Despite the perceived complexities of hotel development in comparison with the more established market sectors such as office and industrial, where debt finance and required income can be achieved through long-term leases, hotels and hospitality are successfully attracting developers and investors from other fields.
In a reflection of the popularity of the sector, investors are concluding long-term leases or franchise partnerships with leading branded international hotel operators, who provide the expertise needed for the day-to-day operation of the assets, leaving the owners to concentrate on asset management.
Although several hotel projects have been put on hold or are subject to delays due to the complexities of the development process, as well as concerns over longer-term guest demand and rising construction, operational and financing costs, there is still a significant hotel pipeline with a number of international brands entering the market. Analysts report that the Hungarian hospitality industry is looking to market itself to a more up-scale profile of tourists.
“Budapest is approaching pre-pandemic visitor numbers; with tourism rebounding strongly, 2024 is promising to achieve nearly 90% of 2019 levels,” comments Péter Takács, a partner at Newmark VLK Hungary. “International arrivals are supported by a renewed focus on leisure and business travel, alongside an increasing number of direct flight connections. There is still room for growth, though, both in revenues and especially profitability,” he says.
“Budapest has approximately 2,500 hotel rooms in the pipeline. I would say it is healthy. Outside Budapest is a slower, more careful market due to negative sentiment on local purchasing power for domestic stays,” Takács notes. “International leisure travelers could be attracted by well-known brands to countryside spa and wellness resorts, but we do not see enough brand proliferation and unique value propositions to trigger significant foreign demand,” he adds.
Consultancy CBRE sees a strong pipeline for both Budapest and Prague in the CE region. “Based on our pipeline, hotel stock will be expanded with circa 1,750 rooms in 2024,” it reports.
As an increasingly attractive development option, the hotel market has drawn in developers such as Wing and CPI Property Group, who operate across various property sectors. Wing, for example, has delivered the 12,000 sqm Tribe Hotel within its 42,000 sqm Liberty office development in Budapest.
“As one of the leading real estate firms in Hungary and the region, we are committed to projects that represent high architectural quality and create long-term value. The Liberty reflects our ambition to create a dual-branded hotel with a wide range of services and an outstanding guest experience as part of an internationally acclaimed mixed-use development,” comments Noah Steinberg, chairman and CEO of Wing.
Wing is also constructing a second hotel at Budapest Ferenc Liszt International Airport in cooperation with the airport operators Budapest Airport. The new 167-room Tribe Hotel is being built next to the existing Ibis Styles Budapest Airport Hotel, also developed by Wing and opened in 2018.
In a new mid-level Budapest project, IHG Hotels & Resorts has announced its first 170-room Holiday Inn & Suites property in Europe with the signing of Holiday Inn & Suites Budapest Centrale. Set to open in late 2026, within a new mixed-use development located directly above the Puskás Ferenc Stadion metro station and intermodal transport hub. The project’s developers, Chain Bridge Ventures, and hotel lease operators, Mogotel Hotel Group, have entered into a long-term franchise agreement with IHG.
A notable trend in Budapest, with its UNESCO-protected historical center, has been for the purchase and redevelopment of listed Central European buildings into hotels in prominent heritage-protected locations, giving the buildings a new use-value while at the same time preserving the turn-of-the-century feel of the historic center of the city.
The latest such renovation is the luxury, 127-room Kimpton BEM Budapest hotel by InterContinental Hotel Group, with interior design by Marcel Wanders.
“The redevelopment of historic buildings offers a unique branding opportunity and capitalizes on Budapest’s rich cultural heritage, appealing to all levels of tourism demand,” says Takács. “However, such projects often face regulatory hurdles and higher renovation costs due to preservation requirements; usually, there is a constraint on the number of buildable rooms. A new building is just more efficient; on the other hand, empty plots and demolishable buildings in good locations are hard to find. That is why we will see more conversions,” he argues.
Central and Eastern European hotel assets are significantly behind those in Western Europe with regard to ESG issues, as investors in CEE still tend to be private individuals with less developed environmental, social and governance strategies. As of 2023, only about 2% of hotels were sustainability accredited in Budapest, according to Cushman & Wakefield. Hungary had five accredited hotels.
ESG features are crucial for larger institutional and branded hospitality investments. They not only align with existing corporate values but also attract a more conscientious clientele, driving long-term business. For instance, hotels that cater to multiple market segments can benefit as MICE organizers, leisure groups, travel agents, and corporate clients increasingly prefer hotels with strong ESG practices. Nevertheless, for smaller standalone properties, the process will be slower until they begin to prioritize, says Takács.
“I think it is more complex and difficult to start an office project today than a hotel one. When you build an office building, you take a broader demand profile for your location (unless it is built-to-suit), build your building and hope to attract tenants, which, in a market such as today, can take quite a long time,” he explains.
“A hotel development takes longer in the preparation phase because you need to find your market niche and service matrix, based on which you secure the operator. But once you have that in place, it goes quickly. You build it, hand it over, and you are all set for at least 10 years,” Takács says.
“Location remains critical, along with adaptability to market shifts and guest preferences. Whether it is a hotel management agreement, a lease, or a hybrid model, it has to be a win-win. For this, you need to find the right accommodation and service matrix and the right brand and operator for your particular location and building,” he concludes.
This article was first published in the Budapest Business Journal print issue of October 18, 2024.
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