• Germany becomes second-strongest hotel investment market in Europe, after the United Kingdom

• Foreign investors contribute c. 1 billion euros more than in the previous year

• Portfolio sales increase

• Prime yield drops from 5.75 percent to 5.25 percent year-on-year

With a transaction volume of 3.0 billion euros, Germany's hotel investment market concluded 2014 with the best year-end result on record. It topped the highest result to date – 2.2 billion euros in 2007 – by 36 percent. Compared to the previous year (1.73 billion euros), the transaction volume grew by 74 percent or 1.27 billion euros. This results from an analysis compiled by the real estate services firm CBRE. “Even core investors have come to appreciate hotels as an asset class,” said Olivia Kaussen, Head of Hotels Germany & CEE at CBRE. “The yield rate is 50 to 100 basis points above comparable office yields, and makes hotels an attractive add-on option for investment funds. So the segment is becoming more and more interesting for insurance companies and pension schemes. However, the keen interest to buy hotel properties is putting pressure on prime yields, which have declined by around 50 basis points to 5.25 percent over the past year.” The share of the hotel investment market in the overall commercial real estate market has gone up to nearly eight percent (2013: 5.7 percent), whereas the investment volume has increased by 53 percent as it rose from 663 million euros in Q4 2013 to 1.01 billion euros in Q4 2014. Investors show a high degree of faith in the market because of the robust economic performance of most hospitality markets in Germany,” said Kaussen. “The persistently low interest rate environment and readily available loans have ensured a high level of liquidity and an attractive return on equity.” The market is flush with equity capital, and gearing ratios rarely exceed 50 percent.

Foreign Investors Expand their Share of the Market
Unlike the previous year, foreign investors dominated the German market for hotel investments in 2014, contributing 1.71 billion euros and achieving a pro-rata share of 57 percent of the total. The most active among these investors hailed from France, the United States and the United Kingdom. Inversely, the percentage of German investments dropped from 55 percent to 43 percent. Yet in terms of absolute value, it rose by 35 percent, from 955 million euros to 1.29 billion euros. “The relative decline of commitments by domestic investors is explained not so much by a lack of interest but by the fierce competition from international investors who in turn serve the target group of foreign investors,” said Philipp Kraneis, Head of Hotel Transactions Germany & CEE. It is on these that he blames the increase in opportunistic portfolio transactions.

Portfolio Sales Climb to 38 Percent
While single transactions still accounted for the bulk of the market trade at 62 percent, portfolio transactions expanded their market share from 30 percent to 38 percent. In May 2014, the French hotel multiple Accor acquired a portfolio of 67 hotels in Germany that had been operated by Accor under the brand names of “ibis,” “ibis budget,” “Mercure” and “Novotel” prior to the deal. The price tag for the portfolio, which also included 19 Accor hotels in the Netherlands, was 722 million euros. The portfolio was sold by two Moor Park investment funds, which had actually acquired the hotels from Accor in 2007. Another portfolio deal involved the acquisition of the SITQ portfolio of eleven German hotels by Apollo Global Management. Among the 190 transactions, 77 hotel sales had single transaction volumes of 10 million euros or more. These accounted for around 82 percent of the total volume (approximately 2.46 billion euros).

A total of three deals actually exceeded the mark of 100 million euros. One of the largest single transactions in 2014 was facilitated by CBRE, namely the sale of the Hilton Frankfurt by London & Regional to an international investor. Similarly, the PalaisQuartier in Frankfurt changed hands for approximately 800 million euros in 2014. The complex of buildings, which includes the five-star Jumeirah Hotel with 217 rooms, was sold by KP Investments to Deutsche AWM and ECE, this being another deal that CBRE facilitated on the buyer side. In addition, the Peach Property Group sold its new development “Am Zirkus 1” in Berlin to the KanAm Grund Europa institutional fund. Located directly on a riverbank, the building was developed in a 80:20 joint venture together with Deutsche Immobilien AG. Home to the Leonardo Hotel Berlin Mitte, it features 309 rooms and 5,000 square metres of office and commercial floor area, and is operated by the Fattal Group. CBRE served as exclusive adviser to the selling Peach Property Group during this off-market deal. Another prominent hotel deal involved the Hotel Atlantic Kempinski in Hamburg. Asklepios Kliniken and Dr. Broermann Hotels & Residences, a company belonging to the head of Asklepios, Bernard Broermann, acquired the renowned five-star hotel on the Alster lakeshore from Octavian Hotel Holding. With a sales volume of 1.26 billion euros and 99 deals completed, Q2 turned out to be the fastest-selling quarter of last year. It accounted for 42 percent of the year-end total. The leading buyer groups of 2014 were hotel operators, open-ended property funds, institutional funds, and private investors from inside and outside Germany.

Munich the Most-Favoured Investment Destination in Germany
Germany's Big Five accounted for a combined investment total of approximately 1,85 billion euros or roughly 60 percent of the total. Year on year, this implies an increase by around 77 percent (up from 1.04 billion euros). The bulk of the investments were earmarked for Munich, Frankfurt am Main and Berlin. In fact, Munich was the single most important investment destination with a share of around 18 percent of the total amount invested in Germany. The volume committed in the Bavarian state capital soared at a rate of 118 percent, jumping from 246 million euros the previous year to 537 million euros in 2014. A prime example would be the two separate sale-and-lease-back transactions in which Hotusa Hotels sold its two Eurostars hotels in Munich (Eurostars Book Hotel & Eurostars Grand Central Hotel) to a special purpose vehicle that now owns them. In another major transaction, the 582-room Holiday Inn Munich City Centre changed hands as part of the SIPQ portfolio. Frankfurt am Main and Berlin claimed shares of 16 percent (494 million euros) and 15 percent (453 million euros), respectively, out of the total investment volume in Germany, thereby achieving a one-year growth in volume by 117 percent and 264 percent, respectively.Investments in tier-two locations added up to 1.15 billion euros in 2014, a year-on-year increase by 67 percent (2013: 690 million euros). “B locations remain subject to keen investor interest, especially on the part of opportunistic investors,” said Kraneis. “For them, investing in B locations is clearly more attractive than commitments in prime locations because of the diminishing returns there.”Favourite German cities include Cologne, Stuttgart, Dresden, Leipzig, Heidelberg and Wiesbaden. In addition, the sales of the tourist resort and leisure park “Land Fleesensee” to Lindner Investment Management was one of the major transactions in holiday hospitality. The holiday resort covers an overall area of around 550 hectares and features three hotel schemes, five golf courses and one spa.

Positive Outlook for 2015
“The interest in hotel property remains high on the buyer side, and there are already several major transactions in the pipeline for this year,” said Kaussen. “Foreign investors will probably continue to dominate the market action, especially when the time comes for the next large-scale portfolio transactions. For instance, domestic high-net-worth-individuals are increasingly emerging as new buyer group interested in buying hotel property, which is why we believe in a bright outlook for 2015.”

Table: transactions highlights in 2014

Source, CBRE Hotels

Selected hotel transactions 2014
HOTEL      SALES    PRICE      DATE      BUYER           SELLER

Selected portfolio transactions 2014
HOTEL      SALES    PRICE      DATE      BUYER           SELLER