For many years, institutional investors have been dealing with the topic of holiday properties without actually investing. Historically characterized by family-run businesses, the investment volumes are still relatively small and the transparency demanded by institutional investors is limited. The holiday hotel industry is characterized by decades of growth and crisis security and has proven this not least in the Corona pandemic.
New concepts and the ongoing professionalization of the operator landscape are increasingly making holiday hotels an investment target for institutional investors. More and more attractive year-round destinations create new perspectives for operators and investors. Union Investment and mrp hotels came to this conclusion in their white paper on holiday hotels, which was presented at an online press conference.
Andreas Loecher, Head of Investment Management Hospitality at Union Investment: “The dynamism of the holiday hotel industry will increasingly offer investors the necessary size and transparency. In the course of this development, we see the markets in the German-speaking area in particular as having a competitive advantage. The season lengthens and shifts. In addition to climate protection, ‘sustainability’ has another facet: maintaining the local connection and incorporating it into the hotel business with a personal approach to guests. Aspects that are also of the utmost importance for institutional investors in addition to the return.”
Martin Schaffer, Managing Partner of mrp hotels: “Natural destinations are trendy, as are the issues of climate protection and sustainability. Tourism experts are working on harmonizing new technologies and concepts in order to enable sustainable travel to sustainably designed and built hotel properties without having to forego pleasure offers. Alternatives must be created to solve overtourism. We see great opportunities due to global market growth, changing travel habits, climate change, etc., but also the need for established destinations to improve in terms of quality. Many new regions will grow into attractive holiday destinations. With the professionalization of an operator landscape that is able to create innovations and with investors who want to support this path.”
Holiday properties increasingly attractive for institutional capital – Large-volume transactions also only sporadically in 2022
Unlike the investment market for city hotels, the market for holiday hotels in the DACH region is considered non-transparent and less liquid. The different parameters of the few transactions that have taken place in recent years do not allow clear signals to be derived for the overall market.
In addition, the market is characterized by a relatively small number of active players. On the investor side, family offices made a name for themselves more than larger institutional investors. The transactions were financed either from equity, from private investors in closed real estate fund structures, or from regional banking syndicates.
In comparison, the investment markets in southern Europe, especially in Spain and Italy, are considered to be more liquid. But here, too, the assets traded were only partially homogeneous. Market participants were therefore only able to access a manageable number of comparative transactions when determining prices.
In the past, pricing in the DACH region was mostly based on a risk premium on returns from comparable transactions in the city hotel industry. “Whereas in recent years resort hotels were more likely to add 100 to 200 basis points to the gross initial yield of the city hotel industry, the yields – also as a result of the pandemic – are currently almost the same,” says Andreas Loecher. In the case of top properties in established holiday destinations such as Sylt, Travemünde or Warnemünde, return requirements similar to those of core assets in markets such as Munich, Hamburg or Berlin can be assumed.
Andreas Loecher: “Even if the market has hardly seen a purchase of a classic resort hotel by a large institutional investment manager, institutional capital is increasingly interested in this asset class.” marked by greater uncertainty. Locher continues: “With the advancing professionalization and the softening of the seasonality, which has so far been very pronounced, this asset class will continue to gain in attractiveness in the future and also establish itself with institutional investors. After all, thanks to their resilience to crises, resort hotels generally offer attractive opportunities for portfolio diversification, with long-term value growth even beyond economic crises.”
Lengthy and complex development processes for holiday hotels
The variety of products and offers in the holiday hotel industry is very pronounced. For boutique hotels, apartment/chalet complexes or large-scale wellness hotels, there are different requirements for the concept and property. Martin Schaffer: “The conception of a holiday hotel product often requires a significantly longer development period, which can take five years or more.” In addition, increasing demands on the sustainability of the property and the consideration of the often sensitive environment at the project location increased the development effort. “An interplay of location, concept, operator and property contributes to the success of the product,” says Martin Schaffer.
“For example, size adjustments are more complex than with city hotels,” says Martin Schaffer. Potential additional costs due to the higher space requirements for different uses and the more expensive equipment should be taken into account. In top destinations, for example, high property costs – often as a result of second homes – make it difficult to implement hotel projects. Attractive properties on the beach or on ski slopes have an additional price premium.
“Under the given conditions, we can assume that – especially with regard to the current framework conditions – investors and project developers still respect the more complex development of holiday hotels. The future attractiveness of such developments lies in the higher sales per room and guest compared to city hotels. This should be a major plus point for potential investors,” says Schaffer.
Asset management in city and holiday hotels
While the operator focuses on professional hotel operations, securing the lease and increasing his own income, the owner concentrates on maintaining and optimizing the value of his property. Asset Management is able to bridge this gap to the benefit of both parties. Depending on the leasing model (fixed or hybrid), the focus of the asset manager varies when discussing operational details.
“Only in the interaction and close exchange of active asset management on the owner side and a professional operator can a (holiday) hotel property in its capacity as an operator property be successful in the long term and sustainably in the interests of both parties. Knowledge of the special destinations and holiday hotel markets, how they work, trends and the diverse product landscape and thus also the profitability of holiday hotels is elementary for successful management of the holiday property asset,” says Andreas Locher.
Challenge of sustainability
With a share of 1 percent of global CO2 emissions (UN, 2018), hotels also have to make their contribution to sustainability. In particular, consumption-intensive resort and holiday hotels have a duty in terms of energy consumption and efficiency.
For institutional investors, the EU taxonomy and the Carbon Risk Real Estate Monitor (CRREM) at property and fund level are relevant components of the sustainability assessment. For investors with long-term investment goals, they are among the main characteristics when assessing the sustainability and future viability of real estate. Andreas Loecher: “There are various options for fund providers to manage in a regulatory-compliant way. Union Investment has decided to manage according to the principal adverse impacts (PAI) and also to pay attention to the CRREM path according to consumption (KWh). It is also important for the fund managers to also take into account the taxonomy conformity of buildings.”
For institutional investors, the EU taxonomy and the Carbon Risk Real Estate Monitor (CRREM) at property and fund level are relevant components of the sustainability assessment. For investors with long-term investment goals, they are among the main characteristics when assessing the sustainability and future viability of real estate. Andreas Loecher: “There are various options for fund providers to manage in a regulatory-compliant way. Union Investment has decided to manage according to the principal adverse impacts (PAI) and also to pay attention to the CRREM path according to consumption (KWh). It is also important for the fund managers to also take into account the taxonomy conformity of buildings.”
Achieving these goals requires significant effort and investment. Martin Schaffer: “For large-scale improvements, a joint commitment from investors and operators is required, because both parties benefit equally: operators through reduced energy costs, owners through securing the attractiveness of the property and its fungibility and – in the case of hybrid lease structures – a higher return.”
