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Berlin: prepare for takeoff

When the Wall came down and Germany was reunited, great hope swelled up among investors and hotel groups alike who counted on Berlin’s strong development. The new federal capital has not yet produced results and must wrestle with overcapacity and average daily rates that are lower than those at its European rivals. And yet the FIFA World Cup and economic recovery marked a turning point. The inauguration of the future international airport will symbolize Berlin’s takeoff.

A new luxury hotel is opening its doors in Berlin! Last October 12 on Bebelplatz, just two steps away from Brandenburg Gate, Sir Rocco Forte inaugurated his lastborn: the Hotel de Rome. This conversion of the head office of the Dresdner Bank, later the East German Central Bank, is the most recent grand opening of a palace in Berlin since that of the Ritz Carlton in 2004. That was an important year for Berlin’s luxury hotels and saw the takeover of the Four Seasons by Regent, the very upscale brand developed by Rezidor. The newcomer can make many claims. Thies Sponholz, its director, announces his plans: “I sincerely hope that Hotel de Rome will become as successful as Hotel de Russie [in Rome], which has achieved iconic status in a [limited] number of years. Our main goal is to be the market leader, with regard to average rate as well as RevPAR.”(*) Fischers Fritz at the Regent; Lorenz at the Adlon; Quadriga at the Brandenburger Hof; Hugos at the InterContinental, First Floor at the Hotel Palace; Vitrum at the Ritz-Carlton; Vox at the Grand Hyatt; Vivo at the Hotel Esplanade, Vivaldi at the Schlosshotel im Grunewald; 44, the restaurant at the Swissotel; Facil at the Mandala. Its competitors have been forewarned: the neighboring Adlon and Regent, the Ritz- Carlton and the Grand Hyatt on Potsdamer Platz will have to brace themselves. They don’t plan to give up their status easily. “We shall continue our growth strategy for our market shares,” explains Lothar Quarz, Market director Berlin and Sales and Marketing director for Ritz- Carlton and Marriott hotels. “The Hotel Adlon has been the market leader in Berlin and we will do everything to maintain this,” explains Stephan Interthal, the new director of the Kempinski group’s jewel. The hotel, which will celebrate its centennial this year and the tenth anniversary of its reopening has prepared itself for the new competition “by reacting to guest needs”. A third presidential suite with state of the art security is now available to a selected public. In 2006, the hotel also undertook the transformation of 48 rooms into 25 suites with private sauna and fitness areas… enough to boost the average daily rate. Another place where the competition is likely to get tough: the gastronomic scene. Four-fifths of the starred restaurants in the city may be found in Berlin’s palaces (*).The competition thus looks tough and despite a difficult market, having an address in Berlin remains a must for hotel groups. The arrival of the Hotel de Rome brings the number of hotels with 5- stars or more to ten in the German capital. At the end of 2006, the city had more than 42,000 rooms versus 33,500 four years earlier, including 13,000 in 45 upscale hotels. While this figure might look harmless for a cosmopolitan city, Berlin is not (yet?) New York, Paris or London. While the abundance of properties might not be damaging, it could create problems. The profitability of the elite of Berlin’s hotel industry does not compare with that of its prestigious rivals. Across all categories, the city’s RevPAR - 67 euros in 2006 – is far lower than that of Paris (110 euros) and doesn’t come close to London’s 130 euros. The rack rates reported by Berlin’s luxury hotels in Fall 2006 illustrate this lag: 300 euros versus 500 euros in London and 700 in Paris.Rapid growth of the supply has put a great deal of pressure on the average daily rates of all the hotels. Even if it might appear to be less pressured on the luxury segment. “The competition is less intense for luxury hotels. You cannot go below a certain price without risking losing your integrity. We must also preserve a certain price level in order to provide the kind of service a client has the right to expect at a 5 star.” Any group worthy of their title owes it to themselves to be in Berlin. As the FIFA World Cup drew near, Concorde and Sol Melia added his prestigious destination to their portfolios. Maritim, Dorint-Novotel and Park Plaza took advantage of this occasion to reinforce their presence. Only Rocco Forte missed the boat by a few months. The neo-classical building “dates to 1889. Converting the premises into a hotel was a very delicate process as it was essential to preserve old parts. As a result, construction took longer than anticipated,” explains Thies Sponholz. But the British group justifies its approach: “The upside is that the end result was well worth waiting for: we have a unique property.”Since the wall came down in 1989 and particularly since the Federal capital moved house from Bonn to Berlin, real estate investors and developers have invested a great deal in the city’s expansion. Its complete metamorphosis, relieved of the weight of the scission, was illustrated by many futurist architectural projects signed Renzo Piano, Norman Foster. But economically the banks of the Spree have not attracted, as some had hoped, the transfer of the headquarters of large corporations already well-established in the powerful regional capitals of this decentralized country: Munich, Frankfurt orHamburg. The State of Berlin is still very much in debt as it shouldered some of the city’s renovation.This overcapacity is not limited to the hotel world alone. A million new inhabitants over a decade were expected to begin arriving on the eve of the transfer. But the result was the opposite, and the city –subjected to a high level of unemployment– watched its population steadily shrink. This phenomenon has only just been stemmed. Consequently the cost of real estate is relatively low. Luxury apartments abound and are not all able to find buyers. Yet, the prices defy all competition in the very upscale: 4,500 euros per square meter in the most prestigious neighborhoods: to the West, Charlottenburg, and Mitte to the East.In their ardor did investors burn their wings trying to reach Berlin? Probably not. They have invested in the future. The takeoff has been slow, but the return on investment is taking shape. “Today, nearly all the international chains are there. The peak of the construction cycle is behind us,” reassures Nicole Röbel, in charge of public relations at Berlin Tourismus Marketing. More satisfying yet, the results are there. The number-three city in Europe Vin terms of number of visitors, Berlin recorded 15 million nights in 2006, meaning 8.4% on the first eleven months of 2006 following 10.3% growth in 2005. The occupancy rate at Berlin’s properties illustrates this with an occupancy rate for 2006 of 69.4%, up by 3.6% from one year to the next.Of course the FIFA World Cup had a more than beneficial effect on the city’s results. But the impact of the event could be felt above all in terms of rates. This was thanks to a serious nudge to average daily rates on the days of important matches such as the Germany Argentina quarterfinal and even more that of the final on July 9, when some hotels saw their RevPAR double. “The FIFA World Cup was a great success for Berlin and the Adlon, and not just during the match. We received many reservations from international clientele in the months that followed. We believe this is the result of good media coverage of the city,” comments Stephan Interthal.A threshold seems to have been passed. Now it is up to Berlin’s hoteliers to reach higher. “The current trend is towards growth in prices,” rejoices Nicole Röbel. On the year 2006, average daily rates grew by 8.5% to 97.3 euros, making a significant contribution to the record increase in the RevPAR by nearly 15%. “We have - compared with the other hotels in the city – a good average rate and we hope that the other hotels in Berlin would not only try to increase the occupancy but also their rate, which is important for all hoteliers, from 1 to 5 stars,” encourages Stephan Interthal. The example could come from above. With a greater margin for maneuver, price positioning between each of the categories should be more distinct, which could lead to a favorable domino effect for all segments.Several elements leave hope for the future. “We are coming out of the red zone,” rejoices Lothar Quarz. With one hundred events each year, major international conventions are growing. According to ICCA ranking, Berlin comes in 4th just behind Barcelona and ahead of Paris and Hong Kong. The number of events organized in the Federal capital grew by more than 7% in 2006, attracting 3.6 million participants. Upscale hotels, meanwhile, also host a hundred or so major conventions each year, and are experiencing similar growth. In addition, some 6,500 smaller meetings also take place that nonetheless account for nearly one million participants.As a result, the nights generated by international clientele are showing strong growth: +30% in 2005; +18% en 2006. The arrival of foreign clients should allow Berlin’s hoteliers to withdraw from the strong dependence on domestic clientele which generate more than two thirds of the nights. Businessmen who mostly benefit from negotiated rates during the week. Tourists who are looking for better deals on weekends, even in the luxury segment. The first to potentially benefit from opening onto the world are the city’s palaces. And Thies Sponholz is counting on international clientele to win the challenge: “We are looking to attract corporate board members, successful entrepreneurs, art dealers, celebrities, etc, from Germany, UK, Spain, Italy and France”.“Berlin is an ‘in’ city, has a lot of cultural offers like almost no other city,” ex plains Stephan Interthal, “we are on the right road, but we need more international conferences and we are still lacking in incoming international flights”. The development of low-cost connections is already bringing a new public to the German capital. “Low-cost carriers make a marginal impact on our properties. But they do provide a great deal of publicity for Berlin as a tourist destination,” explains Lothar Quarz, “Berlin has become hip, a trend-setting city in Europe.”The true breath of air will come from Berlin’s skies. Although it has three airports - Tegel, Schönefeld and Tempelhof - Berlin is paradoxically poorly serviced and well behind Frankfurt, Lufthansa’s hub. Direct longhaul connections are still cruelly lacking in the city even if this trend is beginning to reverse itself. Delta and Continental have just opened routes from North America. From the Middle East, Qatar Airways has flown into the German capital since last December. One part of the world remains to be conquered: Asia. These new connections should begin to attract lucrative clientele. But it is in the midterm that things could definitively improve. Berlin Brandenburg International should allow the city to definitively come out of its rut.In 2012, this new airport will open its doors to replace today’s Schönefeld. The goal: welcome some 30 million visitors. Berlin already sees itself as the turntable of the future for Europe’s hotel industry …(*) Fischers Fritz at the Regent; Lorenz at the Adlon; Quadriga at the Brandenburger Hof; Hugos at the InterContinental, First Floor at the Hotel Palace; Vitrum at the Ritz-Carlton; Vox at the Grand Hyatt; Vivo at the Hotel Esplanade, Vivaldi at the Schlosshotel im Grunewald; 44, the restaurant at the Swissotel; Facil at the Mandala.

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