EUROPE – German fund manager Union Investment has launched a 10-year fund targeting long-lease mid-market and budget European hotels in "above-average" locations to capitalise on investor appetite for core investments in niche segments.

The fund manager, which has invested €150m over the past three years in the budget and mid-market segment, has identified it as relatively crisis-resistant and uncorrelated with other asset sub-classes.

In contrast to premium hotel brands, the mid-market sector has focused services and has low fixed costs.

A spokeswoman for the fund manager said: "It's a massively growing segment, especially in Germany. But its market share in Germany is extremely low compared with the UK and France."

German assets will account for at least 60% of the target-€250m fund, although it will also scout assets in France, Belgium, the Netherlands, Luxembourg, Austria, the UK and Poland.

Leverage is capped at 40%.

Initial acquisitions for the fund will come via strategic partnerships with operators Motel One and Holiday Inn Express.

Although the spokeswoman said the focus would be on a specific segment rather than particular brands, she acknowledged that "a few brands [had] become very successful in operating the concept".

She said the fact it was a strongly growing segment made sourcing assets easier, but conceded that not all concepts and locations fell into the company's hotel investment criteria.  

Location will allow the fund manager to change the operator if necessary – although the manager acknowledged that changing the operator could prove more costly than changing an office tenant, for example.

Outside the fund, Union's hotel portfolio comprises 22 hotel brands valued at €1.7bn.

The spokeswoman said pension funds and banks had led appetite for the fund so far because they saw it as a niche investment with diversifying potential, though she added that interest would not be limited to German investors.

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