Room for rooms?

Mladen Petrov

The credit crunch has seriously impacted the hotel real estate market. In times when the banks are counting every penny, what will the future bring for the CEE hotel sector in 2009? At the moment, there seems to be little consensus

When was the last time when you checked in at a luxurious, top notch 5-star hotel in Warsaw? Can’t remember? Let’s try another city: Budapest, Bucharest, Sofia? The same answer. While the capitals of the CEE countries were getting ready for the next stage of the hotel market growth – that of high-end luxury hotels – the credit crunch started to bite. Hotel developers are now changing their strategy, putting expensive development plans on hold. In December Varsovians found out that a long anticipated investment – a luxury hotel on the historic Próżna Street in the very heart of Warsaw – will never happen. The reason was simple. Warimpex Finanz- Und Beteiligungs, the owner of two of the pre-war buildings designated for general renovation, has decided to go for an office building project instead. Given the extremely low vacancy rate of office buildings in the CBD (around 1 pct) on the one hand, and the uncertainty on the hotel market on the other, the decision of the investor seems natural. At the other end, banks are being very cautious about the pipeline of upcoming hotel projects across the region, and still regard hotel development as rather risky. Is this how the whole of 2009 is going to look for the hospitality market?

Eastern gainers and losers

In the first half of 2008, the CEE region was still perceived as offering strong income growth potential from hotel operations. Although it could be argued that this is still the case relative to some other markets, investors are clearly seeing some impact on trading performance as a number of global economies enter recession. This has an effect on hotel performance too, as overseas guests tend to form a large proportion of the demand for many CEE hotels, especially in Poland, the Czech Republic and Hungary.

In the CIS region, land and development costs, the observed flight to retail and offices, and a general lack of exposure to international hotel operators have prevented the hotel sector from developing. In Russia, the majority of hotel real estate growth has occurred in Moscow and St Petersburg, although investment plans have also been announced and carried out in large secondary cities such as Novosibirsk, Yekaterinburg and the Sochi area. Moscow experienced a notable 20 pct increase in quality supply between 2005 and 2008 and St Petersburg reported a 10 pct increase over the same period.

In 2007, Hilton Hotels Corporation announced it is planning to open, in cooperation with London & Regional Properties, 25 new hotels in Russia, which has been recognized as one of the company’s key strategic development markets. The first Hilton hotel in Russia, the Hilton Moscow Leningradskaya, was opened in 2008.  Over the next ten years, Hilton plans to open 70 Hilton Family hotels across Russia, focusing not only on Moscow and St Petersburg, but also actively looking at opportunities in key regional cities. Over the last three years operators such as Swissotel, Accor, Kempinski, Rezidor, IHG, Marriott and MaMaison have also entered the Russian market.

Moving to the provinces

The big players on the hotel market are also confident about the growth of the CEE hotel market, especially in the large secondary cities in Poland, the Czech Republic, Romania and Hungary. Hotel operator Accor, for example, is looking for local partners to develop domestic chains of budget/economy hotels such as Ibis and Etap in these countries. In Poland, Louvre Hotels and Warimpex are to develop four hotels under the Premiere Classe and Campanile brand in Wrocław, Bydgoszcz and Zielona Góra. Similar hotel developments are also being considered in Gdańsk, Katowice, Poznań, Kraków and Rzeszów. Obviously, no matter what the current conditions may be, investors are scanning the CEE region for more growth opportunities.

Ukraine is no exception. The country has been on the threshold of a development boom for some time, with a buoyant supply pipeline and ambitious expansion plans announced by international companies for the next decade, despite the fact that, together with Russia, it still remains a very difficult place to do business. In 2007 the first Hyatt Regency hotel was opened in Kyiv, while in 2005 Rezidor entered the city with a Radisson SAS brand. Similar to Russia, the hotel development pipeline is now seeing a slowdown and postponement of delivery dates. Irina Maksymiva, CIS research associate with Jones Lang LaSalle Hotels in Moscow, feels that: “In terms of performance expectations, markets such as Moscow or Kyiv will keep attracting demand due to their capital status, and given their business profile and a largely undersupplied room stock they are better placed in their countries to weather the storm.” According to Irina Maksymiva, the Russian regions, which lack a significant share of international demand, will continue to attract domestic visitors, but in reduced numbers. Thus, according to JLL’s analysts, the first victim of the crisis so far appears to be St Petersburg with its highly sensitive leisure demand.

The view of the road ahead

Increases in the revenues of the hotel market in a particular country tend to be closely correlated with GDP growth, and it is here that the region shows the greatest potential over Western European markets. In the current environment, economic forecasts change almost weekly, but recent data from EU continues to support the view that in terms of relative growth, the ten main economies in the CEE region, from a hotel perspective, should still outperform the Euro Zone, with positive real GDP growth forecast in all except Hungary and Ukraine.

Whilst the trend towards growth in hotel incomes has been prevalent throughout the region in the last few years, it has not been universal. Based on the RevPAR (revenue per available room) performance for 2008, it was only Warsaw, Moscow and St Petersburg that achieved positive growth. A number of cities, which for a couple of years in a row have been demonstrating consistently high RevPAR growth, are now facing a RevPAR decline. The long list of such CEE cities includes Prague (20 pct decrease), Bratislava and Kraków with a more than 10 pct decline and Prague (a fall of 9 pct). Regarding the occupancy rate, Warsaw was one of the few CEE cities that managed to maintain the same level of occupancy (around 68 pct) over the last year (September 2007-September 2008). Bucharest saw an 11 pct drop in the occupancy rate (65 pct), while occupancy in Prague was 7 pct down to 66.5 pct. Over the last year Sofia saw a decrease of 4.5 pct to 54.8 pct.

According to JLL, in 2009 investors will primarily be focusing on those opportunities either where income is fixed or at least guaranteed. In these markets, where significant declines in performance are occurring, there is currently a mismatch between the pricing expectations of buyers, being focused on where trading performance is expected to be in the future, and sellers, who on the other hand are emphasizing the historic performance of the asset.  In these locations transactions will only start to occur when this ‘price gap’ starts to narrow. “The price gap exists in all markets at the moment because of uncertainty caused by a lack of comparable evidence of how limited the available funding is and where prices are expected to get to.  In markets where trading performance is falling, the uncertainty is heightened,” explains Alister McCutchion, head of the CEE Hotels team at JLL.

“At times like these, the question of the day is: are there investors out there with an appetite for hotel investment? Our view is that fortune will favour the brave investors, but most investors will wait for the market to bottom out,” believes Saar Sharon, head of the CEE Capital markets team at Jones Lang LaSalle Hotels. Institutional investors’ demand remains strong for hotels with fixed leased incomes or income guarantees in gateway cities and markets that are set for quick recovery.

Around the CEE region in 2008, a few sale transactions were finalized. Delta Real Estate (NGBP Properties) acquired Hotel Continental in Belgrade for USD 226 mln, Central European Estates BV became the new owner of the Le Meridien in Budapest for USD 89.4, while CA Immo purchased Diplomat Center Plzeň in the Czech Republic for USD 48.4 mln. WenaasGruppen bought the Park Inn hotel in Yekaterinburg for USD 35.6