Hotel investors avoid Poland

Weekend empty spaces

Adrian Karczewicz, GE Capital Golub Asset Manager, claimed Polish hotels generate profits too unsatisfactory to be an attractive investment product. Only when occupancy exceeds 60 percent is a minimum profit ensured, acceptable to investors. The trouble is that no Polish city can ensure such a rate of occupancy. The best in this regard are Kraków and Poznań, the first thanks to tourists, the second due to businesspersons. Adrian Karczewicz added, with tongue in cheek, that were the International Trade Fair to be shifted from Poznań to Kraków, the city would become a real attraction to hotel proprietors since rooms would be filled not only during the week but also on weekends. And that is the kind of demand profile for which investors are searching.

Others have it better

Prague and Budapest are in a much better situation than Warsaw. There are not great differences regarding business customers, however there are many more tourists around in the Czech and Hungarian capitals. Michael O'Hare of Horwath Consulting stated: "I would expect new investments in Hungarian resort-grade recreation objects not in Budapest but along Lake Balaton, for instance. Linking tourist and business traffic is best displayed in Prague, which means that new hotel projects are continuously appearing there. But the most interesting market in the region may prove to be Russia", according to the Horwath Consulting analyst. He mentions investors for whom hotels are to be built in the country's twelve largest cities. He is convinced that there may be more firms interested in the purchase of a Russian portfolio comprising a larger number of objects,

What is a good hotel?

Investors are interested in hotels whose owners hold 25-year lease contracts, for instance. Security for such a contract could be, for example, a 12-month rent in the form of a bank guarantee or a guarantee issued by the hotel operator's mother company. But such collateral have to be much more carefully prepared than transactions in other sectors of the market, due to difficulties in estimating hotel profitability. It is much easier to assess earnings and costs of an office building or a shopping centre. Adrian Karczewicz of GE Capital Golub thinks: "The creation of a hotel investment market in Poland may emerge by constructing a network of low-budget hotels serving the needs of persons travelling throughout the country. Such projects would boast large occupancy rates, while their construction would be relatively inexpensive. Were the purchase cost calculated in terms of a room in an object in excellent location to be around 40,000 dollars, the low cost would reduce the risk involved in a transaction".

Hotel with a value

"There are two methods which can be used to estimate the value of a hotel for the requirements of an investment transaction" defines Adrian Karczewicz. "What could be termed the classic method is to estimate the envisaged income and the object's maintenance costs. The value is calculated by dividing the profit prior to interest, depreciation, tax and loan repayment (EBIDTA) by the expected rate of capitalisation. The second method can be employed exclusively on developed markets where many transactions are concluded, consisting of comparing sales prices of mutually similar hotels. The value is defined on the grounds of already concluded transactions in which the features of the objects were similar to the evaluated hotel. Only the first method should be used in Poland.