The annual Hotel Investment Conference for CEE & Caucasus attracted more than 300 delegates from over 30 countries to the Kempinski Hotel Budapest on May 30-31 for the first time since January 2020, after a COVID-enforced break.
HOTCO aims to foster investment in hotels and hospitality in the region, including those who do not traditionally regard the sector as an option, according to Marius Gomola, managing director of the hospitality consultancy Horwath HTL Hungary, organizers of the annual event.
From a demand perspective, Budapest could return to pre-pandemic levels at around 12 million annual visitors by next year, according to figures presented at HOTCO by the hospitality consultants STR. As a walk around the historical center of Budapest reveals, individual tourists have returned, notably from Europe. However, Asian tourists are lacking, as are tourist groups.
Further, business travel has not bounced back, with growing concerns over the environmental impact of air travel and the ability to conduct business online, as was proved during the lockdowns. Whether business travel will return to its pre-pandemic levels is a significant question. The MICE (Meetings, Incentives, Conferences and Exhibitions) sector will only recover slowly as large-scale events, once canceled, take a long time to re-arrange.
Despite the perceived complexities of hotel projects, Budapest and Hungary have attracted developers and investors from the more traditional commercial property sectors seeking long-term partnerships with hotel operators for the day-to-day operation of the projects.
A large number of hotel projects are at various stages of preparation or construction process across the country. There are more than 2,000 rooms in a substantial active hotel pipeline across Hungary, according to CBRE. However, given the current environment, the hotel pipeline needs to be revised downwards, with a significant proportion slipping back, according to analysts. Indeed, several projects have been put on hold with no new delivery dates announced. That said, hotel investment discussions are expected to restart.
Horwath HTL has an estimated 2022 pipeline for Budapest of six hotels totaling 490 rooms, while next year, the expectation is 10 hotels constituting 1,474 rooms. The total pipeline between now and 2026 is put at 32 hotels with a total of 4,418 rooms.
Péter Takács, a partner at Newmark VLK Hungary, argues that the pipeline for 2022 stands at 500 rooms for Budapest, mainly in city-center hotels, with a further 700-800 rooms in the countryside, most wellness or thermal hotels. He sees Budapest as an excellent hotel location and says there are good opportunities for developers and investors for projects with strong covenants.
“When COVID started two years ago, we were among those who 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 will finally 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,” he comments.
Hotel yields for Budapest are difficult to estimate in the current environment, with a limited number of transactions concluded. Further, the hotel market is less liquid than, for example, the office sector, as hotel investors tend to be more specific in their requirements.
Hotel yields for Budapest and Prague are put at around 5.5% for trophy assets and 6-7% for others, in the view of many analysts. Takács thinks sellers are looking for 5-6%, although there are no transactions to confirm this. He argues that buyers should complete acquisitions, as the next three years will be critical in the hotel investment market.
As with other real estate and service sectors, ESG and EU Taxonomy rules are setting new financial standards and a shift in the entire economy, according to Mary Gostelow, hotel and travel journalist and commentator. She argues that adherence to ESG standards is no longer an option and is central to hotel investment.
“This will transform the economy, including, for example, land-use and the sourcing of food, and therefore directly impact the hotel industry. The current environment offers distinct opportunities for hotels in the CEE region by attracting custom through the quality of service,” she said.
There is still no standard measurement of sustainability in the hotel industry, according to Attila Radvánszki, director of Horwath HTL.
“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,” commented Barbara Koncz, partner at PWC Hungary.
With rising construction costs, the option of whether to build or buy is an ever more important question for developers and investors.
“It is difficult to convert historic buildings into hotels as these buildings are full of surprises. There is a need to be close to the development partner in order to achieve targeted prices,” concluded Tibor Massányi, managing director of the architects and construction supervisors, DVM group.
This article was first published in the Budapest Business Journal print issue of June 17, 2022.
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