Dusseldorf Splendor and misery could hardly be closer together than in Germany’s hotel industry. The market report just published by the hotel association IHA calculated that an average hotel room in the trade fair city of Frankfurt, for example, earned just 18 euros a day last year. Things looked similarly gloomy in Stuttgart and Essen, where business travelers usually generate a lot of revenue. But many trade fairs have been cancelled, events and congresses have been cancelled. The guests are missing.
Even in the tourist city of Berlin, the number of overnight stays fell by 60 percent last year compared to 2019. In addition, room rates fell by 14 percent. The number of foreign guests – as of May 2022 – is still more than a fifth below the level before Corona. Particularly bitter: With an average room occupancy of 31.5 percent, Germany’s hoteliers only managed half of what would have been necessary to get into the black in 2021.
To this day, the industry is suffering from the aftermath of the corona pandemic – but hotel investors are surprisingly unmoved. 22.4 billion euros are currently available in the industry for new hotels – twice as much as ten years ago and 1.5 billion euros more than in 2019. This sum, according to the IHA association with the help of several consulting firms, should be in the coming three years to build 807 more hotels with a total of 111,270 rooms. The study speaks of a historic high.
“We have 38 fixed contracts for other locations in Germany,” reports Michael Hartung, Germany Managing Director of the British budget chain Premier Inn. The Munich competitor Motel One speaks of ten hotel projects in the home country that are currently planned, the Steigenberger sister company Zleep is building in Hanover, Hamburg and Frankfurt. And the H-Hotels chain is also planning further new locations in Erfurt, Eschborn and Mainz after the two most recent openings in Düsseldorf.
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Hotels like the Estrel in Berlin, which intends to inaugurate its tower with 750 rooms in 2024, ensure mass, while the Lanserhof on Sylt provides class. From the most expensive hotel in Germany, the operators are hoping for overnight rates that do not fall below the limit of 790 euros.
High expectations, high returns
“Germany is an exciting market,” says Premier Inn Managing Director Hartung, explaining his extensive investment plans. “The expectations of our group management are high that Germany will bring cash.”
In the corona pandemic in particular, German holidaymakers realized how attractive holidays in their home country are, says B&B Germany boss Max Luscher, one of the reasons for the expansion. After the lockdowns of the past two years, many investors also believe that there is a backlog for business travelers to take part in trade fairs, congresses and real meetings again.
In addition, investors are apparently running out of alternatives. Despite rising construction costs and impending default risks, the hotel industry is now considered the favorite of investors like no other asset class. A survey by the auditing company EY among 220 real estate investors, who were asked for their assessment of the medium-term development, provided confirmation of this at the beginning of 2022.
The clear result: 36 percent of the financial experts expect an upward trend in both business and holiday hotels in the next three years – a significantly higher figure than, for example, for shopping centers (seven percent) or office properties (24 percent).
In view of the still low interest rates and a collapsing stock market, the promises made by hotel investors seem tempting, even if banks are finding it increasingly difficult to finance construction projects: The real estate service provider CBRE is currently naming top yields of 4.25 percent. The Düsseldorf hotel investor Jörg Lindner, head of the development company 12.18., who initiated a 500 million euro real estate fund together with a subsidiary of Engel & Völkers a few months ago, even promised investors a return of 4.5 to 10 percent.
Hotel occupancy remains low
The risks should not be underestimated. In the pandemic, the German hotel industry lost significantly more customers in large parts than the European competition. While room occupancy fell by 47 percent across Europe between 2019 and 2021, Germany suffered a drop of more than 56 percent.
From 2020 to 2021 there was only a minimal improvement of 2.6 percent, while Greece, Spain and Croatia were able to boast an increase of more than 70 percent. “One explanation for this lies in the extensive and long-lasting corona regulations for the hospitality industry in Germany,” says the IHA Industry Report 2022. In other EU countries, they were sometimes shorter or less restrictive.
This has also depressed the price level in the German hotel industry. With an average net overnight price of 83 euros, Germany was almost a tenth below the European average in 2021. Countries like Italy came to 110 euros, Great Britain to 94 and Portugal to 109 euros.
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Since then, Germany’s hoteliers have increased their prices significantly again. However, the reason for this is by no means a return of excessive booking demand. On the contrary: Even in May – more recent figures are still missing – the occupancy rate of hotels and guesthouses was 7.4 percent below the level of May 2019 according to the Federal Statistical Office. Above all, the hope of an increase in business trips could remain in vain. According to a recent survey by the business travel association VDR, 61 percent of German companies have cut their travel budgets by at least 30 percent.
“Overnight rates must increase by 20 percent”
According to experts, the number of overnight stays has recently tended to increase because the operating costs for the hotels have risen drastically. “In anticipation of the rising minimum wage, collective bargaining has driven up personnel costs,” reports Moritz Dietl, Managing Director of Treugast, a consulting firm specializing in hotels. In addition, there is the purchase of goods, in which inflation affects the overnight establishments.
Dietl also points out that many hotels were deferred part of their leases during the pandemic. “The amounts now have to be paid back,” he says. Many companies are also due to repay KfW and other bank loans. “According to our calculations, the overnight rates must increase by at least 20 percent,” says the hotel expert, “so that the hotels can return to the profitability before Corona.”
There is probably another reason why financially strong hotel chains in particular are switching in the direction of expansion in these weeks: Competitors who are threatening to run out of breath are usually suitable from their point of view as cheap buying opportunities.
There are more of them than expected, as a survey by the Dehoga hotel association has now revealed. 15 percent of the member companies surveyed said that they now feared insolvency after the obligation to file for insolvency was suspended until the end of April 2021 during Corona. Even 85 percent expressed existential concerns because of the increased costs.
“Because subsidies and short-time work benefits have now expired, survival is becoming difficult for some,” observes Treugast Managing Director Dietl. In particular, houses that are suffering from an investment backlog and are poorly positioned would easily become a takeover target.
More: Attack on the Motel One hotel chain: Premier Inn continues to expand in Germany