Good night? Hotel projects in Germany

Good night? Hotel projects in Germany

10.11.2020 Author/s: Dierk Freitag

No tourism, no events, no business trips - the mood in the hotel industry is gloomy, the economic outlook unclear. How does the crisis affect the different sectors? What is happening with project developments? Where are the big players investing anyway, and what is their plan B? A portrait of a shaken industry.

-- The questions were answered by Dierk Freitag, Head of Hotel and Leisure Real Estate at bulwiengesa. --

Even if the question seems almost absurd: How are things currently going for hotels?

When assessing hotel projects in Germany, we have to distinguish between business and holiday hotels in these disastrous times for the industry.

The classic city hotel industry, which derives three quarters of its turnover from business travel, is severely threatened in its existence. Foreign tourists are missing, the MICE business (Meetings Incentives Conventions Exhibitions) has collapsed, companies have stopped their travel activities and cultural and event tourists currently see little reason to travel to metropolises like Hamburg, Munich or Berlin. Theatres, museums and cinemas have closed and the event industry is lying idle. It is in the same boat as the hotel industry, if not in an even shakier one.  

The city hotel industry and all high-frequency public uses are the biggest losers in the crisis, especially as there is currently another (partial) shutdown for at least four weeks. The Grandhotel Hessischer Hof in Frankfurt, the Sofitel Berlin, Crowne Plaza Heidelberg or the Anna Hotel Munich, among others, have already been completely closed, although many hotels had problems even before the Corona crisis.

Who comes through the crisis better - luxury or low-budget hotels?

Basically, the budget or economy hotel industry seems to come through the crisis better because it has different turnover and cost structures than the full-service hotel industry - less banquet and F&B turnover, less personnel expenses, significantly lower rents.

Especially the city hotels, here the Frankfurter Hof, have been hit hard by the crisis. They live mainly from events and business travellers, many of whom come from abroad.

How does it look for the holiday and holiday hotel industry?

The holiday hotel industry is in a much better position, although here, too, many hotels are experiencing a drop in turnover due to hygiene regulations (e.g. closure of wellness areas and gastronomy) and travel restrictions. The winners of the crisis so far have been holiday resorts, holiday homes and flats, where the distance rules are easier to comply with.

For example, the Fleesensee Hotel and Sport Resort in Mecklenburg-Western Pomerania, one of the largest holiday resorts in Germany, had 90 % occupancy throughout the summer of 2020; demand there was also extremely high in September and October. The closure in November affects the holiday hotel industry much less than the city hotel industry, as the high and peak season is over.   

In Mecklenburg-Western Pomerania, the number of overnight stays in August 2020 was 20 % above the previous year's figure, on the North Sea and Baltic Sea 3 % and 12 % above the previous year. Cities can only dream of this: in Berlin the decline was 52.6 %, in Hamburg still 36.1 %. But Hamburg also never had such a high proportion of foreign tourists (around 25%) as Frankfurt (around 45%), Berlin (around 45%) or Munich (around 50%), where almost half of the overnight stays come from abroad.

So investors are now betting on holiday hotels and flats?

Because Germany's holiday regions are so popular, there is a lot of movement in the entire holiday segment at the moment. We expect some major projects here in the next few years. One of the biggest players is the French company Center Parcs (Pierre et Vacances), which operates six holiday parks in Germany and is planning more.

But of course we have to hope that not everyone suddenly wants to build holiday hotels now. Because this segment is much more complex to build and operate than a city hotel, and it is not easy to handle in third-party use. Who needs student flats in Waren an der Müritz if the hotel there should not run?   

Since the Corona crisis, the groups of interested parties have changed. Before, it was mainly private investors who were interested in holiday properties. Institutional investors, e.g. Union Investment, Deka, Commerz Real looked mainly at hotels in A, B and selected C and D cities, not least because tourist demand in major German cities grew more strongly than in German tourist areas.

This was also related to the expansion strategy of the chain hotel industry, which was mainly interested in the top locations in A and B cities and only occasionally set its sights on C and D cities as market penetration increased. Thus, there are only a few powerful market players in the leisure hotel industry, such as Center Parcs, 12.18., Upstalsboom, Van der Valk or DSR. Names like Hilton, Marriott or Kempinski have not been active in the German holiday segment to date. These players, unlike those abroad, have focused on urban locations in Germany.

Tourism in Germany grew for eleven years in a row. Then the abrupt slump. Can project developers get rid of their projects at all?

Until 2019, project developers had little difficulty finding tenants for their properties. Even the steadily rising rents as a result of rising land prices and construction costs were accepted by operators, even though they were already in the upper range of economic viability in some cases. This could now be the undoing of some tenants if no viable agreement is reached with the landlords.

Land and building costs are still expensive and are currently rising, which is why rents for new projects are not likely to fall noticeably. However, as long as it is not foreseeable when such rents can be earned again, the willingness of most hotel operators to expand will be very limited. They now have enough challenges with their portfolio: for example, to retain employees, to invest in digitalisation and to make their hotels more crisis-proof conceptually.

Some large operator chains such as the French Accor Group and the British Intercontinental Hotel Group have posted losses in the triple-digit millions in the first half of 2020. Revenues at the world's largest hotel chain, Marriott, fell 72% in the second quarter of 2020. Even the industry leader Motel One posted losses for the first time in the first half of 2020.

Project developers in Germany will find it increasingly difficult to find attractive brands or reliable hotel operators for their projects. A large wave of insolvencies among operators has not yet occurred, but is to be feared when state aid expires. Not without reason, there is currently much speculation about consolidations, such as between Accor and IHG. 

Are cancellations or delays in project developments to be expected?

In terms of hotel projects, in my opinion, an Ibis Budget or Ibis Styles currently have a higher probability of implementation than, for example, a Ritz Carlton or Sofitel in the luxury segment. Mid- and upscale projects that are already well advanced in their development - i.e. where operator contracts have already been concluded - may be delayed somewhat, but will definitely be realised in one to two years.

Some plans, on the other hand, are likely to be abandoned or at least rescheduled. Two examples from Hamburg: The hotel planning in Hamburg's Elbtower was reduced by about a third; however, more than 11,000 sqm still remain for the hotel. In any case, the start of construction of the congress hotel in Hamburg's HafenCity planned by ECE for this year, for whose 655 rooms Marriott could be won as operator, will be delayed. However, since Hamburg is a popular city break destination, the city will probably reach pre-Corona levels faster than other major cities in Germany once the pandemic is over.

The congress industry in particular has been given a run for its money by Corona.

Yes, it has. Germany's largest hotel, the Estrel Hotel in Berlin, is focusing entirely on congresses and is now to be expanded by 750 rooms. The 5,000 square metre shell for the extension of the hotel's own congress centre (25,000 square metres) has already been completed. And the construction of the hotel tower was actually supposed to start in autumn this year. But the losses of the Estrel Hotel are likely to be enormous due to its size. According to press reports, the turnover losses from the congress business alone were 30 to 40 million euros in the first half of the year. By the end of the year, this figure is likely to have tripled.

Do hotel developers have a plan B?

Some larger hotel developers, such as the Austrian UBM Development or the Gerch Group, have already announced that they want to change the use of their projects and, for example, build office space instead of hotel rooms. Both, incidentally, are hotel projects in Frankfurt. Such changes of use must, of course, comply with building regulations. In particular, the residential uses that remain in demand are not possible at all locations.

For some time now, Germany's largest hotel developer, the Berlin-based GBI AG, has been increasingly focusing on the construction of serviced flats, which are intended for longer stays and are thus not only aimed at the classic tourist. In general, serviced flats seem to cause far fewer concerns among banks and investors than full-service hotels. However, it depends very much on the location.

Is it better to stop building new hotels now?

Some locations could certainly do with a modern hotel, while other locations are, in my opinion, already well provided for. So I am a little surprised that there is talk of more hotel plans at the new Capital Airport, which has finally opened. And I don't mean the projects under construction.

Steigenberger has just opened at BER, B&B is reopening its hotel that has been closed for eight years and several projects that were put on hold because of the construction delays are likely to follow.

I am not saying that there should be no new city hotels. But demand and supply should be in balance. This will probably not be the case in most locations in the next two to three years. Moreover, should the climate debate again determine our actions more strongly, air travel could lose importance. So how many hotel beds are necessary at airports in the future?

And in the near future, does new construction make sense again?

Every new hotel intensifies competition in what is currently a catastrophic time for the industry.

In any case, many a hotel project might have little chance of being realised, as the financing risks are now assessed differently from a bank's point of view. This has its price.

Therefore, I see a significant dip in the hotel development market for the next two to three years, much to the disadvantage of developers and investors, but to the advantage of the existing hotel industry, which helps it to get back on its feet faster.

Where are the opportunities despite the crisis?

In my opinion, opportunities arise for the holiday hotel industry, which was already much more robust than the city hotel industry during the financial crisis. But as I said, caution is required here, the challenges are complex. Behind many a "Bretterbude" - the name of the hotel concept of Jens Sroka, who is one of the most successful hoteliers in Germany with his "Heimathafen" hotels - there is much more know-how than one might suspect.

Neighbourhood projects with lifestyle concepts that are integrated into existing structures in terms of urban planning and concepts also have opportunities. The journey in this direction already started before Corona, for example with the Ruby Hotels in Düsseldorf and Hamburg or the hotels of the 25hours Group. Now, however, the development could gain momentum. Today's generation will certainly not be reached with functional bed castles. According to Corona, the desire for community experiences and a feel-good atmosphere will determine the guests' choice of hotel. Not to mention that a hotel should also be "Instagrammable".


Contact person: Dierk Freitag, Head of Hotel and Leisure Real Estate at bulwiengesa, freitag [at]