Eastern Europe development on conversions growth spurt
Eastern Europe development on conversions growth spurt
15 OCTOBER 2020 7:55 AM

Hotel-chain development teams are busier than ever despite the pandemic devastating demand, as independents and small networks rush to seek the comfort of scale, loyalty and other brand benefits.

TALLINN, Estonia—The large hotel firms in Europe can sense network growth—even a record-year increase in 2020—but it is nearly all conversions.

Speaking at a panel on “Development” at the New Baltic Hospitality Forum, developers said optimism and opportunity abound in Eastern Europe.

The pipeline is growing as firms seem to balance their portfolios in terms of business model.

Leases are under strain, but will not be forever, panelists said.

Moderator Kimmo Virtanen, director for Scandinavia, Russia and Baltic States at business advisory Christie & Co., said the Baltics region has a fair August, revenue per available down for its hotels is down year over year.

Hotels in Tallinn, the capital of Estonia, reported a 74% RevPAR decline. In Riga, the capital of Latvia, RevPAR was down 73%; and hotels in Lithuania’s capital Vilnius reported a 66% year-over-year decline.

The three capitals enjoy a good degree of domestic and regional travel and perhaps won’t be as affected by overall performance slumps as much as Barcelona and London, he said.

The three Baltic countries also are well-versed in social-distancing IT use, he said, noting that Estonia is the birthplace of such technology as Skype.

David Jenkins, VP of development at Radisson Hotel Group, said the current situation must be considered from the viewpoint of both operations and development.

He said hotel companies should view the slump as a good time to fuel growth and seize opportunity.

“We don’t stop signing; we don’t stop developing through a crisis,” he said. “That’s the time to grow, time to expand. We are launching a new brand this week, which will be a conversion brand, an affiliation brand. We are looking at ways to take over hotels that might be in trouble. We are looking at ways to expand into geographies where we are not,” he said.

Radisson has always been successful during crises in relating to independents and independent chains the benefits of being with a brand, he said.

“Operationally, (2020) is challenging but not fatal,” he said. “We’re building the pipeline of the future.”

Frank Reul, VP of development for Eastern Europe at Accor, said growth is the only way to cater to the explosion of travel demand that will occur once the hygiene aspects of COVID-19 are controlled.

Accor is “exceptionally busy,” with 2020 signings being very close to the firm’s record year in 2019, even if the business model has changed, he said.

“There is financing for long-term development, and investors are very confident in the middle and long term,” he said.

Reul said Accor’s 10 conversion brands are well-positioned for the recovery.

“Both in small networks and independent hotels, I think we will grow our best year ever, and I think from the middle of next year … a lot of hotels will be in prime position to benefit,” he added.

Adam Konieczny, development director for Europe at Louvre Hotels Group, said flexibility is key to grow, as is being cognizant of the hurt many owners are feeling and that there is not a lot of capital-expenditure money available.

“From spring next year, I think the banks will be more open to finance,” he added.

Konieczny said he development costs are going down in the region by as much as 15%.

Eating the small
Reul doesn’t expect large-scale mergers and acquisitions, but said small and medium M&A deals are likely, which will increasingly emphasize the importance of being part of a portfolio with scale.

“In my region, in every country, you have a number of operators with 10 or 20 properties who are really wanting to stay independent but also at the same time wanting to link with a powerful network, with a loyalty scheme,” he said.

He said some local investors have leases that they cannot now serve and which are being converted to management agreements. “This is something we have been busy with,” he said.

Jenkins added “conversion opportunities to gain scale are clearly identifiable.”

The large hotel companies will remain as they are because their values are so high, Reul said.

Konieczny said Louvre is finalizing one small M&A deal.

The cyclical nature of the industry always has produced the need for a good balance of leases, management agreements and franchises, Jenkins said.

“As a company, you go through waves of leasing a little bit more, then you have a crisis, and you pull back, then you reconsider, then you go a little more management and franchise, then things get better, a bit more lease, key cities,” he said.

“Development strategies are never one direction forever. You’re moving, trying to anticipate where the market will go. … We might have been a little more bullish on leases a few years ago, but now with COVID-19, revisiting lease agreement, revisiting force majeure on your management agreements, no guarantees perhaps. You need to work with the times,” he added.

Accor does not discuss leases, but in conversations with investors, investors said they should have gone with a management agreement, not a lease, as in the end the risk is the same, certainly if a hotel is closed, Reul said.

Konieczny added he has noticed more management contracts coming to markets, such as the Baltic countries, perhaps with tweaks such as gross-operating-profit performance agreements.

Jenkins said demand for leases has grown in the region and in markets such as Hungary, but he will not touch that model in those geographies and does not understand what drives this demand, whether it’s banks, operators or developers.

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