Economic and Financial Concerns Impact Hotel Sector

Hotels

The restored Dreschler Palace is due to open as a W Hotel, part of Marriott International.

Although rising tourism and occupancy rates of above 80% saw an investment boom up to 2020, the hotel and hospitality sectors were hit hard by COVID. Now comes the impact of the war in Ukraine on tourism and travel in the region, rising construction, energy and labor costs, growing inflation and interest rates, and increasingly stringent ESG expectations for hotel owners and operators.

When Budapest could return to its pre-pandemic levels of 12 million annual visitors remains to be seen. While individual tourists have returned, notably from Europe, business travel has not followed suit amid concerns over the environmental impact of air travel and the ability to conduct business online.

Significant questions remain as to whether business travel will ever return to pre-pandemic levels. The MICE (meetings, incentives, conferences, and exhibitions) sector is expected to recover, but slowly; once postponed, large-scale events take a long time to re-arrange.

Despite the perceived complexities of hotel projects compared to, say, office or industrial, the Central European region has successfully attracted developers and investors from more traditional commercial property sectors seeking long-term partnerships with experienced hotel operators who can provide the expertise needed for the day-to-day operation of the projects.

Many hotel projects are thus at various stages of preparation or construction in CEE, although schedules are slipping in the current uncertain market environment. Indeed, several projects have been put on hold with no new delivery dates announced.

However, the pipeline remains potentially robust, and discussions on new hotel investment are ongoing. According to the hotel, tourism and leisure consultancy specialists Horwath HTL Hungary, the total pipeline for 2022-2026 is put at about 32 hotels with around 4,420 rooms.

Cushman & Wakefield lists several notable hotel projects in Budapest. A recent delivery is the upper mid-scale 123-room A52 Hotel Octogon in the capital’s historic center, developed by CD Hungary and operated by the Continental Group.

Also in the historic center, a Hungarian developer is due to open the luxury 71-room Radisson Collection Basilica opposite St. Stephen’s Basilica. Other developments include Eurostars’ five-star, 107-room Aurea Ana Palace Hotel and the five-star 100-room Grand Hotel Savoya by Austria’s EST Hotels.

In the mid-range, CPI Hotels is working on the 3-star M4 Hotel in central District V, while the Insider Hotel by Three Corners Hotels will deliver 75 4-star rooms.

A Good Location

Péter Takács, a partner at Newmark VLK Hungary, argues that Budapest remains a good hotel location, and there are opportunities for developers and investors for projects with strong covenants.

“When COVID started two years ago, we were among those that predicted that the recovery would take three to four years. Without the war in Ukraine, this would likely have been possible, but now everything is uncertain again. I do not think anyone can tell when the recovery is finally going to happen,” he comments.

CEE hotel yields are difficult to estimate in the current environment, given the limited number of transactions concluded. Further, the hotel market has traditionally been less liquid than, for example, the office sector; hotel investors tend to be more specific in their requirements and deals can be protracted.

Investment transactions concluded in the last few years include two in 2021: the purchase of the 121-key D8 Hotel and the 50-room Iberostar Budapest by the Hungarian investor and hotel management BDPST Group.

Wing has concluded an agreement with Accor for a 12,000 sqm hotel within its 42,0000 sqm Liberty office development complex in District IX, an emerging business and sports arena district. As previously reported by the Budapest Business Journal, this will be a dual-branded hotel with Ibis and Tribe each operating half of the 332 rooms. The complex is due to be completed in 2023.  

In the first half of 2022, EUR 21.5 million in hotel transactions involving European capital was completed, with the purchase of two development sites comprising a projected 502 rooms, according to Cushman & Wakefield.

Potential Bottlenecks

“While Budapest continues to enjoy strong attention from both international and local buyers, the lack of quality assets in decent locations and limitations in the financing market may slow down the transaction volume,” says the global real estate services firm Cushman & Wakefield.

“The cost of labor has increased and energy [has risen] by as much as five or six times. Hotels that have not updated their energy systems will be in a difficult position. There are delays, fewer planned projects, and banks are offering less favorable financing even for quality projects in good locations,” says Newmark VLK’s Takács.

“Hotels in the countryside will suffer as their guests tend to be from Hungary and the domestic economy has been hit by inflation and the weak forint. Most hotels outside Budapest are wellness hotels that require large amounts of energy, and there will be closures and no new development in this sector,” he warns.

As with other real estate and service sectors, ESG and EU Taxonomy rules and adherence to ESG standards are no longer an option but are central to hotel investment.

“Very strict transaction reporting and obligations are coming into force, and the social and governance element of ESG needs to be incorporated into the reporting strata,” comments Barbara Koncz, a partner at PwC Hungary.

This article was first published in the Budapest Business Journal print issue of October 21, 2022.

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