Germany bubbles as deals flow

Union Investment has forward-funded four developments in Germany, with leases agreed on all projects.

Ongoing interest in the German hotel market has meant that forward-funding has grown as investors seek to secure sites and secondary and tertiary destinations have risen in popularity.

At Union Invest, the group will see three hotels, to be built in Dresden, Oberhausen, and Eschborn, which will be transferred into the group’s open-ended real estate fund Immofonds 1, which is marketed exclusively in Austria. An additional planned hotel property in Freiburg im Breisgau was being acquired for special fund UII Hotel Nr. 1.

Until now, the fund has held three hotel properties worth a total of approximately EUR45m in Vienna, Innsbruck and Dresden. The portfolio of special fund UII Hotel Nr. 1 contains 13 hotel properties and development projects following the acquisition in Freiburg im Breisgau.

The portfolio contains two future Super 8-branded hotels and two planned long-stay formats by Hyatt House and Adagio Access. Long-term leases with a 25-year term have been agreed for all four development projects.

Commenting on the deal, Andreas Löcher, head of investment management hospitality at Union Investment Real Estate, told Hotel Analyst: “In the current market phase forward deals are a good way of securing a deal at an early stage. Using our strong network of project developers and decades of experience in evaluating development projects, we were able to significantly expand our German hotel property portfolio in recent years. 13 out of the 15 hotels that we have acquired in Germany since 2016 were secured as a development project, totaling a value of around EUR470m. As an investor, we prefer forward purchase transactions; in which the purchase price disbursed turn key. But under certain circumstances, we may also consider forward fundings in which payment installments are made alongside the construction progress.”

Looking at the wider market,  Löcher said: “Professionally-managed hotels run under the name of successful brands have been experiencing a continuous increase in value in Germany for years. Competition among investors has become tougher, but Union Investment has nevertheless succeeded in expanding its German hotel portfolio. Since 2016 alone, we have acquired 15 hotel properties and development projects in Germany with a total volume of EUR600m. In this context we put an emphasis on structuring deals on an off-market basis working together with strategic partners both on the development and hotel management side. In many cases we duplicated proven transactions.

“We mainly invest into branded hotels enjoying the benefit of a strong booking system and market awareness. Furthermore we generally regard the fungibility of branded hotels higher compared to unbranded hotels. However, strong micro locations in  gateway cities may not necessarily need a brand or may be absolutely fine with a soft brand as our London House in Chicago which is managed under the Curio brand. Hence management fees could be reduced, benefiting from a historic name.

“In Germany, for example, we were one of the first investors to acquire a Motel One hotel or a Super 8 hotel. The two long stay concepts Hyatt House and Adagio Access from the currently acquired “benchmark portfolio” have also only recently been represented in Germany – and yet they are already finding their way into our portfolio.”

On Germany,  Löcher added:  “There can be no doubt that we are in a late-cycle market phase.In the German hotel sector, however, we continue to focus on good growth potential in A and B locations, although risk management has also gained in importance for hotel purchases in view of the late market cycle and the sometimes enormous new construction activities. STR for instance has states a pipeline per September 2018 of 38.3% for Hamburg. Not all investors fully notice such scary numbers and even expand into C locations which in my view reflects clear signs of a bubble.”

The comments came as Blackstone was thought to be looking for buyers for a portfolio in Europe comprised of 29 hotels, with 18 in Germany and the rest in the Netherlands.

According to a report by Union Investment and Bulwiengesa, the German hotel market has doubled in the past 10 years. The branded hotel segment in the country along with increased supply contributed to the market growth. The number of hotel rooms has grown 16.6% in the last 10 years while strong performance in the hotel chain sector led to a boost in market value.

HA Perspective [by Katherine Doggrell]: Germany has been the comforting go-to for many investors in recent years and has grown from its safe-haven status to a viable source of returns, aided in no small part by the growth of institutional investors in the sector and their taste for leases. This shared alignment has been good news for brands, third-party managers and a veritable torrent of those who would work in and around the sector.

But is there enough Germany to go around? Löcher used the ‘b’ word and the signs are indeed there that those who would pile in at any cost may well be about to get burned. According to the Union Investment and Bulwiengesa study, transaction volume fell from the recorded EUR5.2bn in 2016 to approximately EUR4.2bn in 2017, despite the growth in market size. In 2016, 10.2% of properties were sold. However, the level of transactions dropped down to 8% in 2017.

For those whose business plans mean that they MUST be in Germany – and here we look at Premier Inn – some imagination will be required to get a determined foot on the ladder. Imagination and hard cash.


Posted on behalf of Hotel Analyst