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Tourism, Hospitality & Leisure Review 15 years beyond … · Figure 4: Total overnights in selected cities (1999-2003) Source: Federal Statistics Bureau of Germany. 13 Tourism, Hospitality

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Page 1: Tourism, Hospitality & Leisure Review 15 years beyond … · Figure 4: Total overnights in selected cities (1999-2003) Source: Federal Statistics Bureau of Germany. 13 Tourism, Hospitality

Figure 1: Germany - a challenging market (1988-2003)

Source: EIU/IFO/PKF/Deloitte research.

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Tourism, Hospitality & Leisure Review

15 years beyond the Berlin WallIn the period since unification in 1990, the position of theGerman economy has transformed from one of Europeanpowerhouse to something of a poor relation. This articleexplores the subsequent impact on the market performanceof the German hotel industry.

The macro environmentFigure 1 overlays economic, commercial and hotel performancemarket indicators between 1988 (pre-unification) and 2003.

The programme of convergence which began at unification resultedin far greater costs and challenges than originally estimated. Thiscontributed to a subsequent period of economic slowdown, reachinga low in 1993 when GDP declined by 1.1%. Rising unemploymentwas also a feature of this period peaking at c.13% in 1997.

As economic growth returned (albeit modest) in the second half ofthe 1990’s, investor confidence strengthened culminating in the year2000 when the dot.com boom and an active IPO market drove newhighs in equity markets across Europe and the US.

Against this backdrop, and combined with continued supplyincreases in many individual market areas, overall (country-wide)hotel occupancy declined considerably in the period post unification.An occupancy recovery commenced on the back of improvingeconomic conditions following a low of c.60% in 1996 peaking in2000 at c.65%.

However, improved conditions were short-lived. A softeningeconomy combined with the aftermath of 9/11 impacted investorconfidence again and the on-going issue of Germany’s high socialwelfare costs and restrictive labour laws came under renewedscrutiny, particularly from the international investment community.Subsequently, a proposed package of social reforms was developed,aimed at stimulating the economy.

The volume of international overnights in Germany was c. 42m in2003 (c. 12% of the total). This appears low relative to the volumestypical to other leading European markets, including France (c.567m in 2003) and the UK (c.203m in 2003).

Whilst international overnights to Germany grew at a lacklustre 2% CAGR7 between 1995 and 2003, this compares well relative tothe domestic market which was virtually unchanged over the periodat 0.4% CAGR.

Hotel market performance Whilst economic conditions have contributed to a difficult hotelmarket over the period presented, it is the significant addition ofnew hotel supply that has added a further blow – particularly incertain key city markets. Whilst these cities have seen considerablesupply growth, the focus has been on the former eastern Länder, driven by branded operators aggressively pursuingopportunities to expand their network throughout this enlargedmarket area.

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Tourism, Hospitality & Leisure Review

In summary the supply pipeline has been fuelled by the followingkey factors:

• Appetite of branded operators to expand throughout territory;

• Tax efficient status of real estate funds;

• Considerable stock of poor quality (former Soviet)accommodation which was re-developed; and

• Continued desire on behalf of banks to lend on real estate (hotel)developments – particularly with a lease structure in place whichis common to the German market.

Deloitte research indicates that branded room supply increased at c. 8% CAGR between 1988 and 2002, compared with 4% for totalsupply. Today, branded hotels account for some 25% of roomsupply – still a relatively low proportion in comparison with the UK(c. 40%) and France (c. 36%). The influx of new supply has alsoresulted in shifts in market dynamics. As competition – particularlybranded – has increased, more defined segmentation of supply hasoccurred with a knock-on polarisation of room rates.

With consideration of the foregoing we have sourced hotelperformance data from HotelBenchmark by Deloitte. Figure 2 presentsroom occupancy, ADR8 and RevPAR9 between 1990 and 2003.

A review of the data presented suggests the following:

• Room occupancy has demonstrated a declining trend averaging63% over the period – 60% between 2001 and 2003.

• Difficult market conditions have placed pressure on room ratesimpacting RevPAR performance – particularly in the periodbetween 1993 and 1996.

• A gradual recovery commenced in 1997 and by 2000 RevPARhad recovered in nominal terms to 1992 levels.

• A subsequent market downturn resulted in yet another period ofperformance decline and by 2003 RevPAR was some 11% belowthe 2000 peak.

• The implied CAGR in ADR and RevPAR performance in nominalterms between 1990 and 2003 was 0.8% and 0.5% respectively.In real terms this represents CAGR declines of 1.3% and 2.6%respectively. Whilst results vary by city, it is apparent that therehas been a long-term decline in performance across Germany.

• Moreover, German performance has been adversely impacted byprice sensitivity amongst the domestic corporate market. Analysisof data from the HotelBenchmark by Deloitte indicates thateven at the peak of the market, only 17% of surveyed hotels inGermany achieved an average rate of over €100.

8 ADR – Average Daily Rate or Average Room Rate.9 RevPAR – Revenue Per Available Room.10 The number of German hotels providing data to the HotelBenchmark Survey by Deloitte has

grown significantly in recent years. Consequently, the data does not reflect the publishedresults for each year (except for 2003). Rather, we have extrapolated the longer-term trendson the basis of the movement in like-for-like performance recorded each year.

Figure 2: Germany – hotel performance data (1990-2003)

Source: HotelBenchmark Survey by Deloitte/PKF Eurotrends – strictly illustrative10

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Page 3: Tourism, Hospitality & Leisure Review 15 years beyond … · Figure 4: Total overnights in selected cities (1999-2003) Source: Federal Statistics Bureau of Germany. 13 Tourism, Hospitality

Figure 4: Total overnights in selected cities (1999-2003)

Source: Federal Statistics Bureau of Germany.

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Tourism, Hospitality & Leisure Review

The East and West divide?We have selected four separate markets (Berlin, Dresden, Frankfurtand Hamburg) for a more detailed review of supply, demand andperformance trends – selecting them on the following basis:

• Two markets from the “East” (Berlin and Dresden) and two fromthe “West” (Frankfurt and Hamburg).

• Berlin as the capital and political heart of Germany, in addition toa popular European short-break destination.

• Dresden has re-emerged from isolation in the former Eastern Blocto regain its position as a significant commercial and leisuredestination.

• Frankfurt is the financial heart of Germany and the EU, hostingthe country’s primary stock exchange, the Deutsche Bundesbankand the European Central Bank headquarters.

• Hamburg is Germany’s primary port and a major commercial city.It is also a popular short-break destination, particularly withdomestic visitors.

In short, each city displays characteristics that appeal to internationalhotel operators and developers and has undergone significantchange as the country has emerged from re-unification. Figure 3presents bed supply and overnights for the four identified markets.

• Berlin has the largest bed supply of the four markets (69,000)followed by Hamburg (31,000), Frankfurt (24,000) andDresden (15,000).

• Berlin has recorded the strongest growth in bed supply in recentyears at 4.2% CAGR and a further c. 8% increase is anticipatedover the next two-three years (up to c. 5,300 beds).

• Following significant growth in the early to mid-1990s, Dresdenrecorded a net decline in beds between 1999 and 2003. Whilst a modest addition is anticipated over 2005-2006 (c. 950 beds),this represents c. 6% growth on current levels.

• Frankfurt11 and Hamburg could see new supply of up to 1,900beds (c. 8% growth) and 2,400 beds (c. 8% growth) respectivelyover the next two years.

• Berlin records the highest overnights of the Top 10 German cities(c. 11.3m in 2003).

• Berlin and Hamburg have both recorded strong growth inovernights since 1999 (4.7% and 4.1% respectively), outpacingthe increase in supply.

• Frankfurt does not have a significant leisure market, and demand is heavily influenced by the Messe (Trade Fairs). Overnights wereflat between 1999 and 2003, whilst supply increased at 1.8% CAGR.

• Dresden has a growing meetings and conference, and leisuremarket. In recent years, demand has outgrown supply growth,albeit from a low base.

Figure 3: Total beds in selected cities (1999-2003)

Source: Federal Statistics Bureau of Germany.

11 Additional long-term plans for hotel developments include the airport (c. 1,300 rooms) andthe Urban Entertainment Centre (c. 1,200 beds).

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Page 4: Tourism, Hospitality & Leisure Review 15 years beyond … · Figure 4: Total overnights in selected cities (1999-2003) Source: Federal Statistics Bureau of Germany. 13 Tourism, Hospitality

Impact on performance

• Hamburg enjoys the highest occupancy of the four cities (70% in 2003). This is due in part to the city’s strong domesticleisure appeal which has been boosted by investment in retail/entertainment, including blockbuster musicals (The Lion King, Mamma Mia!, Titanic).

• Whilst each market recorded healthy increases in roomoccupancy (2004 year-to-date), all four markets recorded ADRdeclines, reflecting a combination of competitive marketconditions, new supply and weak local economic environments.

• Historically, Frankfurt has led the field in terms of average rate,reflecting its segmentation, which is predominantly corporateand Messe – both of which are typically higher-rated.

• Berlin and Dresden have both recorded RevPAR growth between1999 and 2003 (2% and 4% CAGR respectively), reflecting theon-going development of each market in the corporate, leisureand Messe segments, compared with the relative maturity ofFrankfurt and Hamburg (both of which recorded little or nogrowth between 1999 and 2003)12.

What next?15 years on from unification, the German hotel market hasweathered a significant period of change. Today, the outlook for the industry remains mixed.

Economic indicators for the next two to three years remain modest,with real GDP growth forecast to reach c. 2%, following three yearsof less than 1% growth. Growth is also forecast in other Europeanmarkets and the US over the next two to three years (albeit slowerthan 2004). However, the proposed programme of structuralreforms is still under discussion and current opinion is that publicopposition will postpone implementation until after the GeneralElection in 2006.

For the German hotel industry, there is evidence that underlyingdemand is growing and the 2006 World Cup has the potential to stimulate additional international visitation. However, theimportance of the German outbound travel market continues todraw branded hotel groups to the country, despite the challenges.Consequently, we anticipate further supply increases across mostmajor cities, as global operators focus on capturing Germandemand at home and abroad. As such, achieving sustainableperformance improvements is likely to remain something of a challenge for the foreseeable future.

Written by Helen Brewis-Levie and Katharine Le Quesne.

Helen Brewis-Levie Katharine Le Quesne+44 (0) 20 7007 8111 +44 (0) 20 7007 [email protected] [email protected]

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Tourism, Hospitality & Leisure Review

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Source: HotelBenchmark Survey by Deloitte. *YTD – Year-to-date August

12 Performance data is based on consistent samples of hotels, typically mid-market and first class.

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