The investment angle

Simon Behr By Simon Behr
Uploaded 4 weeks ago

In the third of a series of reports from Germany's leading hotel and apartment developer GBI AG, Simon Behr, director of sales looks at how serviced apartments have become a preferred type of investment and what makes them so attractive for investors.

The low-interest phase has now lasted almost eight years and is increasingly attracting the attention of institutional investors to the real estate market. Hotel properties and serviced apartments are now among the investment properties that are coming under close scrutiny. For GBI AG this is naturally an exciting and promising development.

One important reason for the change in priorities is that the yields for many other asset classes such as office and residential, which investors initially favoured in the low-interest phase, are now rarely attractive. Hotels and serviced apartments, on the other hand, still offer returns of between four and five per cent. Since the security structure with financially robust international chains is sound and long-term operating agreements keep management costs low, investors increasingly prefer accommodation properties of this kind. They are particularly interested not just in the 40-odd hotels with some 13,000 rooms which GBI AG has built since it was founded in 2001, but also in the long-stay and serviced apartment properties it has had on offer since 2007.

• International chains become tenants instead of owners
For many years supply was not sufficient to satisfy the demand of investors for serviced apartments, even though numerous large international chains have moved into Germany over the past ten years, among them Adina, Accor with its brands Adagio and Adagio Access, Ascott with the Citadines brand and Frasers with Capri by Fraser plus, in the near future, Frasers Suites. As it happens, GBI AG developed quite a few of these properties. For a long time it was customary for financially strong hotel groups such as Adina, Ascott and Frasers to keep hotels in the inventory of their own group of companies. Initially there was nothing on offer for third-party investors. Adina Frankfurt, completed by GBI AG in 2016, was Adina's first rental property and the first institutionally sold serviced apartment building. The purchaser of that first property near Frankfurt exhibition grounds was Deka Immobilien.

Frasers, the international chain based in Singapore, changed its strategy for a development in a prime location in central Leipzig. Capri by Fraser will move in as a tenant, since GBI as the project developer has already sold the property to an Arab family office.

For international chains such changes only work with the support of an experienced project developer who knows their special requirements and sensitivities and integrates these into the concept in such a way that a suitable offer can be made to investors. The international chains also need to be made aware of the advantages rental projects can bring in Germany. In an effort to avoid being dependent on the strategic considerations of multinational companies and to regularly produce an interesting investment object for institutional investors, GBI launched its own SMARTments business brand in 2010 offering long-stay travellers overnight accommodation chiefly in the budget range. The facilities are operated by our own group of companies, i.e. via the SMARTments business Betriebsgesellschaft.

This brand of ours offers very special marketing and distribution opportunities.
1) The serviced apartments can be sold to international investors on a conventional basis as an asset deal / share deal.

2) Several investors acquire shares in a property company in a club deal via AIF (alternative investment funds). This is primarily an interesting purchase alternative for private foundations or smaller pension funds which do not have the opportunity to acquire a complete project.

3) Moreover, GBI has serviced apartments which can also be sold in part ownership to individual private investors.

• Flexible marketing concepts have an advantage
If a property offers such a wide range of marketing opportunities, it is certainly an ideal investment for future market developments. We can adapt our sales according to the market situation so as to meet demand and satisfy changing investment preferences.
This strategy has meant that the serviced apartments of our in-house SMARTments business brand have already found prominent investors.
- Our property in Parkstadt Schwabing in Munich has been acquired by a family office from Germany.
- The property in Berlin-Karlshorst has been bought by HanseMerkur Grundvermögen, the investment subsidiary of the insurance company of the same name.
- Another property in Berlin, in Prenzlauer Berg, has gone to a North German pension fund that works for a group of medical professionals.
- Our third property in Berlin, in Fasanenstrasse near Kurfürstendamm, has been acquired by a family office from Asia.
- Our first SMARTments business abroad near Vienna Central Station has been bought by Württembergische Immobilien AG, a subsidiary of Württembergische Versicherung AG.
- The SMARTments business in Mannheim, right next to the main railway station, has likewise been sold to an insurance company.
- Our SMARTments business in Hamburg situated near the Outer Alster lake has been sold privately. Although this new project was completely new to the individual investors and required detailed explanation, it was quickly sold off within a few months.

• Investors mostly buy before construction starts
An important reason for the demand from all kinds of investors is the fact that our serviced apartments houses are built exclusively in sought-after locations in conurbations where there are excellent transport connections and demand will not slacken in the future. Moreover, we combine the locations with secure 20 or 25-year operating contracts.
As a rule, the institutional investors have purchased the apartments before planning permission was granted, the serviced apartments being sold to the final investors as a forward deal or forward funding.

In order to set this process in motion at an early stage, all the information that is essential for a smooth and efficient transaction must be available in good time. The prospective buyers and their advisors together with the financing banks need a complete overview of the data situation.

The following aspects must be taken into account in this early sale process.
1. It must be made plausible in the early planning phase that there is sufficient demand for the serviced apartments. Only then will the lease be adequately secured. The location must be examined very carefully. Information must be supplied on the current and future competitive situation. Even if there is currently still a great shortage of serviced apartments at a given location, new construction activities in the surrounding area must nonetheless be carefully reviewed.

2. Concept of the property
The property in question must have a coherent design, meet standard functional and quality requirements, and be tailored to the needs of the market or guest.

3. The quality of the operator
Special attention must be paid to the suitability of the operator. Apart from the overriding question of creditworthiness, it is important for investors and financing banks to know that the operator has all the necessary professional qualifications.

 4. The Contract
The contract must clarify more than just the legal and technical intricacies. All the details that determine the cash flow must also be clearly regulated. Additional costs and maintenance regulations, the reporting system, the handling of the inventory and return regulations have a major influence on the valuation and thus on the purchase price. The financing banks are particularly strict in checking the P&L account that compares profits and losses. The contract must be drawn up in such a way that the operator has a good chance of being able to sustainably service the rental/lease.

5. Transparency:
The transparent and plausible compilation of all the relevant information from the business is another basic requirement. Quarterly reporting with the usual scope in accordance with USALI is customary. The owner thus always has a good insight into the figures of the accommodation facility and can counteract any negative trends.

With a sound information base of this kind, serviced apartments are not only an excellent investment for all manner of current investors. The megatrends in society and the world of work ensure that the demand for such types of accommodation will continue to rise at an above-average rate and that the yield prospects will remain promising in the future.

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