BERLIN—With almost 600,000 square feet of hotel space under development in Germany’s top cities, Berlin-based GBI AG is the country’s largest developer by floor space in the asset class.
Reiner Nittka, CEO of GBI AG and managing director of both GBI Projektbeteiligung GmbH and GBI Capital GmbH, said the company was not limiting itself to top markets but expanding into secondary and tertiary locations with strong demand drivers.
“We want to have the best hotel in these smaller markets, and they can be very profitable,” Nittka said.
Nittka said there’s a discussion taking place as to the viability of new hotel development in Germany’s so-called Big 7 markets—Berlin, Cologne, Düsseldorf, Frankfurt, Hamburg, Munich and Stuttgart.
Developing in the Big 7 is made more fraught by regulations, including a high-cost rule dictating that properties must provide enough parking spaces for the property’s size. Nittka said adding parking spaces does not bring in revenue comparable to the cost.
GBI AG’s ownership base falls under 50% with Moses Mendelssohn Stiftung, a foundation that sponsors education and science in the field of European-Jewish history, and 50% under Frankonia, a real estate investment firm.
Chris-Norman Sauer, GBI AG’s head of hotel development, said secondary cities such as Mannheim and Essen are good bets for their high number of publicly traded company headquarters.
Other prime secondary destinations include Mainz and Heidelberg, both in the western region of Germany. In what was former East Germany, the only market Nittka and Sauer picked out is Leipzig.
GBI AG is currently has properties with traditional hotel brands Premier Inn and Moxy by Marriott International and serviced apartment brand Capri by Fraser Hotel Residences.
Nittka said the focus for growth going forward in Germany will be the economy sector, in which GBI AG already has been involved for more than 10 years, and the boutique/lifestyle space, most notably hotel firms such as Hoxton Hotels, CitizenM and Mama Shelter.
GBI AG, which has been in the hotel development game for 16 years, also develops serviced apartments and student hotel accommodations via branded subsidiary SMARTments. The brand currently has six properties open, all in Germany, and has a German pipeline of another six. One property is in Vienna, the brands only international market.
“We see a lot of potential in the serviced apartment market as it just started to develop in Germany and is still relatively immature. Even the key players only have a couple projects in operation. And all the key players ... are in the upscale market,” Sauer said.
The SMARTments brand also has a residential sub-brand.
Triple play
Multi-development agreements continue apace in Germany, according to sources. The practice of a development featuring two or three brands, and not necessarily from the same hotel firm or industry sector, is increasing in frequency.
One case in point is a Frankfurt development GBI AG opened this year that contains a Motel One traditional hotel, a Citadines serviced apartments property, three blocks of student accommodations and even a daycare center for children.
“It is one of our core developments, covering (430,000 square feet),” Nittka said.
“We optimize large plots in city locations that we would not develop with just one single hotel,” Sauer said, who added another similar project was in development in Düsseldorf.
There still will be single-asset developments, though, including an upcoming Holiday Inn Express in Cologne, which will be that brand’s largest property in Europe.
Model discussions
The lease has long been viewed the optimum business model in Germany, but Nittka sees believes third-party franchising is seeing some slight increases.
But he said trust among stakeholders is key to investigating new business models, locations and development scenarios. Nittka and Sauer are seeing the investment base changing, too, in the markets it concentrates on.
“Five years ago there was a development boom driven from the investor side, but now institutional investors are yield-driven,” Nittka said. “Yields in Munich, for example, are now lower than 5% (for all real-estate segments), thus the desire to look at hotels as an asset class and at secondary and tertiary markets.”
Sauer said hotels currently offer the best returns.
“Asset classes such as residential only result in 3% to 4% yield in the top cities and office only around 4% to 4.5%, (but) hotels, 5% to 6%, depending on the market. … In addition, more and more investors such as family offices, pension funds or insurance companies have increased their real estate portfolios in order to find enough investment opportunities,” he said. “Direct hotel investments become more and more common for these investors.”
Growth of franchises
Franchising is becoming more common and accepted by German investors, Sauer said. Asset-light, branded hotel companies have realized management contracts are key to expansion.
“Therefore, they needed to look for alternatives in order to speed up the process,” he said.
Franchisees are willing to commit themselves to lease agreements, Sauer said. Companies such as Foremost Group and SV Group are now accepted by institutional investors. Franchisors support them in their expansion, he said, and part of this support is also key money for new projects in part to be able to do more deals quickly.
“AccorHotels now also wants to build up a new master franchisee, which is backed by several investors and therefore has the covenant strength to rapidly develop new projects,” Sauer said.
Interstate Hotels & Resorts is a key example of this change, Sauer said.
“Interstate just announced a joint venture with Odyssey Hotel Group in order to expand the German and European market,” he said. “This, of course, is extremely interesting for developers and investors since they have more than 400 hotels under management and therefore the track record of operating hotels as well as the covenant strength.
“Germany still lacks these very big franchisees that are able to do multiple deals at the same time. We therefore think franchising will be the main model to quickly expand at least for asset-light hotel companies.”