The health of Germany’s construction and investment landscape is an indicator for all of Europe. Sources said construction will scale back and prices will dip as new products become more lean and digitized.
REPORT FROM GERMANY—Hotel construction continues in Europe despite the pandemic, with investors looking to Germany to set the tone for the rest of the continent, according to sources.
Guest perception and sensibilities regarding safety, hygiene and social distancing will determine much of these new hotel products and amenities. The question facing investors, developers and hoteliers is what can be financed and open in a landscape of reduced demand and revenue and increased traveler wariness.
On 27 August, the German government announced it will prolong insolvency protection and most financial subsidies and aid, including furlough payments, until the end of 2021, and in some cases until spring 2022.
Serviced apartments and non-traditional, heavily digitalized hotel offerings are expected to see an uptick in development, according to sources.
“Despite significant growth in recent years, serviced apartments are still a small segment in the hospitality industry,” said Reiner Nittka, CEO of GBI Holding AG, Germany’s largest hotel developer. “Currently, they account for around 4% of the accommodation market. However, this will continue to increase substantially—a little more slowly than expected at the beginning of 2020, but still impressive.”
He said in Germany there are approximately 33,900 serviced-apartment rooms, with that number due to increase to approximately 50,000 units by the end of 2022.
“Only those who can give their guests the feeling of security and control will be successful in the market, and this is a feeling that serviced apartments will be able to convey more easily,” Nittka said. “Thus this segment as a whole will probably perform better than the market for classic hotels.”
Budget and economy hotels share many of serviced apartments’ low-cost and social-distancing advantages, said Mark Anderson, managing director, property and international, Whitbread PLC, who is in charge of developing the brand in Germany as its second major market. Anderson said his company has not ceased construction.
“We saw some dates extend as (contractors) reduced staff, perhaps to (comply) with COVID-19 regulations, and we have seen no change in costs, although I have not seen new costs come in yet. If (the pandemic) sees the supply boom ease, that will move into an opportunity for us,” he said.
“It is likely to have less competition going forwards, due to (competitors’) lack of will or ability to finance,” Anderson added. “Some will choose to reduce levels, or it would be forced upon them, and some alternative uses—retail, office, student accommodations—will soften, and that is another opportunity.”
Growth from strength
Costs and rents are stabilizing, but they aren’t dropping as much as might be expected, Anderson said.
“Rents are coming off a little bit on new hotels, a little movement downwards, but it is not dramatic yet,” he said. “Developers are looking still as to what to continue and what the cost of finance will be and roll all that into appraisals.”
Anderson said he sees construction slowing a little, which will likely cause construction prices to flatten.
“We’re looking more at what the operators are forecasting, their ideas of markets and how they will be able to perform and so what type of rent coverage they can be,” Anderson said. “As building costs do down, rents will also go down a little bit.
“Activity levels have slowed a little while (investors) understand all this.”
Anderson believes Whitbread’s strong financial covenant and rent-payment discipline will result in more opportunities for better-quality conversions.
“Shareholders are very supportive of our expansion in Germany, which can be seen in the success of our rights issues, 90% of which has been subscribed by current shareholders. However, they want good returns and are keen on us expanding aggressively,” he said.
The health of the economy could teeter negatively in the coming months, Anderson said.
“We are not in a financial crisis right now, but a health one, but if it moves into being one, then things will change,” he said. “That might flatten the craziness of recent years, a reset, and some projects will be put on hold.”
In the face of reduced revenue, developers are homing in on expenses or considering developing new types of projects.
“Transforming classic hotels is not easy and quite costly,” Nittka said. “With digitalization, hotels can catch up. But when it comes to the size advantage, even if it is sometimes only a few square meters, serviced apartments are clearly in a better position. … (they) offer very affordable rates since they do without public areas that are obligatory in a hotel. These expensively built areas would have to be closed down by the hotels if they were to compete for long-term guests.”
He said the most important thing is to complete all hotel properties under construction.
“As we at GBI have already sold all these developments, there are no delays at all. This is where our approach proves its worth,” he said.
He added the next area of consideration is planned projects that were signed before the pandemic but have not yet been finalized.
“These are now being reviewed again,” Nittka said. “Fortunately, we did not squint at the maximum factor in our negotiations and have always remained conservative in our calculations. As a result of this strategy, our sales prices were recently confirmed by expert opinion in the middle of the crisis, and we can now carry out a planned sale as planned. On the other hand, those developers who calculated with the top prices from the boom year of 2019 and exhausted everything will have problems.”
Partners with plans
Jan Winterhoff, GBI AG’s director of hotel development, said the German economy remains in a period of uncertainty, even though government subsidies and aid have been extended.
Winterhoff said he and GBI remain positive about the situation, although much will depend on how quickly revenue per available room and occupancy return to “some degree of normal.”
“Leisure is developing at least better, so in this situation we are looking at investing and developing new hotel projects in that area,” he said. “The financial market is quieter because they are seeing high risk based on the shutdown of businesses for some months.
“It is possible to develop new hotels, so we are looking at strong partnerships.”
Sources said midscale and serviced apartments would dominate construction, while little is expected in higher-end segments. Cost-efficient and digitalized brands would do well, too.
Premier Inn, which opened its first German hotel in Frankfurt in 2016, currently has more than 10,000 rooms in the country and a secured pipeline of 53 hotels in approximately 20 cities. A total of 23 hotels are expected to be open and running by the end of 2020.
Anderson said Whitbread has a team in Germany that finds land and completes deals, which is important in a market that remains competitive and fast-moving.
“We wanted to prove the (Premier Inn) concept faster than we could do organically, and then to run (hotels) to maturity, six or seven years from originally finding sites, and we needed scale,” Anderson said.
“We’re carrying on pursuing this avenue of growth, organically and via (mergers and acquisitions),” he added.
Investors are still interested in Germany’s hotel market, Nittka said.
“Especially owner-operators, where operation and investment are done from one source, are very active,” he said. “These include, for example, Whitbread, Ascott (Citadines), Frasers (and) Adina, with whom GBI has been working intensively for years.”
CitizenM also has just announced its debut hotel in Germany in cooperation with GBI.
“(CitizenM is) also investing in the hotels themselves. … GBI and CitizenM will find suitable sites and properties for the acquisition and then jointly build hotels on a turnkey basis,” Nittka said.
Winterhoff said CitizenM is expanding throughout Germany, targeting Berlin, Frankfurt, Hamburg and Munich, with plans to open several hotels in each.
Anderson said Germany has several factors that make it appealing to hotel developers.
“One greater benefit in Germany than the U.K is the structural composition of supply, with a high number of independents and a federal state system with lots of strong cities, 15 to 20. The market is more balanced,” he said.
Nittka said he thinks there will also be differences within serviced apartments, too, and that the concentration of what travelers now regard as essential will create a new demand.
GBI has developed a niche hotel segment called SMARTments that Nittka said combines “all our experience into a digital, streamlined and absolutely cost-efficient product. No reception desk, even fewer communal areas and efficient use of staff.”
He said digitalization and card payment will not only be seen in reception but also in laundry services. Breakfast buffets and fitness rooms will be scaled back or disappear.
Such an initiative, which likely will target medium-sized cities in strong economic regions, is not only pandemic-proof but comes with lower monthly rents,” Nittka said. An “eco” version of the initiative will also be available.
“SMARTments can offer very competitive prices, as there are many services and areas that are obligatory in a hotel, but not for us,” he said. “Hotels would now have to abandon such expensively built areas if they wanted to enter the competition for long-term guests. And unlike the hotels, we need hardly any staff.
“We notice from guest inquiries and discussions with partners that the trend we represent is increasing, and the price continues to gain in significance, especially in times of crisis.”
Nittka also said it is possible that project developments of holiday hotels will become more attractive again.
“We have a TUI hotel on the North Sea island of Sylt that is experiencing an incredible boom this summer,” he said.
He added hotels or serviced apartments will increasingly no longer be planned as standalone properties.
“On the one hand, you mix different accommodation concepts; on the other hand, you also do this with different types of real estate,” Nittka said. “The demand in the cities is becoming more and more varied. They want vibrant, varied quarters. … Many cities even want to integrate childcare facilities.”