At Bay Street, we see this as a critical inflection point — not just for yield-seeking capital allocators, but also for cultural licensors, sovereign LPs, and asset owners seeking more adaptable, resilient structures for hospitality assets in Europe’s largest economy.
As it stands, the German market remains dominated by lease agreements. Direct hotel management agreements (HMAs) remain rare — largely due to regulatory constraints embedded in the German Investment Act (KAGB), which prohibits regulated funds from taking on operational risk. The result is a bias toward predictability, which institutional LPs still demand.
This structure creates a curious misalignment: while operators want more flexibility and upside, owners — particularly open-end funds and insurance platforms — prioritize cashflow certainty. Historically, this worked in favor of both parties. But the last five years of operational volatility have revealed cracks in the lease-dominant model.
Hybrid leases — where base rent is complemented by profit-sharing or performance-based top-ups — are gaining traction. So are white-label models, where a third-party operator signs a lease but leverages a global franchise brand to anchor guest acquisition.
CBRE’s Helena Rickmers noted recently that institutional appetite has recalibrated: “Pre-Covid, landlords were looking for rent cover ratios of 1.3. Now, many are happy with 1.5 — to give operators more room to flex.”
This echoes sentiments Bay Street has heard repeatedly in our recent diligence dialogues with European hotel operators looking to license art from prominent collector families. These operators prefer hybrid HMA-lease frameworks that allow them to push creative programming and wellness integration while remaining asset-light. As one family office said in a recent meeting: “We’ll license our collection, but only where there’s room for cultural relevance — not just rent pass-through.”
This aligns with a quote from Management of Art Galleries:
“A rigid contract often limits the possibility of true curatorial experimentation — flexibility in the operating model allows for cultural expression without compromising the financial covenant.”
From Bay Street’s perspective, this structural pivot is not just about rent formulas. It’s about building antifragility into hospitality underwriting.
Consider:
That said, variable leases are not a panacea. As Fattal’s Ronen Nissenbaum rightly cautioned, “In unstable environments, variable leases can backfire. We’ve ended up buying properties just to escape guaranteed rents.”
But here’s the real opportunity: if you can structure leases like HMAs — with performance metrics, break clauses, and governance rights — you get the best of both worlds.
As Invesco’s David Kellett noted:
“The next version of the lease blends HMA clauses into fixed structures — giving owners a lever when tenants underperform.”
We view this as a necessary evolution for German leases to remain competitive in a global capital environment increasingly comfortable with operator-aligned models.
Bay Street has been advancing a dual strategy: invest in yield-aligned hospitality assets and use them as canvases for cultural licensing — particularly with families that own contemporary and African diasporic collections.
Germany, in particular, is fertile ground for this. Several of the collector families we’ve engaged with (including during recent meetings in Berlin and Frankfurt) have expressed interest in licensing to “non-traditional” operators — provided there is flexibility in how public programming, art display, and community partnerships are managed.
As quoted in Art Collecting Today:
“Cultural capital accrues not from possession, but from activation. The hotel lobby is no longer just a transactional space — it’s the new gallery.”
Traditional fixed leases suffocate this potential. Hybrid or indirect HMAs provide room to experiment — and room to capture alpha from community and guest engagement that drives RevPAR uplift.
Despite the architectural evolution, it’s important to note that:
But as Christian Buer at Horwath HTL points out, clauses like FF&E reserve accounts, CAP provisions (conflict avoidance pledges), and inflation-linked rent formulas are being embedded to modernize fixed leases.
In short, the German hospitality lease is being reimagined — and not just to cope with macro instability, but to unlock a new tier of creative, flexible, and high-yield hospitality ventures.
Bay Street will continue to monitor the lease frontier across Europe — and back the operators, families, and financing models willing to lead the shift from rental rigidity to quantamental creativity.
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Bay Street Hospitality is a diversified hotel fund series for allocators seeking quant-driven exposure across top countries, operators, and hotel tiers. The fund targets a diversified portfolio in both high-growth emerging markets and stable developed markets, optimizing risk-adjusted returns. The leadership provides structured equity and pivotal strategic guidance to hotel-related investments. The fund establishes joint ventures with best-in-class partners, focusing on deal flexibility, currency considerations, tax efficiency, and clear exit strategies.
