Transactions have picked up in Germany after years of modest performance compared to other European markets, but as operational costs impact profitability and stakeholder relations are shaken by the recent Revo insolvency, what are the prospects for investors? Patrik Hug, Director of Alternative Investments for Europe at Invesco Real Estate, shares his views on the market.
Hospitality Investor: How would you characterize current hospitality investment conditions in Europe?
Patrik Hug: Overall, I am observing a renewed stabilization in market dynamics, with investment conditions once again appropriately reflected in returns achieved. Robust performance growth in Southern Europe has driven heightened investor interest, which is evident in both rising transaction volumes and compressing yields.
In Germany, by contrast, net initial yields of approximately 5.5 per cent –6.0 per cent for traditionally leased hotels in the major cities remain more than 100 basis points above the peak yields achieved prior to the pandemic. As a result, each investment opportunity must be assessed carefully to determine whether it is justified considering the weak macroeconomic environment.
However, the market appears to be working well with increasingly competitive bidding processes for high-quality assets in resilient locations.
Hospitality Investor: Where do you see the strongest opportunities for value creation today?
Patrik Hug: At present, the greatest potential for value creation lies in the comparatively moderate acquisition price multiples for hotels in Germany – both from a European and a historical perspective. While the fluctuating performance of German hotels and the pipeline of unsold assets from project developers could make selective new hotel developments a viable opportunity, I consider the scope for this to be relatively limited.
From an operational standpoint, most levers have already been identified and acted upon in Germany, particularly as wage growth has outpaced revenue growth in recent years. Opportunities for scaling certainly still exist, though the recent insolvency of Revo Hospitality illustrates the boundaries of such strategies and the risks associated with them.
In summary, there is no single overarching strategy that, in my assessment, holds the greatest promise within the German market. Ultimately, value creation depends on the specifics of each individual project and, most importantly, on acquiring assets at an appropriate price, that is reflective of its individual environment, opportunities and challenges.
Hospitality Investor: Which hospitality segments do you currently see as the most investable, and how has that assessment changed from last year?
Patrik Hug: I continue to see the most attractive segment in Germany positioned between the upper‑midscale and upper‑upscale categories in the major metropolitan markets. Germany remains heavily driven by domestic demand, which has traditionally supported strong performance in the economy and midscale segments.
However, due to the significant minimum wage increases since 2020 – which have outpaced RevPAR growth – profitability, and consequently sustainable rents and asset values, are coming under pressure for highly streamlined products with limited potential for ancillary revenue generation.
At the other end of the spectrum, the luxury segment faces constraints, as both leisure and corporate guests in Germany are generally unwilling to pay materially above‑market rates. As a result, the broad mid‑market continues to offer the strongest opportunities for revenue growth, particularly as MICE demand is recovering but has not yet fully normalized.
In secondary markets, extended‑stay products are performing well, benefiting from a business model that is less dependent on compression nights and capable of delivering above‑average results due to their differentiated offering.
Hospitality Investor: As you come to IHIF EMEA, which themes or debates do you expect will shape the next phase of hospitality investment in the region?
Patrik Hug: Although cost pressures are gradually easing, I anticipate that profitability – and, by extension, the long‑term viability of the regulator prescribed predominant fixed lease model in Germany – will remain a subject of ongoing debate.
Thanks to the special fund for infrastructure and climate neutrality, the German economy is slated for growth, however the GDP forecast has just been revised downward – again, after three years without substantial growth, hence an easing on the bottom-line profits is not in near sight. Against this backdrop, it will be interesting to observe whether hotel groups with strong covenant profiles will resume signing direct lease agreements with sustainable rent levels, as Motel One has done. The white‑label model is becoming increasingly unattractive to institutional investors, especially as weak covenants erase the value of high rents and thus, I would also hope to engage in discussion with banks and their view on development financing as well as if their requirement have changed beyond the risk premium.
Meet Patrik Hug at IHIF EMEA as he will be joining the session ‘Germany’s hospitality upswing: The German hotel investment reset’.