GERMANY—IHG has signed its ninth multiple development agreement (MDA) here, which brings its total number of hotels signed under MDA agreements to more than 85 properties, primarily within the Holiday Inn and Holiday Inn Express brands.
“At the moment, we have about 21 hotels in various stages of development waiting for building permits or lease agreements to be signed. It’s a strong pipeline,” said Martin Bowen, associate VP of development, Germany, IHG.
With more than 60 IHG hotels open in Germany, Bowen cited numerous factors driving the company’s focus on the country. “The German hotel market is pretty segmented,” he explained. “About a third of all the rooms available have a brand on them, so the prospect for growth is good.” In addition, Germany has a stable economy—the largest in Europe—as well as low interest rates, and it’s also the region’s largest outbound market. “For an international chain, that is very important to be present so you attract the travelers who go abroad,” he said.
IHG is focused on some 82 cities with more than 100,000 inhabitants or 200,000 overnights. “German has only three very large cities—Berlin, Hamburg and Munich,” said Bowen. “The rest have under one million citizens. We have 82 cities with more than 100,000 inhabitants or 200,000 overnights, and all of these cities are of interest, especially for the Holiday Inn brand family. If you want to reach market scale, you cannot just be in the three biggest cities; you have to be spread out over the country.”
In 2014, IHG doubled the number of its signings in Germany compared to 2013, signing 12 contracts with new and existing owner partners. Bowen attributed that to both internal and external factors. “The economy, which was spared the dip; low interest rates; and growth in overnights all help,” he said. In addition, he pointed to Holiday Inn’s recent brand freshening and the introduction of the open-concept lobby.
“Our growth strategy for Germany is a very proactive strategy,” he said. “We’re not just waiting for franchisees to contact us. We’re actively searching the market for locations and sites, and we work closely with developers to develop the right brand in the right location. Second, because the German market is still very fragmented, there are no really big franchisees.” Bowen noted that franchisees don’t always have a very strong balance sheet. “By working together and helping them grow, my development team here is really a service team for the franchisees, and we can grow together and make them stronger,” he said.
To do this, IHG has introduced a program called Franchise Plus. “It’s an active program where we’re not only looking for projects for franchisees, but we also use our balance sheet to help them,” said Bowen. He noted one successful strategy has been comfort letters. “Usually, the German hotelier is a lessee and not an owner/operator like in the U.S. or the U.K.,” he said. “Germany develops mostly through lease agreements, so the lease has two partners: the brand and the lessor. So far, the franchisor doesn’t really have a relationship with the owner of the property. With the consent of the franchisee, we share with the property owner not only rate and occupancy of that hotel, but also the results in social media and our quality checks. We have a traffic-light system and, when the light switches from green to yellow, we know we have to give special attention to that one hotel.” Bowen noted that this letter increases transparency between all parties: “It’s well received because it increases the comfort of all three parties because we all have the same interest: a good hotel that is operating well in the market.
“And, with Franchise Plus, we also through the use of our balance sheet, strengthened the franchisees’ covenants,” he continued. “That has led to franchisees not signing one hotel, but two during the year. That helps them to grow stronger, and, eventually, we won’t need the Franchise Plus program anymore.”
With the latest MDA, IHG has agreed to develop 10 hotels in Germany by 2019 with first-time franchisee for the company, Interstar. The agreement enables Interstar to develop hotels across both the Holiday Inn and Holiday Inn Express brands, adding roughly 1,700 rooms when signed to Germany’s current development pipeline of roughly 4,000 rooms.
The first hotel under the agreement is Holiday Inn Frankfurt – Airport, a 288-room, new-build property expected to open in Q4 2016. The hotel will feature the brand’s open lobby, which combines the front desk, lobby, restaurant, bar, lounge area and business center into one open, cohesive space. Located at Terminal 2 of Frankfurt International Airport, a shuttle service will operate between Holiday Inn Frankfurt – Airport and the airport’s terminals. Holiday Inn Frankfurt – Airport will join Holiday Inn Frankfurt – Alte Oper, which opened last month.
“We pretty quickly found the right location,” said Bowen. “At the moment, we are negotiating two more that will hopefully come to fruition.”
While IHG is developing new-builds, it’s also looking at conversions. “In the last two to three years, we have been successful in converting empty office space into hotels, which is an attractive way of developing because you don’t have to wait for building permits, it usually doesn’t take such a long time and, by refurbishing empty office space, there are interesting locations that wouldn’t be accessible for new-builds,” he said, noting three Holiday Inn Express properties in Germany have been adaptive reuse.
Bowen is bullish for the future. “We’ve seen strong RevPAR growth in the last year. Germany has always been pretty stable: there’s no rise to the top but no real fall down to the bottom,” he said, noting one might call it a boring curve but, in the recent economic climate, “boring has become sexy.”
“We believe the 85 hotels we have planned will come to fruition pretty quickly,” he continued. “We have accelerated the development pace and last year doubled it. We want to keep it in the double digits for the next three to four years. When you look at the financing sector, that is pretty stable, interest rates are stable, the influx of travelers and the amount of overnights have grown in the cities, and grown with the offering so the market is still not saturated.”