The world at the moment is in a multipolar disorder, but experts believe that despite geopolitical risks and economic policy uncertainty, an upturn is possible. The Hospitality industry can play an important role in this process as demand is booming. A further sign for optimism is many hotel owners are thinking now more precisely about the future of their hotel properties concerning digitalisation and sustainability. It is therefore not only the warm spring season that exudes optimism in the hotel industry, even if hotel business is still struggling with high energy costs, increased prices, and staff shortages. This makes investors get ready again.
The tourism industry is rejoicing: After harsh years of pandemic with a lot of lockdowns, people's desire to travel seems to be unbroken due to the forecast figures from the World Travel & Tourism Council (WTTC). The organisation is projecting a record-breaking year for Travel & Tourism in 2024, with the sector’s global economic contribution set to reach an all-time high of $11.1 trillion.
This clearly shows that since the pandemic travel is on the top of people's priority list. According to Jürgen Schmude, retired professor for Tourism Economics and Sustainability at the Ludwig Maximilian University of Munich travelling for vacation has become a basic need. People would rather do without other things than give up travelling. The challenge for the business-travel sector is different. Covid restrictions have gone, but Zoom and Teams meetings are still here. Historically, business travel has always rebounded at a slower path than leisure travel for example after the financial crisis in 2008. But this time the change in business travel is more fundamental. The opportunity can be, if business travel can become a pivot point to leisure, as leisure hotels have mainly driven the recovery of hospitality.
Investors: Opportunities in the new normal
These positive trends in demand are slowly bringing hotel properties back into the focus of investors, as the hospitality sector has shown its resilience and proving its critical role in the global economy. In contrast to other asset classes such as the office market, the hotel investment market is therefore supported by good fundamental data. Even if the transaction market is still quiet, there is a light at the end of the tunnel. But the noticeable market recovery observed by the end of the year and the generally more positive market sentiment seen by BNP Paribas Real Estate have not yet been reflected in figures in the first quarter of 2024. Hotel transactions totaled just under € 240 million in the first three months, falling short of the previous year's figure by around 13 per cent. The long-term average was undercut even more significantly, by 62 per cent. According to Alexander Trobitz, Managing Director and Head of Hotel Services at BNP Paribas Real Estate, investment activity continues to focus on the sale of individual properties and no portfolio transactions have been recorded to date.
Cushman & Wakefield's (C&W) experts say, that the volume is largely attributable to the sale of the 5-star Hotel de Rome in Berlin. It was sold for around €145 million by the Singaporean sovereign wealth funds GIC and Caleus shortly before the lease with Rocco Forte Group expired. "With the exception of the Hotel de Rome transaction, activity was primarily limited to smaller and operator-free sales," says Josef Filser, Head of Hospitality Germany & Austria at C&W. He, too expects the slight upturn in transaction activity in the second half of the year with some larger deals in the marketing or review phase as lower prices and stabilizing interest rates would make investments attractive again. He also sees more private equity investors and family offices on the investors’ side.
What else? According to the spring report of the German Property Federation (ZIA) foreign institutional investors currently tend to target luxury hotels outside Germany. German city hotels continue to attract comparatively limited interest among buyers. However, this will probably soon change, as the existing hotel segment will increasingly recover due to the decrease in the new construction volume resulting from increased production costs.
"New construction investments and sales of project developments, which in the past have reliably made significant contributions to sales in some cases, have become rare due to the lack of supply. Instead, value-add investments, for example in hotels with short contract terms or opportunistic purchases of vacant properties or conversion projects, are playing an increasingly important role," adds Trobitz.
This trend can be seen in the figures. While core and core+ investments dominated in previous years, now purchases in the value-add and opportunistic segment currently predominate. Even if this may still change over the course of the year due to the low number of cases to date, it is a clear statement for the overall positive assessment of further market development. On the investor side, foreign buyers stand out on the German market with about 61 per cent, although this is likely to level out somewhat over the course of the year due to Trobitz.
Hotel Groups: Expansion by taking over
In the current situation, the hotel real estate market is, due the Zia Hotel Experts an extremely strong tenant market, which is reflected in current developments. Overall, the volume of new construction projects is falling sharply, as hotel chains such as Premier Inn and Hyatt are increasingly implementing their expansion plans by taking over existing properties.
Premier Inn has the medium-term goal of becoming the largest operator of budget hotels in Germany with 300 hotels and 60,000 rooms. Instead of signing lease agreements, the company is increasingly acting as a real estate developer and investor. For large hotel chains such as IHG, Marriott or Accor, the German hotel market is still interesting, but no longer as lucrative as other markets. Domestic hotel chains such as Motel One are also expanding more abroad than in Germany. Motel One opened the first hotel of its new lifestyle-oriented secondary brand The Cloud One in 2022 in New York and entered the German market with the second location, The Cloud One Hamburg-Kontorhaus opened end of 2023, Düsseldorf will follow by mid 2024.
Thinking hotels into the future
Even if the future of hospitality and hospitality investments seems to become brighter again, hotels as an asset need to change. The pandemic showed clearly the underlying weaknesses in the hotel industry. In view of increasing operating costs and the persistent staff shortage, particularly hotels with little capital, usually family-run ones, still struggle, while branded, well profiled hotels having already taken their ways to sustainability increase their market shares.
Times where classic concepts performed well without innovation are gone. Consumer demand has shifted to be experience-led, which is bringing more lifestyle brands. Motel One is keeping up with its clients’ new needs by launching a second brand with rooftop bar, meeting rooms and a brand concept store as well as an F&B area, where the company cooperates with local producers. This shows well, that for both investors and users, compliance with ESG standards is now a key selection criterion as well as new customer friendly concepts.
Concerning digitalization, customer personalisation is becoming critical. Hotels like CitizenM have entered the market with new concepts, putting technology at the centre of the customer experience with self-check-in, iPad control, and accessible, self-serving experiences for guests while not compromising on location. Also the boundary between commercial and residential concepts is blurring, among other things due to serviced apartments, which are aimed at self-catering travellers looking for accommodation for a few days or weeks.
This changing world includes other players too: cities and intelligent urban planning. Hotels can play within new city concepts an important role.
"Hotels have always been mediators between the private and public spheres - and important urban building blocks in neighborhoods. In times of structural change, as we are currently experiencing, they can take on new functions: why shouldn't I be able to pick up my parcel in the hotel next door, go to the hairdresser or buy the most important groceries late at night? Last but not least, as a constantly occupied place, the hotel can be a social center for the entire neighborhood" says Tobias Nöfer, Nöfer Architekten and Chairman of the Board of the Architects' and Engineers' Association of Berlin-Brandenburg (AIV).
Getting all these factors and concepts right experts are quite optimistic that investors are eying hotels again as a hot asset class, especially if they are cash-rich and can catch opportunities.