• Germany’s “overheated” market

Motel One was due to open five more hotels in Germany in the fourth quarter, but described an “overheated market” which meant that no new contracts were signed in the previous quarter.

The company echoed comments made across the market which drew attention to the supply coming into the market in Germany which was threatening its status as a safe haven for investors.

At Motel One, the company said: “We believe that, although demand will generally continue to be fuelled by the two megatrends that are globalisation and urbanisation, the occupancy rates and prices in most European cities will come under pressure because significant new capacities are being advertised, especially in the UK and Germany.

“Terrorism may also have a very negative short-term effect on travel. In addition, latent economic risks have resulted from Brexit and protectionism and also from smouldering political and military conflicts.”

The group has a total of 66 hotels in operation, of which 74% were under lease agreements. The company has expanded its estate outside its domestic German markets, with 33% of the portfolio now international, against 30% in the same period last year.

The development pipeline comprised 28 hotels and of those eight were owned hotels and 20 were under long-term leases with external investors. During the January to September 2018 period, the hotel market in Northern Europe saw a 1.2% increase in revpar over the previous year, with Germany and the UK recording rises of 2.0% and 1.7% respectively.

Concerns over Germany were echoed by Robin Rossmann, managing director, STR, in a presentation to EHIC in London earlier this month.

Year-to-date September, Rossmann described a “tough year” with many of the biennial trade fairs not taking place and an increase in room supply. Revpar growth was varied across the country, increasing by 5% in Berlin, but falling by 10% in Dusseldorf.

Rossmann talked of “significant” amounts of supply coming online next year, with Berlin seeing a pipeline of 14.7% of the current market, with 4.8% opening this year and next. In Hamburg the pipeline was 38%, with ’18/’19 due to see 9.3% opening.

According to CBRE Hotels, Germany remained the third-largest European hotel investment market with hotel deals totalling EUR4.09bn in the year to the third quarter, despite a 20% decline year-on-year.

Yields for hotels in the big five German cities, operated under a management contract or subject to vacant possession saw a decline of -25bps quarter-on-quarter, implying that the fall in investment volumes was due to a shortage of stock rather than a lack of demand.

In a survey commenting on the mood around this year’s Expo Real Munich, Union Investment said that most exhibitors left the trade show “beaming and content”, and 79% of those surveyed described their businesses as “good” or “very good”, with the remainder “satisfied” with their own situation.

There was more caution looking ahead. For the next six months, 69% expect a “good” to “very good” development, against 80.6% in the same period last year.

Regarding operations, the participants were also more wary, with only 57% expecting a “good” to “very good” development of turnover, against 67.7% in 2017. Nine per cent expected it to worsen, compared with 3.2% last year.

Andreas Löcher, head of investment management hospitality at Union Investment Real Estate, said: “The hotel real estate with its long-term agreements still promises a continuous interest rate for capital. Therefore, a large number of investors do not want to sell and instead profit from the lease incomes.

“Increasing construction and property costs are also a reason to expect further decreasing transaction volumes. Investors, which have developed strategic partnerships, understand developments, and have a deep product understanding for the hotel industry, are well positioned for the medium term.”

The company said that transactions and hotel developments would “become more difficult”. It added: “All individual indices are decreasing, especially the Development Index, which has dropped for the third consecutive year after its highest level in the boom year of 2015. Nevertheless, the hotel real estate market is at a high level, the satisfaction is high, and the basic mood is good. The motto is still ‘to open up’, but ‘to drive with foresight’ is becoming more popular again.”

HA Perspective [by Katherine Doggrell]: ‘Where are we in the cycle’ conversations are very hip at the moment and we at Hotel Analyst are nothing if not down with the kids. The investment community has been pouring into Germany, drawn to its historic passion for leases, which hasn’t abated and now the flame it lit appears to be dimming.

This enthusiasm for the country when others were wobbling, or obsessing over franchises served to draw further attention to Germany and the strength of the country’s economy, held up to the rest of Europe as an example of what hopeless spendthrifts we all were, helped to fuel the vision of Germany as a must have.

Now that many have ticked that box, it is no longer the easy-entry location it was and investors and brands must treat it as they treat, say, the UK. If you must have a certain location, you must pay for it. This has led to an increase in forward funding and other mechanisms. Companies such as Whitbread have retained their appetite for a market which has rapidly matured and appreciate that, now that everyone has discovered it, having just collected a skip of cash from Coca-Cola might come in very handy indeed.

Additional comment [by Andrew Sangster]: It is a peculiarity of the German market that despite being an economy that is nearly 50% bigger than the next biggest European economy (either the UK or France, depending on exchange rates) it remains a comparatively illiquid market.

To be described as overheating and yet have fewer transactions than in the UK (by far the most liquid market in Europe) or Spain (the biggest hotel market) is surprising. One might be tempted to describe the German market as a strong and stable were that phrase not currently completely debased in British English.

But the UK is, when it comes to experience businesses like hotels, a more advanced economy than Germany which is still largely organised as a citizen services economy. In Germany, industry remains a huge employer (just over 27% on World Bank figures for 2017). The UK’s equivalent share of industrial employment of total employment is just 18%. Even in Spain this figure is ahead of the UK at 19%.

Unfortunately, there is still a widespread misconception that the decline in industrial employment shows a weakness in an economy rather than maturity. The fact that the UK (and the US) are now more focused on experience economy businesses is not a negative. The hotel business is all too often bracketed in with these negative views and seen as less deserving of government support than industry or even, bizarrely, agriculture.

While the Germans have an enviably robust economy, it will have to transition to be more like the UK and the US. Urbanisation and globalisation are symptoms of this move towards experience economies.

The hotel industry in Germany will hugely benefit from these changes and start to exhibit similar levels of liquidity as the UK and the US as it grows significantly.

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