Prime assets propel investors’ appetite for Budapest
 
Prime assets propel investors’ appetite for Budapest
01 MAY 2019 7:50 AM

As hotel performance improves and competition intensifies, developers and operators are keen to come to Budapest, fueling investor interest. However, business model and labor shortage challenges remain.

REPORT FROM BUDAPEST—After some tough years following the Great Recession, Budapest’s tourism sector has gone from strength to strength, sources said.

Improvements have come about due to a combination of better air connectivity, government investment and continued affordability.

According to CBRE Hotels, Budapest’s upscale hotels generated gross operating profit per room of approximately €44 ($49.02), but by 2018 that figure had shot up to €64 ($71.30).

Stephan Interthal, GM of the Kempinski Hotel Corvinus Budapest, has witnessed this transformation.

“When I came here 20 years ago, it was a completely different environment and city, and the last five years have been very successful with ever growing numbers year on year,” Interthal said.

“The hotel development industry has found Hungary on the map, and in the last four years we have increased our turnover by about 40% and our GOPs at the same ratios,” he said.

Increasing investor interest
Competition likely will only continue to intensify, sources added.

“Developers … operators are increasingly interested in coming to Budapest, (and) this has had a big impact on investor interest,” said Laurent Lassier, director and head of hotels at CBRE Hotels Hungary.

Marius Gomola, managing director of Horwath HTL Hungary, agreed.

“All of a sudden, all the international brands want to be here because they see a growth in the market. The fact that Budapest was sort of overlooked for a five-year period also meant that we had a lot of available real estate in excellent locations and that prices were down, which has fueled interest from international investors,” Gomola said.

The most significant recent transaction has been Starwood Capital’s €75 million ($83.56 million) purchase in November 2017 of the Sofitel Chain Bridge from Orbis Hotel Group, which is to undergo a €16 million ($17.83 million) renovation. December 2018 also saw the purchase of the landmark Buddha Bar Hotel by Qatari investor Nabeel Ali bin Ali Al Meslemani.

According to CBRE Hotels, Hungary’s pipeline consists of 21 three- to five-star hotels under construction. The majority are in Budapest, Hungary’s capital, with a further 15 in the planning stage.

Iconic renovations
One of Budapest’s key attractions is that there remain opportunities in excellent city-center locations, sources said. But developers have to be prepared to work within a small footprint and put the regulatory and restoration legwork in, they added.

Martin Thom, senior director of CBRE Hotels Germany & Central and Eastern Europe, remembered doing some feasibility work back in 2007 on one of the most highly-anticipated upcoming openings, the redevelopment of the iconic Drechsler Palace.

“This tells you how long people have had a view to turning it into a luxury hotel,” Thom said. He added the building now is scheduled to deliver 162 rooms as the W Hotel Budapest by 2022.

Another restoration project, the Párisi Udvar, is being developed by Hyatt and will open as part of its Unbound Collection in mid-2019.

“This is one of those landmark buildings (that) I could simply not let go. I still remember the goose bumps when I first walked into the dimly lit passage of this building back in 1985,” said Takuya Aoyama, VP of real estate and development, Europe, Asia and Middle East, at Hyatt International.

Aoyama had to wait, as it was not until 2016 that Hyatt felt it had a brand that would work for the property.

“We started a dialogue in 2015, but not having a so-called soft brand or collection brand really made life difficult,” Aoyama said. “When we introduced the Unbound Collection, I went back to the owner, and they liked the idea.”

One of the clear gaps in the Budapest hotel market, according to some sources, is a business convention center. But Kempinski’s Interthal believes what’s really missing are lifestyle brands.

“If I was to develop a hotel tomorrow in Budapest, I would develop a young, sexy, contemporary, four-star brand. There’s a huge opportunity there. In the four-star segment, we have nothing new here,” Interthal said.

Thom also sees opportunities at the budget end.

“From a developer’s perspective, a lot of the supply we see coming into the city is in the four-star-plus category. The level and quality of the branded economy supply is relatively low,” he said.

Challenges
Hungary is popular.

According to the Hungarian Convention Bureau, almost 31 million roomnights were sold in 2018, an increase of more than 1 million over 2017.

The country, though, often hits the headlines due to its Prime Minister Viktor Orbán, who many consider hard-liner.

“What is interesting is that all those news headlines, which are not necessarily very flattering about the country, did not negatively affect foreign visitation to Hungary,” Aoyama said.

Interthal agreed.

“I’m much more concerned about Brexit. The UK is our third-biggest market here, and if it softens, we will feel it,” he said.

Other development challenges include the business model, increasingly driven by leases and franchises, the relatively low average daily rate in the market and ambivalence to the sector from domestic real-estate investors.

Attracting and retaining talent is an additional concern.

“Many capital cities in the region have nearly full employment and, on top of it, young and ambitious people tend to move west in search of better paying opportunities,” Aoyama said.

“We have to start preparing ourselves for a profitability level that is comparable to Western Europe. That’s a message that is difficult to swallow, but it is going to happen,” he added.

Horwath HTL’s Gomola said everyone needs to come to the market with an open mind.

“Real-estate developers are going to ask for a lease, and a lot of companies don’t like that, but sometimes you just have to have the tenacity and patience to look at whether there are some other forms of financial comfort to give. … If you explain that with a lease there’s a lot of money left on the table, maybe you can convince them of another arrangement,” he said.

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