German capital wary of UK as domestic market flourishes
German capital wary of UK as domestic market flourishes
31 AUGUST 2016 7:35 AM

While German investors are not stampeding away from Britain’s market volatility in the wake of the Brexit vote, uncertainty combined with the performance of the domestic hotel industry might see them and others invest more within Germany.

GLOBAL REPORT—Before and after June’s Brexit vote, German companies have been widely reported abroad and at home as getting cold feet on U.K. trade and investments because of possible trade barriers, obstructions to investments and increased caution from lenders, as well as fluctuating exchange rates.

Add to that changes to travel conditions for EU workers, who represent a big share of the U.K. hospitality workforce.

Analysts agree that the climate of uncertainty will undoubtedly see German capital investments in the U.K.—including hotel investment—drop initially. At the same time, those same investors are experiencing a renewed interest in hotel projects domestically.

According to the Eric Schweitzer, president of the German Chambers of Commerce and Industry, there has already been clear Brexit fallout on German investments in the U.K.

“One in four companies surveyed have indicated they will scale back exports to the U.K. in the transitional period because of the political and legal uncertainty,” Schweitzer said. “After the exit, we expect as many as half of companies will lower trade with our third-largest export partner, and more than one in four companies indicate they will reduce investments.”

Schweitzer said it’s up to the EU to ensure German companies don’t face extra trade obstacles, though the Chamber believes companies are shifting away from the U.K. to other EU member states, including to Germany.

Investments on hold?
With the Brexit process officially yet to begin, there are increasing claims of German investors putting British investments on hold until the future is clearer.

Ulrike Schüler, a managing partner with PKF Hotelexperts in Munich, said while “massive uncertainty” still reigns as to the exact fallout of Brexit for many German financiers, the country’s serious investors are not necessarily rushing to pull out of the U.K. market.

But German hotel developers and investment banks present in the U.K. will be sizing up the situation closely over coming months.

“Some of the more conservative investors … will no doubt wait to see what happens before placing new investments in the U.K. and may well pull out of some deals or demand discounts,” Schüler said. “This could benefit other markets around Europe such as Germany and Spain.”

Other investors might see even better opportunities for return, Schüler said.

“On the other hand some investors, U.S. private equity, hedge funds, investors who see the U.K. as a good long-term bet, those with a higher appetite for risk and those with dollars might find some good investment opportunities given some level of discounting as well as (favorable) exchange rates,” she said.

Like other industry consultants, Schüler said she feels Britain even stands to benefit, with more overseas investments in U.K. properties—due to the weaker pound—and more tourists, underpinning hotel investments.

“A devaluation of the British pound could enhance the attractiveness for travel to London whereas travel of U.K. citizens to the EU could become expensive,” she said.

Schüler said German investments in U.K. hotels “are of relatively minor importance.”

Catherine Latzenhofer, an analyst at CBRE, agreed that “there hasn’t been much hotel investment appetite recently from German investors in to the U.K. hotel market,” though some deals have been the right fit for the right company.

“Some German institutional investors—Patrizia, Deka Immobilien, Union Investment Real Estate AG, Allianz Insurance—did invest in major gateway cities including Manchester and Edinburgh, with just a couple of transactions in London,” Latzenhofer said. “Given institutional investors’ appetite for fixed-income stock, they acquired properties encumbered by an operational lease and which are operated under global brands including Radisson, INNSIDE by Melia, as well as by U.K.’s fixed-income budget brands Premier Inn and Travelodge.”

Robert Seabrook, executive director and head of U.K. hotel transactions at CBRE, said that while a wait-and-see approach is the most likely outcome, there will be investor interest in U.K. hotel properties among some interested parties.

“In the short term, it is likely that some investors will defer decisions until they perceive greater stability; however, the slowing in U.K. hotel transaction volumes can also be attributed to the change in types of buyer and lower stock availability that has been evident in the market since the beginning of the year,” he said. “The falling pound relative to the dollar and euro is likely to make U.K. investment opportunities seem particularly attractive to overseas investors.

“Dollar- and euro-denominated funds, which have seen the value of their current U.K. property assets fall due to weakening exchange rates, may be reluctant to sell. But cash buyers or those with secured debt are already expressing great interest in U.K. hotel acquisition. The low value of the pound may also make the U.K. more competitive, driving a ‘staycation’ trend and causing an increase in inbound travelers to the U.K. resulting in greater overseas demand for hotel accommodation.”

Greater interest in homegrown projects
A joint hotel investment survey by German real estate industry federation ZIA and Deloitte shows that Great Britain is actually the second-biggest hotel investment market for German interests, with 38% of respondents saying they had invested there. By comparison, 63% of respondents invested in Austria, and 25% invested in Belgium, the Netherlands, Poland and France.

On the other hand, 80% of survey respondents said had invested back home in Germany, and that trend is increasing in a low interest-rate environment for hotels.

According to CBRE, those factors plus the Brexit dampener have seen Germany overtake Britain as the most attractive hotel market for European investors.

In 2015, CBRE research showed Britain‘s hotel investment market was worth $10 billion—almost twice that of Germany’s—but in its latest surveys, only half of respondents perceived the U.K. to be a very attractive market, compared to 58% for Germany.

“Many investors take the referendum on United Kingdom membership of the European Union and general economic and political instability as the greatest danger in investment in hotels in Europe," said Olivia Kaussen, managing director and head of hotels at CBRE Germany.

In a survey released at a hotel investment conference in June, investors showed they were relatively unruffled about the disruptive potential of Airbnb or a sharp rise in interest rates, Kaussen said. Of much more concern was global economic instability in general, and especially the risks linked with Brexit.

Those doubts bounced off on owners thinking about taking their properties to market this year, she said.

Despite that, many players have remained active and have attempted to capitalize on a potentially less competitive sales process.

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