Three stars to the rescue

With 5-star hotels having a hard time filling their rooms and the expenses on business trips being dramatically slashed, the developers and operators of budget hotels are just trying to hold their nerve

Mladen Petrov

Tallinn is believed to be one of Europe’s best kept secrets: a lovely city with beautifully preserved mediaeval architecture, pricey-but-good restaurants and only moderately inundated by tourists. In addition, Tallinn now offers such affordable hotel accommodation that a number of Scandinavian newspapers have branded the capital one of the cheapest cities in Europe in terms of accommodation prices. And they weren’t exaggerating – a night in one of the 5-star hotels will set you back only EUR 95, while in 4-star hotels you will be charged around EUR 65. Quite a deal. Despite the generous discounts hotel operators are offering, in Tallinn they are complaining that their assets are “almost empty”. The economic crisis is only one of the reasons for the significant decline of tourists. The other reason is to be found in the over-supply of hotels, an issue which has also been troubling Prague.

The survivor?

Luckily, this is not the case in all of the CEE capitals and major cities. While the gloomy mood of Estonian hoteliers is also evident across the whole region, economy/budget hotel operators are remaining calm. In times when every penny counts, they are expecting to be the ones who will provide accommodation for the smaller number of business travellers and tourists on a budget. “The general feeling is that the budget sector is more robust and in fact the only one that is expanding in the current conditions,” believes Karen Friebe, the global co-chair of the hospitality and leisure group of international legal practice DLA Piper. Recently, DLA Piper issued the 2009 Europe Hospitality Outlook Survey, which identifies the major trends in the hotel industry. The study, based on the answers of 261 top hotel management respondents, also typifies the mood of hotel operators and investors on the continent. Having to operate in a troubled segment and in a deteriorating economic climate it comes as no surprise that 80 pct of the respondents to the survey describe their outlook for 2009 as pessimistic.

Still down in the dumps

Another 2009 mood study by Horwarth HTL shows that in Europe it was the hoteliers in the CEE region that had the most gloomy outlook for the year, with an overall average score of
-45.7, far below the global average of -34.2, where a zero score indicates unchanged expectations from the previous year, whereas a positive 150 signifies a highly optimistic outlook. The latter is not expected to be recorded soon. According to DLA Piper’s study, an industry-wide recovery will not happen until 2011, with the lack of liquidity – as is is the case everywhere – remaining the primary concern of European hospitality executives.

There is, however, some light at the end of the tunnel. Among the new trends, which the current conditions are particularly favouring, 47 pct of those surveyed identify the economy/budget hotel sector as the one representing the most attractive investment opportunities in the next 12 months. In the opinion of Frans-Jan Soede of the Vienna-based HAM hotel real estate consulting company, the major CEE markets will together see up to 45 new budget hotels over the next two years, given the current pace of development. Delays in delivery do happen, obviously, but according to Mr. Soede the cancellation of budget hotel projects is less likely. “The hotel projects that are being put on hold in the CEE region usually from part of larger mixed-use schemes, which require enormous financing. The large international hotel chains are still looking for growth in the CEE region, as clearly there is undersupply in the region,” Frans-Jan Soede comments. “A city the size of Kyiv, for example, has room for around 25 budget hotels,” Mr. Soede adds.

The average investment in a 100-room budget hotel stands at around EUR 5-6 mln, with the return on the investment being completed after 5-6 years. Industry experts claim that the concept does not carry investment risk. “Obviously, financing is the big issue here. The major hotel chains have ambitious plans for growth in the economy/budget sector, but this is all dependent on the banks. The demand is there,” asserts Alex Kloszewski, a partner in the hospitality department of Colliers International Poland. According to Mr. Kloszewski, Poland needs around 1,000 more rooms per year. This means that ten new hotels can enter the market annually, not only in the biggest cities, but also in smaller secondary cities such as Toruń, Gorzów Wielkopolski, Bydgoszcz and Lublin. “Each of these cities could support one or two budget hotels. Countrywide, Poland is definitely undersupplied,” Alex Kloszewski says.

Time to verify

International players such as Accor/Orbis, Wyndham Worldwide, Louvre Hotels, Hilton, Rezidor, IHG and Loews are screening the region for opportunities together with individual investors. To provide a few examples: Accor has announced it is looking for local partners to develop domestic chains of economy/budget hotels such as Ibis and Etap. The company is targeting the large secondary cities of Poland, the Czech Republic, Romania and Hungary. In 2008, Orbis Group, part of Accor and the largest hotel group operating in Poland and of the largest in the CEE region, opened four new Etap hotels in Poland. In 2009, Orbis will be opening an Ibis hotel in Kielce and an Etap hotel in Toruń. The company has announced that it is to increase the proportion of economy hotels in its portfolio, but the continuing crisis has forced the company to re-consider its ambitious plans. The main focus is to be on the Etap and Ibis brands, but this change will take place in the longer time frame. Also, in Poland alone Louvre Hotels and Warimpex are to develop four hotels under the Première Classe and Campanile brands in Wrocław, Bydgoszcz and Zielona Góra. Next in line are Gdańsk, Katowice, Poznań, Kraków and Rzeszów. In the opinion of Alex Kloszewski: “I believe that we are going to see more things happening in this sector as soon as the end of this year as the banks’ lending policies soften, with an annual supply of 1,000-1,200 rooms from 2010 onwards and for the next 10 years.”

Golden rules

“There are plenty of missing concepts in the region. Has anyone heard of highway hotels ormotels? When combined with an internationally-branded restaurant they have a huge potential,” Mr. Soede explains. These days, developers are being quite creative. “The budget chains are looking to offer the best value, more services at the same price. Creativity is the key,” claims Karen Friebe of DLA Piper. One of the examples is provided by the Yotel hotel brand, which now offers its guests the option of checking in for a number of hours. The chain claims it is dedicated to providing luxury at a reasonable price and is accessible to all. Another emerging trend is that of branded hostels, by which is not meant a large room full of backpackers in lousy t-shirts heading east. Although in branded hotels such as Generator and Wombat, 70 pct of the rooms meet hostel standards, the rest could easily qualify as cosy hotel rooms. In Budapest, one of the projects HAM is advising on involves the conversion of a residential building into a budget hotel.

What else should developers be aware of? The first element is well known: the location. The cost of land accounts for up to 15 pct of the investment, and for budget hotels construction costs are 20-25 pct lower than for 4 -and 5-star facilities. Developers are now even starting to look for opportunities in the centres of cities, up until now reserved for the more upmarket players. “There is a c