The ZIA German Property Federation, the umbrella organisation of the German real estate industry, acts as the voice of the property sector’s entire value chain. Its members include 28 associations, representing 37,000 companies in the sector. Two of its members comment on the hospitality market and their views for the future, ahead of the International Hospitality Investment Forum (IHIF) in September.
The enduring strength of the travel and hospitality market
The travel market has shown strength throughout crises, and this bodes well for investment opportunities in hospitality. As Simon Betty, Chief Executive Officer for Europe of aparthotel brand Adina, says “Travel is a long-term, secular trend. People have always loved to travel and that will not change”. Dirk Bakker, CEO at Colliers, agrees : “The fact that the travel industry has proven to be extremely resilient against disasters and that the travel movements in the world will only continue to grow is an assurance for investors. Covid-19 will be resolved within a couple of years and preventive measures against ‘Covid – twenties etc.’ will be found. Tourism will continue to grow”.
Indeed, hospitality has already started showing signs of recovery: “The recent strong pick-up in trading activity, following months of lockdown, has reminded property investors and capital markets of the resilience of the sector” says Betty. “Operators are slowly returning to profitability – albeit it at lower levels – and many have driven efficiencies and sharpened operations since the onset of Covid. The medium to long-term outlook is strong, conviction levels are high and asset pricing is stable. Availability of debt remains an issue, particularly for leveraged buyers. Time will tell how quickly debt markets recover, and what will be the subsequent impact on asset pricing”.
In terms of investment, “from a relative perspective, the hospitality sector appears good value” says Betty. “Logistics, multi-family residential and life science sectors are at eye-watering yields, inaccessible to all but the cheapest of capital. The jury is out on the future of offices with the ‘will-we won’t-we’ debate about the return-to-work rumbling on. Retail has been ’uninvestable.’ When all things are considered, there are many worse places to deploy capital than to good quality hospitality assets”.
Experiential travel as the key trend
Betty highlights the importance of the guest experience in the enduring appeal of travel: “This is especially true in younger generations like millennials and Gen Z that critically question all aspects of consumption (ethics, provenance, sustainability) and enjoy greater utility from the acquisition of experiences than they do from the accumulation of products. We need only to observe the evolution of the sharing economy and rapid growth in peer-to-peer to platforms to see this trend in action “I no longer need to own a car to drive one, nor do I need to buy designer clothes to have the pleasure of wearing them”. He adds “This increased propensity for spending on ‘experiences’ rather than ‘stuff’ bodes well for the travel industry and hospitality assets more widely”.
The operational impact of the pandemic
Tight trading conditions have forced businesses to review their practices. At Adina Europe, Betty says “we are sharpening operations and improving efficiencies throughout the business. This applies to operations within our hotels where we have been making investments in our digital capability, sustainability and ESG credentials”.
Operations have also had to adapt to new market requirements during the pandemic, and adopt “the highest of standards in respect of our hygiene practices”. Like many operators, Adina has had to develop comprehensive hygiene standards: “Our flagship program is ‘Clean Touch’ which we have developed internally and delivers a strong safety promise for our guests: contactless check-in, hourly cleaning, regular hygiene audits, Covid-19-safe training for all staff and rigorous screening of suppliers ensure we regularly achieve industry-leading hygiene standards”.
Although implemented in response to the pandemic, these measures are expected to provide longer term benefits across all businesses: “The same applies to our headquarters in Berlin where we are making systems improvements and streamlining processes to boost agility and pace of execution. We believe all of this will be important drivers of a performance as we move into a more volatile ADR growth environment” Betty adds.
In addition, the pandemic has impacted the relations between operators, owners, lenders and all stakeholders. Bakker expects that “shorter contracts will be agreed on and that fixed leases will be replaced by more variable leases. Clauses will be added to share the burden of possible future pandemics, or ‘acts of god’”.
Serviced apartments : a resilient segment
The serviced apartment and extended stay segment has outshone traditional hotels during the crisis: “Our core product in Europe has performed relatively well through the crisis” says Betty. “Our guest mix is split c. 50/50 between corporate and leisure with many of our corporate clients using our product for mid duration or long duration stays. About 20%-25% of our revenue comes from guests staying over two weeks. These guests are often corporate travellers or commuters and choose our apartment style product because of the extensive in-room amenities. This segment of our guest mix has been the most resilient through the crisis and has contributed to the outperformance of Adina and other extended stay companies through the crisis. Going forward we will continue to focus on our core segment of apartment hotels and extended stay assets.”.
Serving international and domestic guests
Markets like Germany that were able to count on a strong domestic audience have performed better than those relying on international travel in the past 18 months. This has benefitted Adina: “our guest mix is split c. 50/50 between domestic and international travellers. We have always been proud of our popular appeal to domestic travellers, particularly in Germany, our largest market and, of course, the relative importance of these guests has increased as international travel has become more difficult”.
Destinations leading the recovery
Destinations haven’t all fared equally during the crisis, with city locations suffering from the drop in corporate and international travel. Where will recovery come from first? “Leisure destinations will bounce back first alongside with regional destinations” says Bakker. “Gateway cities will follow later”.
At Adina, growth strategies in key destinations are linked to changing consumer preferences: “We are expanding into new countries: in May we debuted in Austria with our launch of Adina Vienna directly adjacent to Belvedere Palace. In 2023 we will open our first property in Switzerland with the launch of Adina Geneva. We will continue to opportunistically expand into new countries with a priority on those locations with a mix of both business and leisure demand drivers. Over time we will augment our Adina brand with complimentary extended stay products to ensure we remain relevant to our guests and that we cement our leadership position in the European apartment hotel sector”.
Betty adds “We have always located in cities - and micro-locations - with a strong mix of leisure and demand drivers, and this will remain a key-criteria for us in evaluating new locations. Over-reliance on international guests is a clear risk and the true value of our domestic guests has been thoroughly reinforced through the Covid crisis. Going forward we will continue to ensure that our location, marketing and product development strategies have this core customer group at their core”.
The ZIA German Property Federation is a Patron Sponsor of the International Hospitality Investment Forum (IHIF), taking place in Berlin in September. Hear more about the German hospitality market in the session ‘DACH market: Opportunities and Trends’.