German Funds To Become Pan-European Hotel Investors?

Frankfurt, 17th December 2001 — German institutional investors have the potential to become a truly pan-European investment force, according to a new report released by Jones Lang LaSalle Hotels.

According to the research, German open and closed-ended funds currently have approximately €10.8 billion to invest into European real estate. “Given the existing average asset allocations, this translates into a potential €400 million for investment into the hotel sector” said Arthur de Haast, Managing Director Europe at Jones Lang LaSalle Hotels. He adds “German funds are experiencing high cash in-flows as a result of the poor stock performance, and this has only increased since the events of September 11th, with investors viewing property as a safe investment haven in the current economic climate”.

Historically the German funds have been primarily focused on domestic hotel investment activity. However this pattern is beginning to change and more recently the funds have branched out and concluded an increasing number of acquisitions outside of their home domicile. Deutsche Grundbesitz-Investmentgesllschaft mbH (DGI) was the first open-ended fund to set up an international capacity, the €1.1 billion ‘Grundbesitz Invest Global’ to invest in the USA and Asia. Commerz Grundbesitz Investmentgesellschaft mbH have also announced plans for an international real estate fund in 2002 with a focus on the USA.

“More specifically in the hotel sector, Deutsche Immobiliend Fonds AG (DIFA) bought the Radisson SAS in Brussels earlier this year. This follows on from DGI’s sale and leaseback deal with Accor on four hotels in Spain. This week we have seen CGI acquire a hotel development at Charles de Gaulle airport in Paris, to be operated by Marriott Hotels & Resorts under the Courtyard brand” stated Mr de Haast.

Hotel operators across Europe are increasingly willing to enter into lease contracts to access this institutional capital. According to the report, this should increase the cross-border investment activity of German real estate funds, and they stand to become a significant force in the European hotel real estate market. “The trend in the industry is towards a split between ‘the bricks and the brains’ ie the real estate and the management, a structure that the German institutions have been pursuing for a number of years” commented Mr de Haast.

The report highlights the investment criteria as:

• Strategic location – city centre or airport locations with a strong demand base, avoiding secondary, tertiary locations or resort hotels. The funds also require a reasonably standardised product in terms of brand requirements to allow for a change in operator.

• Assets subject to long-term lease agreements – firstly they seek freehold assets and require a long-term lease contract (minimum of 25 years) and a fixed level of rent. Funds will not invest in assets with a management contract in place. They require long-term partners who have a strong brand name, provide fiscal guarantees and a high degree of credibility.

• Quality product – seek three, four and five star hotels in strategic locations. They will not consider budget or luxury product due to their higher perceived level of risk. Funds will look at high quality mixed use developments (with a hotel element) to spread occupier and market risk.

• Low initial yields – tax advantages enjoyed by their investors allow the funds to buy on lower initial yields than other investors. Their lower cost of capital and high levels of equity investment also allow for lower initial yields.

Jones Lang LaSalle Hotels conclude by highlighting the benefits of leasing with German institutions:

• Long term investment horizon – therefore they are not likely to dispose of the asset and jeopardise an operator’s representation. Institutions seek long-term strategic partnerships and leases generally do not have a break clause in the case of the sale of the asset.

• Pre-determined level of rental income, therefore any revenue over and above is solely for the operator.

• Access to reasonably cheap source of capital – the return requirement of real estate funds are lower than traditional equity investors.

• German funds can be pure equity investors and do not require debt financing. This means a less complicated deal and generally a shorter time to completion.

• High quality products – open and closed-ended funds seek quality product in which they invest heavily to maintain it to an excellent standard and hence value.