Lifestyle brands are no longer niche players. Their success has convinced the major hotel chains: to cite just one example, the Accor Group acquired a 30 percent stake in 25Hours Hotels in November 2016.
Arnaud Robin/Le Figaro Magazine/laif

From dishwasher to billions in assets

Hotel properties, still marginal products not that long ago, are increasingly the focus of international investors. There are many good reasons for this – not least the global increase 
in the number of tourists, along with greater mobility.

It all started with a root beer stand. Back in 1927, J. Willard Marriott and his wife Alice were selling the sweet soft drink to thirsty Americans on the streets of Washington, D.C. Almost 90 years later, in 2016, the Marriott name graces the largest hotel chain in the world – a mega-group with 1.1 million rooms. Marriott’s founder and his successors are a perfect example of the well-known career path “from dishwasher to millionaire”. Many hotel operators have risen from rags to riches in past decades, but hotels as an asset class have themselves made good over the last ten years – and are writing their own success stories with billions in transactions.


JLL Hotels & Hospitality Group reports that the global volume of investments in hotels was some $61.7 billion (approximately €59 billion) in 2016, although that is down from $85 billion in 2015. The volume of transactions has slowed in the Europe, Middle East and Africa region, falling from $29 billion in 2015 to just $20.9 billion in 2016, according to JLL Hotels & Hospitality Group. In contrast, the trend on the German market is anticyclical: commercial real estate advisor CBRE found that the German hotel market had record earnings of €5.1 billion in 2016, up 15 percent on the previous record the year before. In spite of lower transaction numbers – a decrease of 29 percent – the volume of transactions was offset by higher average transaction sizes, leading to a rise for the seventh straight year. The industry is still sexy after all these years.


Income from tourism up

There’s a good reason for that: tourism is the only industry that is booming all over the world and has generally proven to be relatively unimpressed (so far) by shocks such as terrorism or natural disasters. International tourist arrivals have risen from 25 million in 1950 to 527 million in 1995 and 1.18 billion in 2015. Income from tourism has risen analogously from $2 million to $415 million to $1.24 billion in 2014. The World Tourism Organization (UNWTO) says that international tourist arrivals grew by 3.9 percent from 2015 to 2016, reaching a total of 1.26 billion worldwide. UNWTO anticipates a 7 percent increase in 2017. It is expected that 1.8 billion people will be travelling each year by 2030, just 13 years from now. Prospects like this have encouraged investors and hotel operators and are one reason for the seemingly endless wave of new hotel construction – and brands.


UNWTO

predicts that in 13 years 1. 8 billion people will be travelling.

The hotel (property) world owes its current sex appeal to the greatest crisis of all time: hotel operators drastically cut costs in 2008 after the financial world dragged many investors down. For two years the operators saved until they could save no more and fought at the margins. Then the penny dropped for some of them, and they realised they should renegotiate their contracts and get the banks and owners to share some of the responsibility, for example by means of a turnover-based lease – in short, to stick together for better or for worse. The banks and the owners thought so, too.


Greater choice and increased professionalism

Calls to deal with one another “in a spirit of trust and partnership” had repeatedly been heard during public discussions even before the financial crisis, but who notices as long as the property market is booming? And who was thinking back in 2007 about whether too much had been paid for property or whether a lease agreement (Pachtvertrag in Germany) could even be fulfilled? The gibes of the Anglo-Saxons still sounded too alluring to continental Europeans: “Don’t you want to earn double-digit returns?” Then came the crash. Today’s hotel investors in Europe are happy with returns of 4 to 5 percent, and returns can sometimes be much lower in other countries. Experts often compare the current hotel property euphoria with 2007, but the comparison doesn’t really apply. There have been ten years of increased professionalism – and changes in economic background conditions. 


Hotels as an asset class have now risen to great heights. Over the past few years, investors seem to be increasingly aware of how pleasant it is to have a single tenant for over 20 years and, in the best-case scenario, to join that tenant in ratcheting up the asset value. They also benefit from an increasing choice of both hotel brands and operating companies. 


All products with the word ‘hotel’ on them are moving fast.
Markus Beike, Managing Director Northern and Eastern Europe CBRE

Deals, Deals, Deals

Large numbers of new, young hotel groups have been springing up for many years now – including in Western Europe for the first time in a while – primarily in the budget and lifestyle segment. Some of them (such as citizenM, Motel One, 25hours, Ruby, and prizeotel) have even succeeded in challenging the major players. At the same time, the mega-chains have been creating their own new brands almost monthly. The number of franchisees in Europe has also increased markedly – thanks in part to multiple development agreements, which InterContinental Hotels Group in particular used so successfully to make sure of its expansion with the Holiday Inn and Holiday Inn Express brands.


The European hotel market has not been this dynamic for years. The boom seems to be continuing – at least in the “safe havens” of the world, which are primarily still in Western Europe. However, viewed globally, their numbers are decreasing. Germany is still considered the island of the fortunate and is profiting from the geopolitical miseries of the world, which are shifting travel patterns and changing investors’ plans. “We are living in the platinum age, not just the golden age,” says Markus Beike, Managing Director Northern and Eastern Europe at CBRE, summarising the hot trend on the market in late November 2016. The supply of hotel properties is extremely thin, while wallets are fat. At the same time, interest rates are still at a low ebb – and will likely remain there – while capital seeking a place to invest continues to grow. “The pressure to invest is intense,” says Beike, explaining the trend and the high prices. He says that investors no longer see gold and shares as attractive alternatives to real estate in the current climate: “Everyone wants to see their money invested safely.” For that reason, Beike and his colleagues at CBRE think the run on new hotel deals will continue in 2017: “All products with the word ‘hotel’ on them are moving fast.” He adds that the primary drivers are deposit-taking institutions such as funds, private equity, and high-net-worth individuals (HNWIs).


Due diligence takes much longer now than it did ten years ago, and the banks are auditing more intensively and professionally than they used to.
Marc Werner, Office Managing Partner at Hogan Lovells Frankfurt am Main

Higher multipliers and greater flexibility

That much capital pressure is breathtaking – particularly in view of the prices. Core properties on the Munich hotel market changed owners for a multiplier of 25 and more in 2016, while in Berlin it was still 20 times the annual rent. Before the current rush, core properties in Munich could still be acquired for multiples of 15 to 16. “Today that corresponds to the factor for B locations,” says attorney Mathias Jung of the Jung Schleicher law firm in Berlin, explaining the enormous jump in prices. He notes that the year-end hype is reflected in another detail: “We have never seen so many broken deals.” It has become a bad habit, he says, for sellers to back out even after signing because another buyer has offered more. The bidding procedure was facing increasing criticism by year end, and anyone who was able to do so responded with an off-market deal (as Invesco Real Estate and Pandox did with the €415 million transaction for a portfolio of seven hotels in core locations in Germany, Austria, and the Netherlands). But experts are again being reassuring and dismiss a comparison with 2007/08: “Due diligence takes much longer now than it did ten years ago, and the banks are auditing more intensively and professionally than they used to,” says Marc Werner, Office Managing Partner at Hogan Lovells in Frankfurt am Main. The British with their Brexit vote, along with Putin, Erdogan, and now Trump, have unnerved the world of international investment, he says, so it would be no surprise if many institutional investors continued to wear the label “extremely conservative” on their foreheads. But the opposite is now happening, and they are also becoming more flexible, agile, and creative. As managers of OPM (other people’s money), they have to abide by their investors’ wishes for returns and proceed to make investments. Invesco Real Estate stated in the context of its Pandox deal that in future it might no longer limit its investments to four-star business hotels and also invest in promising segments such as extended stay or design/lifestyle hotels.


Creative niches

Life Union Investment, which was brave enough to be the first institutional investor to launch a special fund for budget and midscale hotels back in 2013 (later with the operator Motel One as the flagship), increasing numbers of investors are turning to providers of affordable lifestyle. Ruby Hotels, which hasn’t even been on the market for three years and started operations with only three hotels, is continuing to expand with three new hotels in top districts of top locations in the German cities of Hamburg and Düsseldorf, as well as Vienna. The Ruby concept of “lean luxury” convinced three strong investment partners: the residential giant Patrizia, Allianz Real Estate, and the investment advisor ifa Institut für Anlageberatung. Union Investment is also showing some interest in the segment: “We are looking at lifestyle concepts in Europe and the United States,” reports Andreas Löcher, Head of Investment Management Hospitality. Serviced apartments are another impressive trend. Long-stay offerings have increased by more than 80 percent since 2008, as noted in the “Global Serviced Apartments Industry Report (GSAIR) 2016/17”. The report, published by The Apartment Service, continues to show strong global growth in supply as well as increasing demand by customers, particularly business travellers. There were almost 750,000 serviced apartments at 9,800 locations throughout the world in January 2015. The supply had increased by 10.5 percent to 826,759 units by mid-2016. The total number of residential units is projected to exceed one million by 2017/18. 


In 2016, Union Investment acquired another top hotel in the United States: “LondonHouse – Curio Collection by Hilton”.
openphotography.co.uk

Mobility drives growth

An analysis by Boardinghouse Consulting Berlin is just as positive about the situation in Germany. It surveys 80 operators (20 percent of providers) of serviced apartments in Germany early each year. According to its 62-page market report, published in April 2016, supply is expected to grow some 30 percent by 2018. Rising room rates – up 5 percent from 2015 – go along with that, as do longer average stays, which have increased by about five nights to almost 32 nights.


Experts believe the reason for the increasing demand for serviced apartments is greater mobility, which drives the need for temporary accommodation. In fact, the following statement made the rounds at the ZIA Innovation Conference in Berlin: “Hotels are the new apartments.” This hypothesis is confirmed by the trend for microapartments. This product, which is similar to a hotel, is also obviously being boosted by mobility, as clearly shown by Zoku, a new mix of hotel, extended stay (apartment-hotel), and microapartment in the Netherlands. The first Zoku opened in Amsterdam in June 2016, with occupancy at over 85 percent every month up to the end of the year and guests staying an average of seven days. Hotel segments merging into each other and mobile guests with a taste for experimentation, who want to work and relax in the same place, pose new challenges for operators and investors. Trend follows on trend at an increasing pace, requiring ever-faster adjustments to guests’ taste. Similarly, travellers are getting faster at finding “their own” individual product and booking it directly online. The ongoing dynamism of the market – on both the supply and demand sides – is breaking down all of the fixed, reliable patterns of the past.


63

hotels with 16,715 rooms belong to the Union Investment hotel portfolio.

Seeking safe investments

Given the changes on the market, simply classifying investments as upscale, midscale or budget obviously doesn’t work anymore. Investors seeking “safe” investments must also scan locations more intensively to detect micro-markets – at least in areas outside of the main transportation hubs. But are there really any “safe” investments anymore? Even that term has taken on a double meaning given the dynamic changes in market conditions. For example, in their joint “Investment Barometer” (autumn 2016 survey), Union Investment and hospitalityInside magazine asked investors and real estate experts about their current appetite for risk. Responses showed two equally strong camps: 51 percent of respondents are following the “same return – higher risk” strategy, while 49 percent stated that they were satisfied with “lower returns and the same risk”.


Exciting times ahead

The other interpretation of a “safe location” brings terrorism into play. At the first Hotel Symposium, held by Union Investment in Frankfurt am Main and entitled “Hotel Perspectives 2016”, panellists from UBM, Feuring, Hogan Lovells, and Union Investment were still confident they could handle the increasing risk of terrorism where investments were concerned.


This was followed by the attacks in Brussels, Nice, Istanbul, and Berlin – with the Brexit vote causing additional uncertainty, and then the election of US President Donald Trump, who has made “America first” his byword. The only thing it’s safe to say is that the world is in a period of dramatic change.


Andreas Löcher, Head of Investment Management Hospitality at Union 
Investment Real Estate GmbH, whose responsibilities include purchasing new hotels.
Union Investment

Interest in lease agreements kindled

Andreas Löcher, Head of Investment Management Hospitality at Union Investment Real Estate GmbH, is taking the hotel portfolio in a new direction in the United States


Mr. Löcher, is Europe now too small for Union Investment? 
Union Investment has been active in the United States since 1986. We made our first US investment in the office sector in Washington, D.C., more than 30 years ago. Union Investment is therefore already a familiar name in the country. Our colleagues have made very good office deals in the United States, particularly over the last 24 months. As hotel specialists, we are naturally very attracted by the biggest property market in the world. New York City alone is a gigantic sub-market – the largest in the world. As the youngest asset department in our organisation, we have simply been catching up.


That seems pretty daring for a fund company that, according to German law, is only allowed to enter into lease agreements. In the United States, the only possibility is management contracts in 99 percent of cases. Doesn’t the market work completely differently there?
That’s true – and we are part of that one percent. Our first opportunity, The Godfrey Hotel Boston, a boutique property in Boston, helped kindle the interest in lease agreements. Our partners Oxford Capital and Walton Street Capital were very open to the subject of leasholds – much more than we expected. They negotiate without any dogma, simply listening to everything. Europeans often get stuck in dogmas of that kind and love to divide the world into “good” and “evil”. Our experience shows that Americans are different that way. That’s why they signed a 25-year lease agreement directly with us. The hotel is now part of the property portfolio of our UniImmo: Europa open-ended real estate fund.


Have you developed a strategy from your first investment opportunity?
Yes, we have – but we had already learned a lot about the US hotel market even before the acquisition of The Godfrey Hotel Boston. At first we brought in partners from Europe, but now we’re working with local partners. The US real estate market operates at a much higher speed, and the highest level of professionalism is required. Our strategy, for example, is to get developers involved at an early stage and then look for independent third-party leaseholders – which is very close to our approach in Europe.


How do your plans for additional investments in the United States look?
We completed the hat-trick in the United States around the New Year and also gained a foothold in the hotel market in New York City – securing an unparalleled location in midtown Manhattan for the newest Courtyard by Marriott. And a letter of intent has already been signed for another.


How much will all of this cost?
More than in Europe. In the United States, we’re talking about minimum investments from $80 million to $100 million. The LondonHouse in Chicago – a hotel that will operate under the Hilton soft brand Curio – cost over $330 million. We are focusing our search in the top five cities: Boston, New York City, Chicago, San Francisco, and Los Angeles – the last two a deliberate push to the West Coast. However, 15 locations are feasible for us – always in very good micro-locations. Demand can’t be limited to international travellers and must also include the domestic market. 


Are yields in the United States more attractive than in Germany?
Relatively speaking, yes. Based on gross initial yields, we expect more than an extra 50 basis points. However, this is also related to the lateral movement in individual markets at present. A further increase in the supply of hotels in New York City will frighten off many local investors, for example. That could change again in 2019, when the existing supply is projected to be absorbed. But we’ll have to wait and see how political and economic background conditions in the United States take shape.


The interview was conducted by Maria Pütz-Willems.


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