Oh, I do like to be beside the seaside...

In August of last year, many of the emergency Covid restrictions were temporarily lifted, and Polish tourists finding themselves unable to fly out to foreign lands were forced to make do with a bucket-and-spade vacation on the Baltic coast. Despite the hotel industry having been almost wiped out in the preceding months, Polish tourism actually boomed. “Some leisure hotels, especially those that were used to being highly seasonal, had a record summer season and even a record year. What we saw was very strong growth in demand for domestic leisure travel and actually an acceleration of a trend that had been clear for about five years before the pandemic – of increasing strength in domestic demand for leisure tourism,” points out Jacek Tokarski, the COO of Hotel Professionals. With this strange cycle of boom and bust, the question arises of what is the actual state of the tourism industry in Polish coastal resorts.

One person who has direct experience of this lurch between boom and bust and back again over the past year is Marcin Dumania, the CEO of Sun & Snow, which is in effect two companies. One is a developer of holiday apartments, which it sells as investment properties, while the other leases these flats on behalf of their owners. In his own words: “We are a developer and also the biggest rental company in Poland,” he says. He is also the first to admit that the past year has not been easy: “Financially, it has been difficult, but we received some help from the government and we survived. In terms of residential projects, March, April and May last year were difficult.” But he then adds: “We weren’t selling many apartments, but from June sales increased ten-fold. We were selling ten times more apartments on a monthly basis than before the pandemic. This was a huge increase. I believe many people started to think that they needed to have a holiday apartment that they could go to if there was a lockdown. People were forced to stay in the places they lived and many bought holiday apartments because they wanted to have a place to get away to. They couldn’t go to hotels, but they were allowed to go to their own properties.” Even today, his company’s sales are higher than before the pandemic, although they have fallen quite far from their peak. “Demand has slowed down a lot – it’s half as much as it was, but still much higher than before the pandemic,” he explains. Many, many businesses – and not just in the tourism industry – have received government handouts to tide them over the economic hardship caused by the successive lockdowns. And when it comes to tourism, Łukasz Bondyra, the senior hospitality advisor at Cushman & Wakefield, gives us some idea of the scale of these subsidies: “We understand that the government is planning on spending app. EUR 300 mln on the tourism sector for post-Covid-19 recovery,” he remarks. And he has no doubt that government subsidies have rescued the industry: “Everyone has been expecting significant distress in the hotel market, but there is still no sign of this in Poland or the CEE region. This is partially due to the government subsidies but also the low leverage levels and accommodating lenders. With hotels reopening, subsidies reduced and difficulties in finding employees to work in hotels, we may start seeing a bit more stress in the market. And even though so much capital has been raised to purchase hotels with very few opportunities on the market, we feel that bankruptcy situations will likely be avoided, especially for the right asset in the right location.”

Staying the course

So it seems the pandemic has turned out to be a mixed blessing. And Belgian developer and investor Fenixco has also clearly had a bit of a roller-coaster ride with its first Polish investment. Pinea, which has been designed by Chapman Taylor, is a complex of three interconnected buildings next to the beach in the seaside town of Pobierowo. It includes a condo hotel, a standard hotel run by Hilton Garden Inn and 175 holiday apartments. There will even be a swimming pool on the roof of the complex. But the moment they started construction work on the project, they were instantly hit by the outbreak of the pandemic. Unfazed by events, the work continued: “The project is proceeding according to the schedule we adopted at the beginning of construction. Thanks to the efforts of the general contractor – Strabag Polska – we have managed to avoid delays despite the difficulties caused by the Covid-19 pandemic. The construction of the project’s first stage will be completed this summer,” explains Joanna Drążkiewicz, the head of sales at Pinea Resort & Apartments. And, curiously, yet again the pandemic appears to have improved the company’s sales. “Since the beginning of the pandemic, we have seen a slight increase in interest for what we are offering. This is true for both apartments sold as a second home and as an investment. We believe this trend results from, on the one hand, real estate being perceived as one of the safest forms of investment, and on the other, from the desire to secure a safe harbour or even asylum away from the crowded cities. The intimate scale and beauty of the place where we are investing is undoubtedly our ally,” she claims.

The question of 8 pct

None of this addresses the elephant in the room. Before the outbreak of Covid-19, the internet was awash with offers of a guaranteed 8 pct return on investment (often over a period of five years) for those who bought into holiday homes and condos. However, now the market looks very different. “We offered an 8 pct return on the investment, but that was a long, long time ago. It was when the prices of apartments were relatively low compared to Western markets, but we don’t do this anymore. If you look at our portfolio of apartments, maybe around 5 pct of them have this guarantee, while 95 pct have normal rental agreements that split the rental revenues based on a percentage so that around 70 pct goes to the owner and 30 pct to the rental company,” reveals Marcin Dumania, the owner of Sun & Snow. Indeed, he doesn’t seem to believe that such guarantees were ever a very good idea in the first place, adding, “I was against any form of guarantee long before the pandemic. I believe most of the condo hotels built in Poland offered 8 pct.” Jacek Tokarski of Hotel Professionals seems equally unimpressed by the guarantees that were offered. “A fixed 8 pct guaranteed return is more like a marketing slogan. However, there are a number of good condo projects that offer a fixed rent, which, in the end and after some deductions, can provide quite a reasonable return. During the lockdown most condo operators were not able to offer fixed rent for premises that they couldn’t use. However, in many cases they offered either a variable rent based on turnover or temporarily waived or reduced the rent. Those condo owners who switched to a turnover rent for 2020 were probably the lucky ones, as their returns exceeded fixed rents. Individual condo buyers still expect a fixed rent in new projects, but maybe it’s about time to adjust the model to a more resilient version either of a low fixed rent with turnover bonuses or just based on turnover only. There are renowned condo developers who offer these types of contract and they also manage to develop and sell their projects pretty quickly,” he explains.

According to Cushman & Wakefield, such guaranteed returns were not usually as high as the stated return rate. “Returns were often guaranteed at between 4.5 pct and 9 pct and in some cases went even higher, which in practice is very risky for developers. It should be noted, on the other hand, that the real returns are generally very different to the stated returns, as it’s necessary to deduct all the costs related to ownership, management, maintenance and use in order to calculate the real return. During the pandemic developers were forced to decrease the guaranteed rate of return by renegotiating contracts with individual owners,” says Łukasz Bondyra, who also adds: “High guaranteed returns are unsustainable over time. One can understand that the return is related to the use of the condo units by tourists who pay for their stay, which is fine in a strong economy when the income generated by the property largely outweighs the operating costs. But when the market is disturbed, we start encountering challenges and difficulties in fulfilling the agreed return. It is typically very risky for the vendor to guarantee returns and so buyers need to consider the strengths of the guarantor to assess the risk taken – which in some cases can be huge.”

Looking to the future

According to Łukasz Bondyra, how quickly the industry is going to recover is “a crystal ball question.” But he doesn’t duck the question completely: “Clearly, we can see significant pent-up demand, especially in predominantly leisure destinations. Those locations that benefit from a large catchment area with good road access will be the first to recover. The Polish seaside is very well positioned to rebound quickly and I wouldn’t be surprised to see stronger performances achieved in some of the key established locations with the resurgence of strong local demand. Current restrictions allow hotels to use up to 50 pct of the total number of rooms, but from unofficial sources we hear the limit is to be increased to 75 pct.” If anything, Jacek Tokarski of Hotel Professionals is even more upbeat: “Baltic resorts were among those which, although hit significantly by the lockdowns, recovered pretty quickly and this year might be able to generate some positive NOI. However from the perspective of the return on the investment or the free cash flow after debt service, a breakeven result for 2021 will be a major success. We have to bear in mind that hotels are still under partial lockdown – only 75 pct occupancy is allowed, with a number of exceptions, but technically following 4.5 months of full lockdown hotels still can’t operate at full capacity.” The developers themselves appear extremely optimistic. “Currently we have the lowest interest rates in the history of Poland, so everyone is trying to find alternative investments. This was another reason for the boom during the pandemic,” explains Marcin Dumania of Sun & Snow, who goes on to add that his company is soon to launch two more Baltic coast developments: “One is in Ustronie Morskie and the other will be in Mielno, which we will start in about half a year. We need to finish all the procedures and get the building permits. We want to start them both, hopefully, this year. We should be launching the sales campaign for the Ustronie project in around two months.” It’s also business as usual for Fenixco’s Pinea project: “This autumn, we will hand over the first phase of the project to our clients – the private apartments. Staying in them is not only unrestricted, but has often turned out to be a tempting getaway from the stress of everyday life. Experiencing the advantages of remote working has additionally strengthened our willingness to get away from crowded cities. We are optimists. And no matter what, we hope the pandemic will end soon,” says Joanna Drążkiewicz of Pinea Resort & Apartments.