months of 2021, a total of 11 single asset transactions with a volume of €295m were recorded, corresponding to a decrease of 29% compared to the previous year (Q1 2020: 22 transactions with €414m). At just under €27m, the average transaction size was 43% above the previous year's level (Q1 2020: €19m). A remarkably large proportion was attributable to hotels as part of mixed-use properties accounting for 25% of the total volume.

Examples of single asset transactions:

• The acquisition of the Villa Kennedy Frankfurt by Conren Land. Currently a 5-star Rocco Forte hotel with 163 rooms, the asset also provides potential for conversion. The seller was a property company owned by Frankfurt-based DIC and its subsidiary GEG. With a volume in the upper double-digit million range, it was the largest single transaction in the first quarter.
  
• The sale of the Motel One Bonn, which opened in December 2020, as part of the Urban Soul development at Bonn’s main train station. After completion by die developer, the entire development comprising over 20,000 m² of rental space was acquired by Ampega Real Estate.
  
• The project sale of the yet to be completed Radisson Leipzig as part of the Future Living development. A 25-year lease was recently signed. The buyer was the Versorgungswerk der Landesärztekammer Hessen, who acquired the project from the developer Fay Projects. The completion of the 224-room hotel is expected for 2023.
  
• The sale of the recently opened Brera Frankfurt West comprising 150 serviced apartments as part of the mixed-use property Double U. City 1 Group sold the property to an insurance company in February.
  

Following a one-off hiatus in portfolio transactions in Q4 2020, just over €200m flowed into three transactions between January and the end of March (Q1 2020: 5 transactions with €571m), accounting for 41% of the total volume. The average transaction size subsided significantly compared to the previous year to €67m (Q1 2020: €114m).

Amongst the portfolio transactions were:

• The sale of the Leonardo portfolio in Munich, in which the Israeli hotel group Fattal sold the Leonardo Munich City West and Leonardo Hotel & Residenz Munich to a family office in a sale-and-lease-back transaction. The transaction volume for both properties equaled €77m.
  
• The disposal of a portfolio in the Ruhr area, comprising the Courtyard by Marriott Bochum Stadtpark, Renaissance Bochum and Courtyard by Marriott Gelsenkirchen. In this transaction, the family office Anter Group acquired the majority stake in the three hotels, which in future are to be rebranded to the company's own Stay Design brand.
  

Transactional activity in the first quarter divulged an increase of investment by private investors and family offices. With €224m (3 transactions) and a share of the total transaction volume of 45%, these groups invested significantly more than in the same quarter of the previous year (Q1 2020: €89m, share 9%), rendering them the strongest investor group in Q1. “The growth is partially a result of the fact that private investors have historically played a less significant role in large and particularly competitive processes. This has now changed in light of the currently increasing proportion of off-market activities.” explains Heidi Schmidtke. Institutional investors accounted for a share of 39% (6 transactions), corresponding to almost €200m.

In times of limited international mobility, German capital was the predominant source of investment: 13 out of 14 transactions, or 85% of the investment volume were funded by domestic capital. Only one transaction was attributed to foreign investment.

Heidi Schmidtke concluded: “The expected large wave of distressed hotels is yet to be seen. Many assets with strong tenants and guarantees are unlikely to be brought to market in the short term, as funds would refrain from selling below book value coupled with a lack of alternative investment opportunities. Wherever operators are on the brink, vacant possession exit scenarios are being analyzed, which, depending on the location, can generate considerable interest from alternative operators. In locations that are no longer suitable for hotels, other uses can also become an attractive option to secure cash flow in the long term. Whilst the pressure is increasing on the operator side, there are sufficient alternatives that provide owners the flexibility to avoid a distressed sale. Simultaneously, there is considerable movement on the operator side. While some hotel groups already sought stability through financially strong partners in the past, other operators will consider this in the future. This first quarter was as such marked by increased consolidation activity, demonstrating the willingness of financially strong players, such as Whitbread, HR Group or Activum, to pursue opportunities. This development provides the market with a certain degree of assurance and will benefit the recovery of the hotel investment market in the short to medium term.

It is certain that there will be opportunities. While conservative institutional investors continue to rely more and more on core assets in top locations, opportunistic investors are sounding out the market in pursuit of attractive market access. When and to what extent these become available depends on the development of the pandemic, the progress of the vaccination roll-out and many other secondary factors. The hotel market has been impacted but it has not fallen. We still have challenging times ahead of us, posing a tough battle for many and opportunities for others. In the end, hotel real estate will have proven its resilience as an asset class”.