Low-yielding office and retail assets keep hotels on investor radars

There's a fickleness to hotel ownership and investment; it changes based on market conditions and other factors such as interest rates and buy-sell spreads. Andreas Löcher, head of hotel investments at Union Investment Real Estate, knows this all too well. It's his job to try and make sense of it all, and understand the trends and fads that impact the global hospitality industry.

We caught up with Löcher ahead of March's International Hotel Investment Forum (IHIF), in Berlin, to find out, indeed, which way the wind is blowing.

1. What hospitality trends and storylines will dominate discussion at IHIF and why?

Investors have had hotel properties on their radar for some time now. This trend is currently being fueled by the fact that office and retail properties are commanding extremely low yields, combined with relatively short supply. IHIF 2018 is thus also likely to attract even more investors who don’t have the necessary specialist expertise to engage with major hotel brands and operators on an equal footing. This means that experienced market players will be scrutinizing potential buyers very carefully and weighing up prospective investors in terms of skill sets. When conducting transactions involving one or several hotels, it is clearly crucial that both sides have confidence in the professionalism of the other party.

Another trend that is sure to interest attendees is the growing willingness of hotel companies to enter into long-term leases, having traditionally relied on management and franchise agreements to grow their business. Major international hotel brands are among those currently embracing this trend. This development is creating an exciting environment with manifold opportunities for real estate investment managers, who typically use leases to generate income from their real estate assets.

2. What are the markets/countries that you are looking at for future development and what makes them an attractive investment?

We are a European investment manager, so most of our more than 60 hotel properties—which have a total value of almost €4 billion—are located in Europe. The European markets will remain attractive to us because of the diverse investment opportunities they provide. Having said that, since 2015 we have built a hotel property portfolio worth around €900 million in the U.S. We aim to continue expanding this portfolio at a similar rate to that of recent years.

After making three investments in the eastern U.S., we acquired our first hotel on the west coast, in Seattle, in 2017. Later that year we also signed deals for additional hotels in Washington D.C. and Portland, Ore. We intend to continue this diversification of locations in North America because the U.S. market offers us excellent conditions for investment due to its stable economic framework and the strong demand for modern hotels across a range of locations.

Prior to acquiring our first hotel in the U.S., Union Investment had already been active for many years in the U.S. office property markets. We could see pursuing a similar strategy in markets such as Australia and Mexico in the not-too-distant future.

3. With so many brands in the marketplace, what makes them a success and are they differentiated enough in the market? Do both customers and developers understand the differences?

Union Investment is a relatively conservative investor with a long-term horizon, partly because we are a provider to open-ended real estate funds and thus often serve the interests of private investors. That is why we generally work with large, well-known hotel brands that have a strong market positioning.

Our role as an international investment manager also means we can help establish brands to expand globally. Super 8, for instance, has been a successful hotel chain in the U.S. for many years, but the first Super 8 hotels were only opened quite recently in Germany. If we see that a brand offers a distinctive proposition and good growth potential, we will invest in it at an early stage in selected cases. One such example has been Motel One, that has grown into highly successful Pan-Europe brand since our first Motel One acquisition in 2010.

4. What are the strategies hotels are employing now to boost revenue and curb costs?

The most recent bookdirect.com initiative allows guests to book their rooms directly and at the same time it provides the hotel brands with data relating to the guests’ consumption behavior. Initiatives like this show that alongside ongoing digitalization many brands are striving to transform their business model to implement IOT. Their ambition is to provide a 360-degree tailor-made offering and therefore enhance the overall guest experience. Hotels are no longer just places to sleep, but places where people can meet, relax and interact. This is reflected in the fact that the lobby is now often the most important spot in a hotel. More and more activities are happening in the lobby, where the increasingly applied “Open Lobby” concept provides plenty of scope for interaction. This space may also appeal to visitors who are not staying in the hotel.

The amount of retail space within hotel properties is also on the rise. This is partly due to the presence of small shops that are often open 24/7 and thus provide a convenient service. Rooftop bars, roof terraces and pleasant outdoor areas, especially those featuring a café, all help to enhance the attractiveness of hotels and boost total revenue.

5. How has the role of new technology, home-sharing disruption and online travel agencies impacted your business?

The home-sharing trend has shaken up the hotel market, but it has also provided fresh impetus that is already enriching the hotel sector and will continue to do so going forward. One example that springs to mind is the rapidly growing number of concept hotels with quirky design details and feel-good features. These hotels take a creative design idea, implement it consistently and thus succeed in differentiating themselves in the market, as long as the concept is genuinely compelling. One of the impacts of this particular trend is that large hotel chains are now striving to adapt their hotels more to the local environment and create a cosy atmosphere. Withit guests then experience the unique vibe of a city like London or Paris in their hotel.

Generally, the hotel market is continuing to grow across all the key locations worldwide. User-friendly digital booking systems and new technologies are playing an important role here. People are so mobile nowadays that hotels have almost become a second home. Figures collected by Union Investment show that the investable hotel market in Germany is now worth €51 billion, which represents an increase of 8.3 percent on the previous year. The situation is similar in other countries.