If you’re in the mood for luxury at reasonable prices, try a five-star hotel in a German city. In Berlin, the average room costs €159 ($189), and you have 28 top-end hotels to choose from. In New York, London, Paris, Tokyo or Rome, the same room would set you back around $370, according to figures from the Hotel Price Index.
These low prices in Germany’s capital may be great for tourists, but they’re an increasing source of anxiety in the country’s high-end hotel trade. Fears are growing that profit margins and room occupancy are unsustainably low, with too many new luxury establishments created by cheap credit rather than market demand. In 2016, prices for five-star hotel accommodation in Germany went up just 0.7 percent.
Some high-end hotels are doing just fine. The Breidenbacher Hof in Düsseldorf, which was recently voted Germany’s top luxury hotel, saw revenues jump 11 percent in 2016. An average room here costs €388, or if you want to spring for something swankier, the Royal Suite can be yours for just €14,000 a night. But such profitable hotels may be the exception rather than the rule.
Low prices have led to startlingly meager differentials between market segments: in Berlin a five-star room can be had for just €60 more than a room at the budget chain Motel One. Underlying these low prices is stagnant or falling occupancy at the top end of the market. Occupancy in five-star hotels fell 1.1 percent last year, with average revenue per available room falling 0.3 percent. In the rest of the hotel market, that figure rose 4.4 percent.
The boom appears to be driven by speculative capital and low interest rates rather than potential for market growth, and despite the tight market conditions there is no sign that the building boom is slowing. “We can expect a clear-out at the top of the market,” warned a recent study from the IHA, the German hoteliers association. Between 2017 and 2019, according to research agency TopHotelProjects, 17 new luxury hotels will open in Germany, increasing total capacity by 6.5 percent.
“Germany is a difficult market right now,” confirmed Frank Marrenbach, CEO of The Oetker Collection, the hotel management subsidiary of the Oetker Group. To stabilize its returns in the sector, the group has acquired eight overseas hotels in recent years.
As well as low room rates, luxury hotels in Germany also have to cope with elevated running costs. “Many Asian hotels pay their lowest-paid staff starvation wages,” says one German hotelier. “But our staff costs are among the highest in the world.” This hits five-star hotels particularly hard: Luxury in-house restaurants can help drive staff costs up to about 35 percent of revenue. But with unemployment low in Germany’s booming economy, these high costs are paired with chronic staff shortages.
“Anyone who wants profitability and high occupancy needs a high proportion of foreign guests.”
Margins are thinner at the top end of the hotel market than among budget hotels. According to figures compiled by industry consultants Treugast, budget hotels retained 40 percent of revenues before taxes, interest, depreciation and rents. A five-star hotel retains just 25 percent.
For the moment, none of this is stopping the building boom, above all in Berlin. Three new five-star hotels opened this year in the German capital, bringing the city’s total to 28 – to the chagrin of many locals who are tired of the influx of foreign money. The last one to open, the Orania, was the subject of major protests in the Kreuzberg neighborhood before opening in August. By October it had reported 17 vandalized windows.
In Munich, the US chain Marriott opened a 280-room luxury hotel a few weeks ago; Hyatt will follow suit in early 2018. Competition is just as tough in the northern city of Hamburg, where the building of the spectacular riverside Elbphilharmonie concert hall, which itself incorporates a Westin-owned hotel, has ushered in a wave of luxury hotel openings.
Private hotels have it particularly hard. The Bayerische Hof in Munich, owned by the Volkhardt family for over 100 years, saw a 5.6 percent fall in revenue last year. The Grand Hotel Heiligendamm on the Baltic Sea has hosted international political summits in an air of old-fashioned luxury, but low occupancy means the hotel is in persistent financial trouble.
Klaus-Michael Kühne, the 80-year-old investor bankrolling The Fontenay, a new Hamburg hotel aiming to be the country’s finest, admitted to Handelsblatt that it was unlikely to turn a profit. “Let’s be honest: Ultimately it is a labor of love. We can afford it,” he said.
Few hotels can expect that kind of indulgence from investors. Ultimately, to improve margins and occupancy rates, most high-end hotels look to foreign customers. Last year, the Breidenbacher Hof in Düsseldorf spent €1.1 million on advertising in Russia, China and the Persian Gulf, an astonishing figure for a hotel with annual revenues of €15.2 million.
“Anyone who wants profitability and high occupancy needs a high proportion of foreign guests,” confirms Michael Lidl, managing director of Treugast. Here, globally known hotel chains enjoy a real advantage. Munich’s Mandarin Oriental hotel, whose parent company owns 41 luxury hotels in 27 countries, is among Germany’s top five hotels. With its rooms costing an average of €800 a night, it is also the country’s most expensive.
Christoph Schlautmann covers the logistics and waste management sectors for Handelsblatt. Brían Hanrahan adapted this story into English for Handelsblatt Global. To contact the author: firstname.lastname@example.org