• Germany facing long term issues

Germany’s hotel market is facing a long recovery to normal business, as coronavirus shutdowns combine with market oversupply.
Last week saw the country shut its borders, and act to restrict gatherings by closing non-essential shops, bars, nightclubs, concert halls, and museums. The country has the third largest number of coronavirus cases in Europe, behind Italy and Spain.
Germany, Europe’s biggest country economy, was already struggling with weak demand and flatlining growth. Industrial production had increased in January, leading to hopes that a recession would be avoided. But research institute ZEW said its economic sentiment indicator had dropped to -49.5 from +8.7 a month earlier, its largest fall ever.
For the hotel industry, the coronavirus will prove deadly, but hits a sector that had already moved into negative territory in 2019, largely due to oversupply. A report from agent Christie & Co, covering the six major markets of Berlin, Munich, Frankfurt, Hamburg, Cologne and Dusseldorf, notes three of those cities experienced falling revpar last year.
Increasing supply has been a feature of German markets for the last few years, but demand too has grown, with 5% more room nights booked in the featured markets in 2019. However, supply continues apace: “In 2019 alone, an average of 50 new beds were added every day among all top six destinations”,said Patrik Hug, associate director at Christie.
As a result, the Frankfurt market saw revpar fall 4.3%, while Hamburg performance was down 3.4%. Munich, too, was down, by 1%.
All markets still have a strong pipeline of new growth. Hamburg has close to 10,000 rooms coming to the market, while Berlin’s confirmed pipeline is around 8,000 rooms. Dusseldorf, Munich and Frankfurt all stand with around 6,500 rooms planned or in construction, while Cologne has 20 pipeline sites.
Hotels in these cities often derive super profits via peak demand pricing around trade fairs. But the agents warn that increased room supply, alongside what was expected to be a consistent trade fair market, are already depriving operators of highly profitable nights. “The loser here is the operator, who may have to accept falling revenues whilst personnel costs rise, triggered by the existing shortage of skilled workers”, said Christie’s head of hotels in Germany, Benjamin Ploppa.
In no small part, it appears the weight of investment funds seeking hotel assets has fanned the flames of overdevelopment. Funds are still purchasing sites off-plan, ahead of construction, as they compete for the cashflow of long leases signed by operators. Said Ploppa: “Yields in the transaction market remain low due to the high availability of liquidity.”

HA Perspective [by Chris Bown]: Even without coronavirus, key German hotel markets were already looking at a worrisome future. Funds chase the “guaranteed” fixed income that long leases provide, while the hotel sector has appeared increasingly attractive, compared to other traditional sectors such as offices, retail and industrial, where long leases are harder to come by.
The brands, keen to get into a large, confident market, have provided a range of help to operators, to enable them to sign the required long leases. Now the chickens are coming home to roost – with added coronavirus.

Additional comment [by Andrew Sangster]: Like all national hotel markets, Germany’s is going to look very different after this crisis. There are areas of strength and, as we discuss in this story, areas of weakness.
The strength is the size of leisure hotel demand. Germany is Europe’s biggest outbound tourism market. In a world recovering from restrictions on national borders and interrupted air travel, how quickly will leisure travellers want to go overseas? If there is hesitancy, Germany’s domestic hotel market will benefit.
On the flip side is the huge volume of business that Germany does through trade shows. Are corporates going to want to send the same number of executives and other workers on long trips abroad? It seems that the hotels geared up to cater for corporate groups and business travellers are set for a lean time.

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