Despite Challenges, Budapest Remains Popular Hotel Development, Investment Location

Construction

The listed Drechsler Palace on Andrássy út, which is undergoing restoration and renovation and is due to be reborn as the W Hotel Budapest this year.

Budapest was the third most sought-after CEE destination based on a survey of hotel operators, Cushman & Wakefield says in revealing its “Outlook 2022 Hungary” report.

“The impact of the COVID-19 pandemic on the hospitality sector was deep and sudden across all markets and hotel tiers. Nonetheless, while markets prove their ability to recover, investors, operators, and other industry stakeholders remain confident about a positive market recovery,” the consultancy reports.

“Retrospectively, Budapest is demonstrating strong capabilities for recovery, currently being the best performing market among other CEE capitals. At the same time, operators and investors continue to be highly interested in establishing a footprint and/or further growing their market share in Budapest due to the city’s healthy market fundamentals entering COVID-19,” Cushman & Wakefield says.

According to the report, there are about 4,200 rooms in the Budapest pipeline, including 320 rooms under refurbishment that are expected to open by 2024. This represents a 16.7% supply growth over the next three years. However, development challenges could cause delays in hotel openings. Further, several online short-term rental platforms are rivaling hotels.

In 2021, Budapest had the second-best RevPAR (revenue per available room) improvement rate in CEE at plus 61%, above the European average. The measurement is calculated by multiplying a hotel room rate by its occupation rate. 

Questions remain as to when there will be a full recovery amid more uncertainty due to the war in Ukraine.

Uncertainty Looms

“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,” comments Péter Takács, partner at Newmark VLK Hungary.

“I do not think anyone can tell when the recovery is finally going to happen. Hotels have learned to operate in the leanest possible way during the last two years, so I am sure they will be able to adapt again. Most hotels could survive the last two years due to bank moratoria; the question is how long they can survive if and when they have to start paying their loan obligations,” he warns.

“With bank moratoria, you could get by with 25-30% occupancy, but with loan obligations looming, you need at least 50% occupancy and increasing average rates; not an easy task these days,” Takács adds.

Officially, there are approximately 4,000 rooms in the pipeline for 2022, which seems an impressive figure; however, owners’ decisions and construction delays will probably mean the final number is much lower. He expects around 2,500 rooms to be delivered, with an even split between Budapest and the rest of the country.

Cushman & Wakefield says the expectation is still that the hotel investment market for Budapest will pick up during 2022. It is currently involved in several transactions that are expected to close this year.

“The risk for Budapest hotels now is that, with the war in Ukraine, travelers tend to avoid an entire region for leisure and business,” Takács explains.

“The risk for countryside hotels is the inflation and the domestic economic measures that are looming on the horizon and their potential impact on local demand, which is a key driver of these properties, not to mention the potential long-term loss of Russian and Ukrainian business to health and medical resorts,” he notes.

“Just when we seemed to be leaving COVID behind and getting on the way to recovery, along comes a new uncertainty. In this situation, only the fittest will survive,” Takács warns.

This article was first published in the Budapest Business Journal print issue of April 8, 2022.

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