Caught in the chain

The Polish hotel market has not ground to a halt. Large operators are currently formulating expansion plans, which gives some indication of the potential of the sector, while a growing number of investors are interested in cooperation with domestic chains, attesting to the ever-improving professionalisation of the Polish hotel industry.

Explaining the revival
Twelve projects at various stages of development are what Hilton Worldwide's pipeline of projects currently consists of in Poland. Orbis/Accor also has ambitious plans. At the beginning of the year, Laurent Picheral, the president of Orbis, announced that the chain was going to accelerate its development in the country, particularly in the economy segment, where the number of hotels is to grow from 17 to 22. Meanwhile, Best Western is planning to have 20 facilities up and running by the end of the year, nine more than a year earlier. Where does this revival spring from? The hotel market is still developing, while occupancy rates are improving and so are average room prices in finished facilities in large Polish cities. Poland's attractiveness has also been strengthened by the decision to hold the Euro 2012 football championships in Poland and Ukraine. Operators have seen a chance to expand in under-developed segments of the Polish market. There is still a shortage of facilities in the economy and low budget classes, and a growing demand for hotels addressed to the needs of business travellers. Chains have discovered this niche and are eager to fill it. "We are observing a lot of new projects from chains in the economy and budget segment. According to our research, we will witness even greater interest in our market over the next 3-4 years," claims Janusz Mitulski, a partner of Horwath HTL and vice-president of the Polish Hotel Association (PIH). This is reflected in the approach of the big operators. "Poland is a strategic market for us, with a lot of potential," insists Magdalena Sekutowska, Eastern Europe development director of Hilton Worldwide. Such declarations by hotel chains are also backed up by the figures. According to Josef Filser, EMEA analyst for Jones Lang LaSalle Hotels, Orbis is planning to open four hotels with a total of 600 rooms before Euro 2012. In the next two years, Marriott is planning to open the Renaissance hotel next to Warsaw airport as well as a Courtyard by Marriott in Gdynia. Hilton has also signed a management contract for two new Hamptons to be built at the Warsaw and Gdańsk airports, as well as for two Double Tree Hiltons in Łódź and Warsaw - all are scheduled to open before the end of 2013. A strengthening in the position of hotel chains is one of the signs of a maturing market and a sign of the attractiveness of the Polish offer. "The days of hotel management without the support of a chain or a professional operator have come to an end in Poland. The best proof of this is the large number of independent hotels for sale which cannot find buyers," explains Alex Koszewski, a partner and head of the hotel and leisure investment department of Colliers International Poland.

With greater caution
There is indeed a great deal of movement on the secondary market. "There are currently around 200 hotels for sale in Poland. These often include facilities that are hard to sell for various reasons: the price, the wrong location or low profitability," remarks Janusz Mitulski. These properties are the legacy of more optimistic economic times, when loans were readily available and investors had faith in their own abilities... but were often unprepared and had little knowledge of the hotel sector. "Being chosen to host the Euro and the demand for more hotels has encouraged private investors and developers, often unconnected with the industry, into building facilities. However, after some time they have found that it is a difficult business from the operational point view. Moreover, you have to wait a relatively long time for a return on the equity invested - around 12-16 years. That is why we have seen a lot of unsuccessful projects," concludes Piotr Kwiatkowski, managing director of DeSilva.
However, experts stress that this is slowly changing. Investors' knowledge and preparedness for doing business are improving. Many are starting to understand that the hotel business is a hard way to earn a living. Investors are increasingly often admitting to their ignorance with regard to running hotels and are trying to look for some support. "We are observing a growing number of business entities seeking advisors who understand how important it is to be well-prepared from the very beginning, when it is easier to evaluate an idea and introduce changes that are beneficial for the project," explains Janusz Mitulski.

A crisis with a silver lining
The large number of unprofitable hotels shows how much the industry over-indulged during the good times. Investors counted on the fact that each project would sell, while the banks did not do their homework carefully enough. When it turned out that the market was a difficult one and optimism started to fade, the ones to suffer most were private players operating without any support. Associated hotels also felt the effects of the economic slowdown, but this did not threaten their existence or their operations. According to Magdalena Sekutowska, the healthy results of chain hotels show that it is worth being taken under the wing of a big operator. "The owners of our brands are satisfied with the cooperation; they appreciate the added value and profits contributed by the chain. This knowledge spreads and brings about an increased awareness of the industry. New investors start to understand how such a business should be run," she explains. Banks and their requirements are also playing an important role. "One of the key factors forcing the professionalisation of brands is the increasingly common requirement to have the support of a thriving hotel chain when applying for financing," claims Jacek Tokarski, an investment analyst in the hotel and leisure investment department of Colliers International Poland. Stricter credit policies may be having a positive influence on the amount of hotel 'chaining' in Poland (according to 'Hotel Guidebook 2011', this amounted to 13 pct of the total supply last year). "Banks expect that a brand will be acquired on the basis of a franchise, by leasing a facility or putting it into management. A brand and a professional manager considerably increase the chances of the business being successful and paying back," adds Janusz Mitulski. Even though this new approach has been a little forced, it is contributing to a reduction in unsuccessful projects and supporting those that actually have the chance to become profitable businesses. "In our experience banks limit access to credit if an investor has not signed a letter of intent with a chain. Thanks to this, the number of good and profitable projects is going to grow," says Piotr Kwiatkowski.

It's important to have a strong partner
However, the safest approach for the lender is one that limits the risk of the borrower beoming insolvent to the minimum. Out of the three main types of partnership, the most desirable for banks are lease contracts, as they provide the highest security. Operators, on the other hand, tend to opt for management contracts. "We prefer management, whereas a lot of investors prefer leasing, which is more in line with banks' requirements. Of course, everything depends on the terms of the contract and the risk calculation," explains Piotr Kwiatkowski. This is also a good solution for Hilton. "Our chain cooperates on the basis of management contracts or franchises," reveals Magdalena Sekutowska. Franchising is also fine with the Louvre Hotels group, which has signed a contract with Qualia Development for the rights to the Golden Tulip, Tulip Inn, Royal Tulip brands. It also suits the Orbis/Accor hotel group, which has gone so far as to create a separate team for the acquisition of new partners. The Starwood group also invests in Poland. However, it prefers operational contracts. "Starwood has received inquiries about cooperation from investors interested in opening hotels in Poland who want the facilities to operate under such brands of ours as Sheraton, Westin or Aloft. At Starwood we analyse every project very carefully and conduct negotiations with potential investors. The choice of investor is the key issue for us, though. Consequently, we work on the assumption that we do not sign operational contracts just to extend our portfolio in Poland; instead we focus on their profitability. Moreover, we prefer cooperation based on an operational agreement - all this is done in order to manage the reputation of our brands. However, the portfolio of nine brands owned by Starwood makes it possible to start cooperation on the basis of a franchise - for example ,in the case of the Aloft and Four Points by Sheraton brands," says Thomas Schoen, regional director of Starwood Hotels and Resorts Poland.
Cooperating with an operator, regardless of the chosen option, strengthens the position of new facilities and makes the market more mature. There are two other important aspects of cooperation with an operator: it prevents you from making serious mistakes and makes it possible to prepare the project for a possible sale. "Errors made by inexperienced operators are very costly and hard to rectify in a short period of time. An investor deciding to open a hotel on their own also constantly has to invest their energy. Without any support from experienced experts such activity very often becomes ineffective. Cooperation with a professional operator makes it possible to achieve better financial results from the very beginning of a hotel's operations, but most importantly ensures the continuous functioning of the facility in the case of a sale or takeover," concludes Jacek Tokarski.

Sven-Torsten Kain
management board member, BRE Bank Hipoteczny
Financing only for the big players
BRE Bank Hipoteczny is open to the hotel sector, but financing new projects is actually limited to provincial cities and developers with a lot of experience in this segment. A private investor should have a lease contract signed with an operator. However, this business model is rarely used by chains. Nonetheless, we believe that an operational contract or a franchise are not sufficient as they do not guarantee security. We allow credit of up to PLN 100 mln for hotel projects with an own contribution of 40 pct. The value of a project that we can finance de facto fluctuates around PLN 150-160 mln. The loans are granted for 20 years.