Key takeaways from Expo Real and 196+ hotelforum

By Robin Wattinger
Director | Head of Financing + Investment

In October, we had the pleasure of hosting our hotel lounge at the Expo Real in Munich and our 196+ hotelforum Munich. It was nice being back LIVE and networking in person. The overall mood was positive and forward looking. In this brief write-up we summarise some key takeaways from our conversations and panel discussions held at these events.

Hotel Market overall

• Even though business travel recovery is expected to be much slower than for the leisure segment, and corporate business, especially in big cities, continues to suffer, 95% of business travelers are prepared to return to travel and 65% are very willing to do so again. However, companies have started to review travel budgets and reassess the need for certain business trips in general. It is anticipated that this will impact business travel in the long term.
• STR estimates about 123,000 keys in the pipeline in Europe, and about 80,000 are forecasted to be on the market before 2024. With developments that have been delayed reaching their final stages, 2021 and the years to come expect record high new openings.
• DACH is expected to recover gradually: DACH RevPAR is expected to get back to 85% of 2019 level by the end of 2022, and fully recover by 2025.

Innovation and Transformation

• Flexibility of changing space allocation – less boundaries between hotel rooms, offices, and meeting rooms (e.g. hide/elevate the bed to have more office space in the room) ­– is the key to create more diverse offerings now.
• Sustainability in hospitality comes in different directions: it could be a sustainable hotel design and operational project or providing educating activities for the guest. Sustainability in hotels and elsewhere goes beyond just a trend and represents a growing guest expectation – beyond just marketing and green washing.
• Experimenting a hybrid model for hotels (where the room may be used by someone for work during the day and by someone else for sleep at night) can largely improve space efficiency. Considering this concept, hotels may start to look at metrics like revenue per sqm/per hour as well.
• Creating authenticity and a sense of tribe catering to different guests have become more prominent than offering standard features (e.g. the size of rooms, number of stars, etc).

Investment activity

• Market participants increasingly see hospitality real estate as the most versatile sub-asset class in commercial real estate with cross-over products combining residential- and traditional hotel components giving rise to innovative serviced living products (e.g. aparthotel, co-living, student accommodation, etc). Such products often come with an implied conversion option providing investors with an additional exit route.
• In addition to more innovative offerings, lifestyle changes such as workcations are expected to boost demand for smart work/life products which only the hospitality sector can deliver.
• Other commercial real estate players – particularly in the retail space – increasingly turn to turnover leases resulting in a more volatile lease profile comparable to hospitality assets. This, in addition to fading attractiveness of retail assets, further boosts the appeal of hospitality assets as it reduces a competitive disadvantage.
• The above is further reflected by strong fundraising results for dedicated hospitality investment funds, examples in 2021 focusing on Pan-European opportunities include:
  • Schroders Capital European Operating Hotels Fund: EUR 525 million (hard cap) after targeting EUR 300 million
  • Azora European Hotel & Lodging: EUR 815 million (hard cap) after targeting EUR 600 million
  • HB Titan: GBP 1bn with specific focus on hotel transactions (debt & equity)
  • Global players such as KKR or Cerberus have also recorded excellent fundraising results.

• Negative sentiments broadly focus on the following:
  • while strong fundraising results signal a newfound euphoria about hospitality assets, deal sourcing and execution is becoming more competitive
  • looming concerns about rising inflation are expected to hit the broader hospitality space harder than other commercial real estate assets
  • return to pre-covid (2019) levels is still expected to take two to three years leading to uncertainties concerning the sectors profitability in the short-term
    
    
• Large DACH based institutional investors are returning to the market and consider again forward purchase transactions. Yields for high-quality assets are close to pre-covid levels which, considering still prevailing risks and uncertainties, is a testimony to the attractiveness and ultimately the resilience of hospitality real estate assets.

Overall, the mood at both events was very good. On the one hand, the hospitality investment community is genuinely hungry for networking opportunities. On the other hand, despite the ongoing crisis mode in hotel operations, the common feeling is that the future for hospitality looks bright. Hospitality products have been hit hard by lockdowns and general travel restrictions, while at the same time they have proven to be more flexible and versatile compared to other asset classes. The future of hospitality is hybrid or even fluid; new concepts need to combine elements of transient accommodation, living, office, retail, and more. The boundaries between the various asset classes become fluid, and the mind and skill set of hospitality professionals is probably best suited to deal with these new realities.