Whitbread raises the trophy in Germany 

All eyes are currently on Germany – specifically the Dutch football fans’ hopping from side to side dance – but it’s not all wearing orange and being quite tall (post-war government policy backing cheese consumption, we’re informed). Germany is back in the sector’s eyeline after years of thinking that it was all very well, but leases.

The Euros are expected to do good things for the hotel industry, with rates likely to grow. The transactions market has remained shaky, with CBRE reporting a transaction volume of €1.47bn in 2023. Although this was the lowest volume since 2012, corresponding to a decline of 24% year on year, the decrease in the transaction volume was the lowest of all the asset classes.

The group reported that the repricing process was also progressing. While, at the end of 2022, gross initial yields of 4.65% were still achievable for hotel properties leased long term in the Top five cities, the prime yield rose by 60 basis points in total to 5.25% over the course of 2023. In this scenario, demand was especially on the rise for existing properties, either with well secured and long-term lease agreements or with no operators, and thus with value-add potential. Properties of this kind attracted more than 90% of the volume in 2023.

The positive market development, combined with interest rates stabilising, gives rise to expectations in 2024 for more activity on the hotel transaction market, ultimately also for reason of the greater challenges facing other asset classes, meaning that investors were on the lookout for portfolio diversification.   

Enter Whitbread. We are now 10 years in from the company buying its first hotel, in Frankfurt, and announcing plans for half a dozen hotels in Germany over the next five years. The rationale? That Germany’s property market is a bit like the UK. Not something you’re likely to hear from a Reform candidate in the final week of campaigning in the UK elections, but there’s no denying it.

A decade later and Whitbread has an open and committed network of over 90 hotels (of which 59 are operating) and announced at its Q1 results that it had launched its first online-focused brand campaign and was “trading well …on course to break-even on a run-rate basis during calendar year 2024 which is a key milestone as we progress towards our longer-term target of 10-14% return on capital”.

But look! Germany! Has been Whitbread’s fallback whenever things were looking a bit sticky for it – rare as that is for the company we like to call Boring Boring Whitbread – and it was no different here. The group is converting some of its restaurant space into hotel rooms, in line with the prevailing wind of ‘it’s cheaper to run’ and, with pressure on the hotel business in London, looking more closely at Germany was very much favoured. 

As Mark Crouch, analyst at eToro, commented: “The hotel sector is Whitbread’s bread and butter, and despite economic challenges, the brand is clearly carrying weight with customers at a time when consumer spending is falling. With Premier Inn making up over 70% of Whitbread’s revenue, it’s little surprise the company is moving more of its eggs into their Premier Inn basket.”

The company’s plans to make omelettes and break some of these eggs has caused it to fall on the wrong side of the unions, with the 1,500 job cuts provoking demonstrations at the AGM and various properties, but this didn’t deter analysts at Jeffries, which reiterated its ‘buy’ rating on Whitbread citing, yes you guessed it, Germany.

Announcing that you were going to break even may not seem like much cause for jubilation, but it is telling how much the sector has suffered under the cosh of costs that it is enough to perk analysts up. Well, that and a saddened share price. Time to make like the orange folk and do a little dance. 

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