Ready for the next cycle

Hotels have been particularly hard hit by the various measures taken to counter the coronavirus pandemic. Even major property holders are feeling the effects. The prospects of a quick return to growth are good, however, provided the right steps are now taken with regard to tenant and property management. By Christian Hunziker

The Radisson Blu hotel in Berlin’s DomAquarée complex is a popular accommodation option in the German capital. One guest described it on travel website Tripadvisor as “A great hotel in the best location in Berlin”, while another describes the staff as “very friendly and professional”. Despite this praise, the hotel has had very few guests recently. Restrictions on travel, social distancing and the cancellation of conferences and other events mean that the fight against Covid-19 has affected the entire hospitality sector, including the four-star Radisson Blu, which is held by Union Investment’s open-ended real estate fund UniImmo: Deutschland.

Nevertheless, during 2020 the property owner succeeded in negotiating a new 20-year lease with the Radisson Hotel Group that guarantees a fixed minimum rent. This agreement is being accompanied by an extensive refurbishment programme that will see the fund investing some €20 million in the fabric of the building, while the operator will spend approximately €12 million on updating the rooms and public areas. On completion of the work, the hotel will join the exclusive Radisson Collection of exceptional hotels in a move that underlines the hotel’s strong lifestyle appeal. “It’s a feature of the current crisis that our hotel partners remain committed to strong locations and high-quality properties and are locking in those benefits. All parties benefit from this approach,” says Martin Schaller, Head of Asset Management Hospitality at Union Investment.

Union Investment hotel property in Berlin: After 15 years in service, the world’s largest cylindrical aquarium underwent a full refurbishment. The project at the DomAquarée complex took nine months to complete. Work on this scale had never previously been carried out on a free-standing aquarium of this size. With the job done, the piscine population of the AquaDom is now back home again.
Union Investment

1,500 tropical fish

were temporarily moved to the breeding and nursing area of the neighbouring Sea Life Aquarium.

Stable business relationships help provide answers to the crisis

Looking at general hotel performance in 2020 shows just how significant the contract extension is. According to real estate consultancy Savills, at the height of the pandemic occupancy across Europe plummeted to 15.3 percent. In Germany, the important RevPar figure (revenue per available room) collapsed by over 90 percent in April and May 2020 compared to the previous year, based on findings by market research companies Fairmas and STR. Against this tough economic backdrop, some hotels shut their doors for good or declared insolvency. The slump in overnight stays and room revenue has also created challenges for owners of hotel properties, not just for operators. “We had to learn to take one step at a time and model a wider range of scenarios,” comments Martin Schaller. According to Schaller, landlords waiving part of the rent is not really a solution. “Simply waiving the rent without the operator delivering something in return is generally not the best way forward,” he says. Such a waiver does, however, make sense if it can be made to serve the long-term interests of the fund and its investors. The objective should be to offset rent concessions by tweaking hotel agreements that needed changing anyway, irrespective of the crisis.

Theoretically, it’s possible to reopen a hotel within two days. For safety reasons, however, additional checks on water quality are performed so that it takes just under a week to reopen.
Rolf Hübner managing director, UBM Hotels

Switching brands is one of many options

As hackneyed as it may sound, tackled correctly, a crisis can be an opportunity. “The current situation provides a major window of opportunity; the action we take now will shape our hotel portfolio over the longer term,” says Schaller. Never before has Union Investment agreed so many changes with its tenants in such a short time as in 2020. “Almost all agreements have been renegotiated or are in the process of being renegotiated,” explains Schaller. “Our aim here is that every solution should add long-term value for our funds.” Requiring both parties to invest in the property is just one option here. Another is to bring forward a planned rebrand. 

Union Investment is currently preparing for a hotel outside Germany to switch to another brand, for example. The change had been scheduled to take place at a later date, but the crisis created new priorities. In another case, Schaller and his 15-strong team were able to induce a tenant to recommence rent payments by offering a long-term lease extension. It can also make sense to change the contract model, which is what happened at the Pullman Berlin Schweizerhof hotel.

During the crisis, Union Investment succeeded in extending the remaining term of the contract ahead of expiry from 15 to 30 years, while at the same time converting the management contract with Accor Hotels into a franchise agreement, with the HR Group becoming the new tenant. In Schaller’s view, there’s no need to incorporate clauses about future pandemics into agreements: “A contract cannot cover every eventuality.” In any case, that type of clause would not have solved the practical issues associated with suddenly closing a hotel, as became necessary in many locations due to the lockdown in March 2020.

Operators are actually well prepared for such a scenario, says Rolf Hübner, managing director of UBM Hotels. This Austrian company leases ten hotels owned by Union Investment across three countries and signs its own contracts with the hotel managers. The first thing to clarify was whether it was even commercially viable to remain open under lockdown conditions, explains Hübner. In his words, hotels that decided to close went into “standby mode”. The heating, ventilation and water supply remained in operation, but on a reduced scale. Water management was a particularly important issue: to prevent a build-up of legionella bacteria, it was necessary to turn on the hot water in every room every two to three days. A closed hotel was therefore never fully deserted – according to Hübner, there were always at least two employees on duty. Theoretically, it’s possible to reopen a hotel within two days, adds the hotel expert. For safety reasons, however, additional checks on water quality were performed so that it took just under a week to reopen. Hübner explains that the necessary hygiene requirements were drawn up while the hotels were closed by law, allowing fast implementation when preparing to welcome guests back. 

Experience and strong partnerships help in a crisis

Something that became apparent is that hotels which shut down during the first wave had a tougher time in terms of being accepted by guests again than hotels that remained open throughout. While the majority of the 73 hotels in the Union Investment portfolio stayed closed during the first wave of the pandemic, that figure was around a third during the second wave in late 2020. Throughout, it is essential “to work in partnership with tenants”, says Martin Schaller. That’s not the sole prerequisite for successfully navigating the crisis, though. According to Schaller, the long experience of the Union Investment Hotel Asset Management team is another key factor that underpins tenant trust. The quality of the portfolio is also of critical importance. “Recent months have demonstrated that our hotel portfolio, with its creditworthy tenants and excellent micro-locations, is already largely crisis-proof,” says Martin Schaller. “The pandemic is a temporary challenge facing hotels as an asset class, not a structural one.” Having said that, it’s possible that Union Investment will add strong holiday hotels and resorts to its portfolio, which currently consists solely of city hotels. He firmly believes there are better times ahead, including for city hotels that attract large numbers of tourists in addition to business travellers: “People will start travelling again as soon as it’s safe to do so. There is a basic human need for individual experiences and social contact in a global world.”

By Christian Hunziker

Title image: BHotel Pullmann Berlin Schweizerhof

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