sentiment report · hotel market germanv 201912020 engel&vÖlkers hotelconsulting . 1 dear...

SENTIMENT REPORT HOTEL MARKET GERMANV 201912020

ENGEL&VÖLKERS HOTELCONSULTING

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Dear Readers,

For the second time, EVHC takes the pulse of the hotel real estate market with its Sentiment Report. Where is the market heading whenpositive domestic conditions meet increasingly uncertain global prospects? Undoubtedly, the solid hotel market with constantly growingnumbers of arrivals and overnight stays forms the basis for the positive mood. Not only operators but also investors see further growth,albeit outside A-cities, in niches locations and neighboring products.

The repeated, anonymous survey of the most important industry participants again provides insights into the market, both from theoperator's and investor's perspective. EVHC is also able to make comparisons with the results of the previous year and thus also showchanges in the mood and assessment of market conditions.

Together with our valued partner Fairmas, we will again give you an overview of the performance in the first half of 2019 of the top 7cities.

Our colleagues at EVIC also took a closer look at other asset classes as part of their "Investment Pulse 2019/2020". This will be publishedparallel to the Hotel Sentiment Report - please contact us for your personal copy as well.

We wish all our readers an exciting reading and new insights.

Andreas Ewald Matthias Hautli

September 2019

ANDREAS EWALDFounding Partner+49 (0)40 36 88 101 [email protected]

MATTHIAS HAUTLIDirector+49 (0)40 36 88 101 [email protected]

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Operators pursue various expansion strategies. Eventhough C-cities are not yet fully in focus, hotel companiesconfirm a constant or higher level of activity in thesurvey. Compared to the previous year, fewer operatorsindicated to focus their activities only on A-cities (37%compared to 55% in the previous year).

OPERATORS

of the operators indicate price /lease expectations of the owneras main reason for unsuccessfulcontract negotiations.

While 73% of the operators see servicedapartments as established on the hotel market,64% of the operators (-18% compared to theprevious) stated that the competitive situationis intensified by serviced apartments. Incontrast, 40% (+54%) of investors stated thatthey could achieve a premium return withserviced apartments in the exit compared tohotels.

For 90% of the operators surveyed, overcapacity is just asmuch a potential risk as to the growing delta between leasepotential and construction costs. The lack of qualifiedpersonnel is also still seen as a risk by the operators. Thedownturn in the global economy is also assessed as a risk by83%.

The number of overnight stays is the most relevant factorfor choosing a city destination.

are cited by operators as the second and third mostimportant aspect for selecting a destination.

“Through supply growth and hotel groups pressure toexpand, earning potentials of existing hotels are at risk.”

Operators are currently focusing on developments to drivetheir expansion strategies, while 29% are taking overexisting properties and 7% are reporting operatorconsolidation as their strategy.

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Direct acquisitions are foreseen for the majority of theinvestors (55%).

Both A- and B-destinations remain attractive for investors.However, it should be emphasized that the activity in A-cities has decreased compared to the previous year (YTD -33% relatively).

of investors indicate price expectations asthe main reason for failed transactions(YTD -21%).

Berlin defends again this year its 1st place in the ranking ofthe most attractive hotel investment locations in Germany,followed by Hamburg. of investors see a possible global economic downturn as

the biggest potential threat. The growing delta betweenleases and construction costs continues to be seen as arisky development.

3.0% 4.0% 5.0% 6.0% 7.0% or more3.5% 4.5% 5.5% 6.5%

perceive increases in interestrates as potential risk whichequals an relative decline of78% YTD.

INVESTORS

Less than half of theinvestors see positivedevelopment for theGerman hotel real estatemarket in the medium term.

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„The hotel market remains stable and continues its diversification. Uncertainty evolves from an increasing momentum of the economic & political environment.“

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EXECUTIVE SUMMARY 3

MARKET SNAPSHOT 7

MARKET OUTLOOK – HOTEL OPERATORS & INVESTORS 11

HOTEL OPERATORS – TRENDS & DEVELOPMENTS 19

HOTEL INVESTORS – TRENDS & DEVELOPMENTS 23

METHODOLOGY 31

IMPRINT 34

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TREND SNAPSHOT – GERMANY

The yield compression has lost momentum. Although the conducted survey of market participants as part of the

Sentiment Report shows a further decline in prime yields, the trend has slowed considerably.

Not only large hotel chains but also specialized operators appreciate the potential of niche markets and destinations.

Constant brand development should help to penetrate these markets in order to develop further target groups. Newly developed concepts often make it possible to use

atypical, non-standardised (existing) properties.

High land costs in A-locations and rising construction costs lead to high lease expectations. Project developers and operators are forced to develop alternative locations to ensure further growth. B- and C-cities as well as holiday

destinations, continue to establish themselves.

A large number of project developments means that another record number of newly opened hotel rooms will be reached in 2019. This development will continue in the

coming years due to the high amount of new projects.

The often-quoted product shortage and the lack of areas in the top locations have both, operators and project

developers to resort to alternative strategies. In addition to switching to secondary destinations, the focus is increasingly on densification as well as mixed-use

developments.

The ongoing shortage of personnel is being countered, particularly in the focused service area, with

multifunctional facilities and reduced and streamlined work processes. Hotel operators' academies are

established to train staff from outside the industry. The introduction of the digital registration form makes it

possible to further automate processes.

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+ 2.5%

+ 3.0%

+ 0.6%

Key indicators for the German hotel market as a whole continue to be positive in the first half of 2019. An increase in the number

of overnight stays of 3.8% compared to the previous year was able to compensate for the supplementary bed growth again. The performance indicators of the hotel operations (ADR, Occ,

RevPAR) also recorded an increase compared to the same period of the previous year.

+ 3.0%

+ 3.8%

Source: Fairmas, Destatis

PERFORMANCE SNAPSHOT – GERMANY

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Berlin 99 EUR+ 2.9%

78%+ 3.0%

78 EUR+ 6.0%

16.1 Mio.+ 5.3%

approx. 0.16 EURbn-61%

Hamburg 116 EUR+ 1.4%

76%- 2.1%

88 EUR- 0.7%

7.2 Mio.+ 5.5%


Munich 130 EUR+ 13.1%

72%+ 0.8%

93 EUR+ 14.2%

8.3 Mio.+ 8.0%


Frankfurt a.M. 112 EUR+ 2.5%

68%- 3.0%

76 EUR- 5.4%

5.2 Mio.+5.8%

approx. 0.13 EURbn+26%

Dusseldorf 105 EUR- 0.1%

68%+ 2.4%

72 EUR+ 2.1%

2.4 Mio.+2.6%

approx. 0.07 EURbn+81%

Cologne/ Bonn 110 EUR+ 5.1%

72%+ 1.7%

78 EUR+ 7.0%

4.0 Mio.+5.3%

approx. 0.23 EURbn*+18%

Stuttgart 109 EUR- 2.3%

71%+- 0.0%

78 EUR- 2.1%

1.9 Mio.+ 4.5%


> +1.0% towards STLY -1.0 - +1.0% towards STLY > -1.0% towards STLYSource: | E&V Research, Federal Statistical Offices / STLY = same time period last year | *Transaction volume includes only Cologne

KEY PERFORMANCE INDICATORS FIRST HALF-YEAR 2019

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Portfoliotransaktionen Einzeltransaktionen Transaktionsvolumen

Yield development

In the first half of 2019, the hotel transaction volume reached a value of EUR 1.6 billion, which

corresponds to a decrease of approx. 14% compared to the same period last year. The

average volume per transaction rose by around 13% despite the dominance of individual

transactions.

In 2019, a premium was again achieved for hotel properties with an average peak yield of 4%

compared to other asset classes. In the area of peak yields, a base seems to have been reached at around 4%, compression will not continue for

the time being in 2019.

The continuing shortage of products will further lead to a focus on single-asset deals and project

developments in the medium term. The transaction volume in 2019 is not expected to

reach the levels of 2017 & 2018.

Soruce: E&V Research

MARKET SNAPSHOT – 2009 TO FIRST HALF-YEAR 2019

Portfolio transactions Single transactions Transaction volume

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▪ CITY TYPES IN FOCUS

▪ FUTURE STRATEGIC FOCUS

▪ POTENTIAL MARKET RISKS

▪ FUTURE EXPANSION STRATEGIES

▪ SIGNIFICANCE OF SERVICED APARTMENTS

▪ YIELD POTENTIALS

▪ SUSTAINABILITY OF CITY DEVELOPMENTS

11O

PER

ATO

RS

higher activity steady activity reduced activity

INV

ESTO

Rs

A-CITIES B-CITIES C-CITIES

The response option „do not know“ is not displayed in the graphic

previous-year figures

Investors and operators are planning to maintain their constant activity in A-cities. An even greater focus on A-cities is probably not planned due to the lack of products. A similarpicture can be seen in B-cities where it is noticeable that the reluctance of investors is greater. According to this survey, hotel operators would like to further expand their activities inC-cities, while investors are more conservative here.

MARKET OUTLOOK

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Adjustments are planned

Shift to smaller markets

Shift to international markets

Shift to areas with development prospects

More agressive bidding policy

Adjustments are planned

Shift to smaller markets

Shift to international markets

Shift to other asset classes

Shift to other risk classes

Shift to more conversionsEntry into new segments

OPERATORS INVESTORS

Investors and operators alike continue to see a great need to adapt their strategies to market conditions. As in previous years, both groups are considering entry into secondarymarkets and abroad. Hotel operators also seem to be working on diversifying their portfolios. Similarly, hotel investors can increasingly imagine involvement in other types of use.

MARKET OUTLOOK

Agree Disagree Previous-year figures

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Regulatory provisions with operational impact

Growing delta between lease levels and construction costs

Oversupply

Downturn of international tourism flows

Lack of qualified personnel

Downturn of the global economy

Sharing Economy (Airbnb, Wimdu, etc.)

Downturn of the global economy

Downturn of international tourism flows

Increasing interest rates

Oversupply

Lack of sustainability in lease offers from operators

Growing delta between lease levels and construction costs

The most pressing fears of investors and operators, a downturn in the global economy and the sustainability of lease levels in relation to construction costs, have intensified over thelast 12 months. On the operator side, staff shortage and increased supply pose specific operational challenges. It is also striking that in the previous year 67% of investors classifiedinterest rate increases as a potential risk, while this is losing importance due to current developments.

MARKET OUTLOOK

OPERATORS INVESTORS

Agree Disagree Previous-year figures

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MARKET OUTLOOK

The growth pressure on hotel operators forces them to be as flexible as possible in their acquisition activities. This means that all expansion opportunities are assessed almost equally- but this also requires the correspondingly flexible brand worlds with soft brands and white labels. Active acquisitions remain the most important pillar of your strategy on theinvestor side - compared to the previous year (12%), strategic portfolio adjustments could lead to more movement on the market and alleviate product shortages.

OPERATORS INVESTORS

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MARKET OUTLOOK

Agree Disagree

…are an attractive concept from an operational perspective

…will increase the competition on the hotel market

…are justifying a higher lease per room due to their cost structure in comparison to

hotels in comparable segments

…are valid alternatives to rather classical hotel investments

…achieve a return premium in an exitscenario compared to hotels

...have meanwhile established themselves on the hotel marketO

PER

ATO

RS

INV

ESTO

RS

Serviced Apartment products have fully arrived on the market. The enthusiasm, as well as the fear of competition with classic hotel products, have been put into perspective, servicedapartments have established as real alternative for investors. Leaner operating structures do not justify higher lease payments but offer lower risks in terms of third-party usabilityand conversion.


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MARKET OUTLOOK

Budget

OPERATORS INVESTORSA-CITIES

B-CITIES

C-CITIES

From the operators´ point of view, there is a clear trend towards budget and focused service concepts. Possible reasons are leaner cost structures, high standardization or shorterstart-up phases that minimize the overall operational risk.Investors show a more diversified picture depending on the location. They also give higher-quality and more complex hotel products good earnings opportunities, such as trophyassets in the top 7.


LuxuryUpscaleMidscale Budget LuxuryUpscaleMidscale

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MARKET OUTLOOK

…SUSTAINABLE

… NOT SUSTAINABLE

Operators and investors agree in their assessment of the five most sustainable hotel markets as well as at the bottom end of the list - rapid capacity growth and a still full pipelineseem to be the decisive factors for a critical assessment.In the case of B-cities in particular, the ratings of investors and operators differ, especially if they have not yet been the focus of developments.


…SUSTAINABLE

… NOT SUSTAINABLE

OPERATORS INVESTORS

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▪ PARTICIPANT PROFILE

▪ LOCATION CRITERIA AND GROWTH STRATEGIES

▪ CHALLENGES OF THE HOTEL INDUSTRY

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COMPANY SIZE SEGMENTATION

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OPERATOR

MOST IMPORTANT CRITERIA WHEN SELECTING A CITY DESTINATION HOW DO YOU PROPORTIONATELY DRIVE YOUR GROWTH?

The most important criteria for the selection of a city destination - overnight stays, demand generators and accessibility - remain unchanged. However, the weighted differencesbetween the top criteria are small, which is why no clear prioritization can be identified.However, the preferred expansion strategy of operators is clear - their development is the favorite here.

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OPERATOR

PRICE - / LEASE EXPECTATIONS

HIGHER BIDDING COMPETITOR

QUALITY OF PROPERTY

IN TIMES OF CONTINUOUSLY INCREASING CONSTRUCTIONCOSTS , LEASE EXPECTATIONS OF PROJECT DEVELOPERS ANDOWNERS GENERALLY STAND IN A SUSTAINABLE RELATION TO

THE OPERATIONAL EARNING POTENTIAL

DUE TO SUPPLY GROWTH AND THE EXPANSION PRESSURE OFHOTEL GROUPS, PROFITABILITY OF OUR ESTABLISHED HOTELS

ARE AT RISKCONTRACTUAL

RISK ALLOCATION

REASONS FOR UNSUCCESSFUL OPERATING AGREEMENTS

*Relative change compared to previous year

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▪ PARTICIPANT PROFILE

▪ ASSESSMENT OF THE MARKET ENVIRONMENT

▪ INVESTMENT AND CONTRACT CRITERIA

▪ YIELD LEVELS

▪ INVESTMENT STRATEGIES

▪ CHALLENGES FOR THE INDUSTRY

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Ø yearly transaction volume thatthe questioned investors are involved in

TRANSACTION VOLUME SEGMENTATION

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INVESTORS

A-C

ITIE

SB

-CIT

IES

C-C

ITIE

S

...has a professional investment environment

...has the most attractive risk-return profile in the European environment

...will develop positively in the next two years

AG

REE

Agree Disagree Do not know

THE GERMAN HOTEL REAL ESTATE MARKET … THE MARKET IS CHARACTERIZED BY PRODUCT SHORTAGES

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INVESTORS

…MOST IMPORTANT INVESTMENT CRITERIA … MOST IMPORTANT CONTRACT CRITERIA

“Location, location, location " continues to be the guiding principle. Furthermore, the operator moves into the focus of investors' attention. The contract design has been furtherstandardized, which may explain the decreasing relevance of the contract. In addition to the lease amount, the most important contractual points for investors are the underlyingstructure, the final amount of the security as well as the leasing company (eg. SPV).

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INVESTORS

A-C

ITIE

SB

-CIT

IES

C-C

ITIE

S

3.0% 4.0% 5.0% 6.0% 7.0% or more3.5% 4.5% 5.5% 6.5%

*The size of the bubbles reflects the percentage of participants who have chosen the particular answer Previous year’s value | **Data were cumulated from a scale ranking of 1-10

HOW INVESTMENT-CAPABLE DO YOU SEE B- AND C- CITIES**

WHERE DO PRIME YIELDS FOR HOTELS IN A-LOCATIONS LIE IN…

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INVESTORS

31% OF THE RESPONDENTS SAY



11

%

IN THE UPCOMING 12 MONTHS INVESTORS ARE PLANNING AN EQUITY SHARE OF...

WHICH HOTEL SEGMENT IS PREFERRED?

Budget Midscale Upscale Luxury

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INVESTORS

MAIN REASONS FOR UNSUCCESSFUL TRANSACTIONS IN THE LAST 12 MONTH THE HOTEL PROPERTY PRICES HAVE REACHED AN ALL-TIME HIGH AND WILL NOT CONTINUE TO INCREASE

Agree Disagree Do not know Previous year‘s value

High prices are considered the main reason for failed transactions, even though, remarkably, almost one ¼ less gave this reason than in the previous year. Higher-bidding competitorswere also named for failed transactions. This may be due to a lack of products and aggressive bidding behavior. In the top 7 cities, however, unlike in the previous year, investors arehesitant about the development of prices. For secondary destinations, however, an increasing price increase is expected.

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"Hotel investments continue to be in demand - despite the lack of

product, investors stil l put strong focus on tenants and locations for

their underwriting."

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The Sentiment Report “HotelMarket Germany 2019/2020”reflects the market atmosphereof the industry from theoperators and investors point ofview and should filter thepossible trends as well asmarket developments.Over four weeks this summer, market experts were

encouraged to participate in the survey. A specific onlinetool for empirical studies and surveys was used. It allows amathematically sound evaluation of the results andguarantees the anonymity of the respondents.

Engel & Völkers Hotel Consulting in cooperation withRUECKERCONSULT created a survey that addressed themost important participants on the German hotelmarket.

Hotel Group/ Operator | 43%

Project Developer/ Contractor | 17%

Bank/ Consultant/ Lawyer | 12%

Asset/ Funds Manager | 10%

Open Real Estate Funds/ Special Funds | 5%

Other | 4%

Closed Real Estate Funds | 2%

Private Investor/ Family Office | 2%

Real Estate Companies/ REITs | 2%

Insurance/ Pension Funds | 1%

Public Administration | 1%

NoteDifferences in totals can occur due to rounding and “do-not-know” answers.

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DISCLAIMERAll content included in the Sentiment Market Report is for general information purpose only andEngel & Völkers Hotel Consulting assumes no responsibility for possible errors. Thus, the drawnmarket overview cannot substitute in-depth research as well as expert consultation. Although thisreport was written with great diligence, claims of entire validity, integrity and or currency cannot beguaranteed, especially in terms of occasional instances. The information in this report is true andcomplete to the best of our knowledge, but Engel & Völkers Hotel Consulting GmbH, a licensee ofEngel & Völkers, Ruecker Consult and/or Fairmas GmbH cannot be held liable for any content.

Engel & Völkers Hotel Consulting GmbHLicense partner of Engel & Völkers Commercial GmbH

Stadthausbrücke 5, 20355 Hamburg

Telephone: +49 (0) 40-36 88 10-150Homepage: www.engelvoelkershotel.com

Managing Partner: Andreas Ewald, Kai WolframRegistry court: Amtsgericht Frankfurt am MainRegister number: HRB 106942

Profession Supervisory Authority:Ordnungsamt Frankfurt am Main, Kleyerstraße 86, 60326 Frankfurt am MainPermission according to § 34c Gewerbeordnung issued by the city ofFrankfurt.

https://www.engelvoelkers.com/de-de/hotel-consulting/

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