Reporting live from the battlefield

Normality is certainly returning to the market, according to 
Jean-Francois Laporte, head of Hotels (CEE) at CB Richard Ellis Hotels Central & Eastern Europe. But it looks like 2010 is not going to be any better from a trading perspective

Mladen Petrov

This certainly wasn’t an easy year for the hotel industry. It is safe to say that the industry suffered everywhere and the CEE region was no exception to that rule, unfortunately. The region followed a pattern from the Western market, where London was the only capital that succeeded in weathering the storm, relatively speaking, of course, given the circumstances. What happened in the region in 2009? Bucharest, Budapest and Prague emerged as the biggest strugglers, with occupancy decreasing respectively 16.1, 16.2 and 11.1 pct in 2009 (and RevPar dropping by 41.7 pct, 28.8 pct and 31 pct); unfortunately these cities had already been encountering problems from mid-2008. In general, the CEE region boasts a large number of emerging cities, which meant that the market foundations were not in place to weather the storm. For instance, on the one hand there is Bucharest, where the demand was and is mainly driven by business, and hence it has had one of the worst performing hotel markets. On the other hand, Vienna – a market with strong fundamentals and driven by tourism, business and conference business – has been the best performer in the region (occupancy fell by 8.2 pct). Now that Romania is mired in recession, the business hotel guests are missing and there are no tourists to replace them. Except for Vienna the only relatively stable hotel market in the region was Warsaw, with an occupancy drop of 9.7 pct (the ADR fell in euro but was relatively stable in złoty). The fact that the Polish economy is still growing certainly had an impact on the sector’s performance. In general the whole industry was hurt – both international chains and local players saw their revenues decline. In 2009, hoteliers initially decided to maximize costs (i.e. cut costs) to counter balance the potential loss of revenue, but quickly decided to engage in price re-adjustments to handle the crisis. This “price war” has been particularly fierce in some markets, with average room rates dropping by more than 30 pct over the year in Bucharest, 22.3 pct in Prague and 24 pct in Budapest. The consequences for the industry are damaging in the long term. After 9/11, the market needed seven years to recover price-wise in absolute values to pre-attack levels. This time, hopefully, we won’t need seven years, but in our opinion we will only go back to pre-crisis price levels in three to five years following stabilization. In general, unfortunately it looks like 2010 is not going to be any better from a trading perspective, hoteliers will still try to boost revenue and manage costs tightly, but we will certainly witness some normalization on the market, with the RevPAR concluding, hopefully, its declining trend.

With regard to transactions in 2009, the market was extremely quiet, with the only significant deals taking place in Poland (the sale of andel’s hotel and the Radisson Blu hotel in Kraków). However, these are very specific transactions that only confirm that hotel investment activity in the region was completely frozen. Today, none of the primary hotels would be sold unless the owner is pushed to do so by lenders. These forced sales are highly unlikely to occur in the CEE region at the moment, as lenders are first looking to find solutions with owners. In 2010, investment activity will initially be driven by local investors willing to buy secondary assets. In the second part of the year maybe the first true prominent distressed assets will be marketed.