Research shows that while the hospitality sector has been heavily affected by the pandemic, there is reason for cautious optimism post-crisis, reports Andreas Löcher.
The coronavirus pandemic has hit the hotel industry hard. Bans on overnight stays, travel restrictions, cancelled trade fairs and the second (partial) lockdown within a year have sent the occupancy rates and turnover of the accommodation industry into a tailspin. Nevertheless, the medium to long-term prospects for the German hotel real estate market are not all gloomy.
Despite the pandemic, there is still a lot of liquidity in the market and investors are looking for investment opportunities. Accordingly, the current operational crisis, which under Covid-19 restrictions essentially means the non-use of hotel property, is not accompanied by an equivalent investment crisis.
This is revealed by the hospitalityINSIDE Investment Barometer 2020, which the specialist publisher carries out every autumn together with Union Investment. Throughout the crisis, which has put enormous challenges before the hotel sector, the requirements and the arguments in favour of a future investment in this asset class have become clearer than ever before.
Investor wish list
For 64% of those surveyed, “good diversification within the hotel portfolio” is one of the most important prerequisites for a (re)commitment to the hotel markets. “More flexible contracts taking into account upside/downside scenarios” is a condition imposed by 60% of those surveyed. For 46.5%, “operators with a good credit rating” are the prerequisite for a foreseeable return on a hotel investment. The importance of “new contract clauses in the event of a pandemic”, meanwhile, is given similar weight (43.8%).
Hotel groups are still reporting new openings or the start of new projects. However, the contracts for these were signed before the outbreak of the pandemic. In the meantime, the pipelines are visibly shrinking and supply is becoming scarcer. The almost complete standstill in terms of transactions indicates there is still a wide spread between supply and demand prices. At the same time, Covid-19 is artificially holding back guest demand for hotels, which is in itself delaying the market recovery.
What scenarios does this create? In the Investment Barometer 2020, the following picture emerges: more than half of those surveyed (59%) believe it is likely that owner-operator and direct leases will gain in significance in future. A similarly large group believes that the market will in future be dominated by cash-rich companies: 53.4% believe that only these players are still capable of investing.
‘In principle, investor interest remains intact: 52% of those surveyed expect hotel yields to come under pressure again after the pandemic and its aftermath.’
Andreas Löcher, Union Investment
In principle, however, investor interest remains intact: 52% of those surveyed expect hotel yields to come under pressure again after the pandemic and its aftermath due to recurring demand and the associated recovery of the hotel markets. This optimism is based on the fact that there is still a lot of liquidity in the market looking for investment opportunities, especially in the lower hotel segments and the aparthotel sector. At least in the short term then, only moderate price discounts can be expected in Germany.
Leisure hotels and houses in the economy hotel sector are likely to reach pre-crisis levels faster than luxury hotels or business hotels, especially those with a higher proportion of conference rooms. In general, markets strongly influenced by domestic demand are likely to recover faster than those that are highly dependent on air travel. C and D locations will also remain attractive according to the survey. Only 20.5% of those surveyed assume that there will now be more investment in A and B locations and less money will flow into C and D locations.
Nevertheless: The INVESTMENT BAROMETER Index 2020 shows a significant drop compared to the previous year, falling from 3,483 to 2,130 points. In detail: The Business Index provides an overview of current business. It slumped by 40.31% compared to the previous year, but a look at the next six months reveals hopes of a slight improvement, with the Expectation Index declining by ‘only’ 28.7%.
Expectations for the hotel industry show a much worse picture: The Development Index falls by 37.43% from 3,340 to 2,090, the Operation Index by 49.24 percent (from 3,270 in 2019) to 1,660 in 2020.
That the Business Index reveals a better picture than expectations in general for the hotel industry is likely due to the lower number of participating hoteliers in the current survey. This time they represented only 37.5% of respondents, in contrast to 50% in the 2019 survey. At 43%, consultants made up the largest group among the participants (2019: 28%).
Andreas Löcher is head of investment management hospitality at Union Investment