IMPROVING TRENDS ON THE HOTEL MARKET?TIME TO JOIN?

HSM Szakmai Baráti Kör

Attila Hegedűs MRICS

Partner, Managing Director of BDO Hungary Hotel and Real Estate Services Ltd.

19.02.2013

ESKIMOS VS. FISH(ES)

IS THERE FUTURE FOR SUPPLY ? IS IT NEEDED?

BLACK SOUP – IS THERE A PILL AGAINST HEADACHE?

FUEL FOR GROWTH? WHAT IS MISSING? MAYBE THE

MOTOR?

CAN WE MANAGE THE NUMBERS OR NUMBERS MANAGE US?

WILD, WILD WEST OR WORLD WIDE WEB?

DOES THE WORLD OUTLOOK MEANS MORE THAN A TOOL IN

MICROSOFT?

Main Topics

THE ESKIMOS

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Recent Developments - General

• Slowdown since 2008

• Shrinking pipeline

• Major openings were planned pre-crisis (also inclusive some openings nowadays)

• 2012 new entrants:- Budapest: Park Inn, Buddha Bar, Zenit

- Countryside: ETO Park, Mirage Hévíz

Budapest (42% growth)

• 4- and 5-star sectors perceived as best to develop

• 2- and 3-star categories shrinking

Provinces (34% growth)

• EU Funds, leisure and

conference sector growing

• Wellness and conference hotels are hot – size does not matter

• Anyone can operate a hotel, no need for brands in numbers

THE FISH(ES?) AND THE COST OF FISHING….

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Budapest (53% growth)• Visible milestones in growth – 2001, 2003-2005 and 2009-2012 all with

different attributes (2004,10,11,12 – double digits)

• Still the market is feeding off leisure (both individual and group) demand

• The market is fragile, any international event (911, crisis etc.) results in quick drops – especially in rates

• Lower end of the market is at the mercy of higher hotels’ market share approach

• Rates: only 1% growth in 12 years

Provinces (32% growth)• Supply driven demand with the advent of new hotels (quality) –

domestic travellers tended to opt for domestic holidays

• Travel cheques and recently the SZÉP card are demand drivers

• Historically the provinces trendline was in a year delay to Budapest

• 2012 data shows rebound (5.1% in rates) yet price levels are still on 2006 levels

• Provinces started off from a low base therefore the 83% growth may seem extremely good – reality is much sourer

SUPPLY SNAPSHOT – STATUS QUO

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Budapest Hotel Room Stock 2012

DEMAND SNAPSHOT – A SHOT IN THE HEAD?

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Budapest Hotel Demand 2007 - 2012

- 12%

- 24%

- 20%

2007Net ADR

2012Net ADR

A look back• Budapest, like most of Europe saw growth in H1-

2008 and suffered thenafter

• Prices fell dramatically by 20% after the outbreak of the crisis, and failed to return to pre-crisis levels ever since

• Demand changes lead to market fragility, especially in rates

• Rate development has been diverse as per category> while 5-star rates have been showing promise in 2011 and 2012, the ADR of the 4-star sector is still slightly decreasing due to the fierce competition for market share

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TRADING PERFORMANCE – IF WE CAN CALL IT THAT…. Performance Indicators of Budapest Hotels

YearDEMAND

(guestnights)OCC %

ADR (EUR) Net.

RevPar (EUR) Net.

2007 5 646 857 58,7% 63 39

2008 5 646 857 57,6% 62 36

2009 5 121 522 49,9% 53 26

2010 5 607 444 51,1% 54 28

2011 6 049 196 56,8% 54 31

2012 6 897 168

57,4% 51 29

Source: KSH, Hungarian National Statistical OfficePerformance Indicators• Steady growth of ADR until 2007 ,

followed by sharp decrease especially in 2009

• Rate softening/stagnation continued in 2010 albeit visible demand growth

• 2011 > a year of stagnation in ADR, slight improvement in RevPar

• 2012 suggests that 5-star sector is getting somewhat stronger in realised rates- A possible result of tougher rate policies in

the category

Operator Profiling

•International operators still wishing to land, expand or return to Budapest

•Large international companies management agreements

- seldom with some guarantees

•Small companies’ tool to grow lease

- yet the question is if the project and the market justifies a lease income that is expected by the developer

•Long-time players protecting their markets as opposed to massive expansion

•There is a niche market characterised by small, private hotels run individually trying to exploit the opportunities of the online markets – less at the mercy of cheap groups

•Very little interest from international players to enter the provinces

Developer Profiling

•Market is still characterised by individual deals and opportunistic transactions as opposed to major funds buying up portfolios or multiple assets (unless there are packaged deals with other cities)

•There are still parties out looking for quick buys and hot deals, however most current owners are still holding their investment

•Own and operate: Spanish hotel companies have bought substantial RE in Budapest

•Provinces: Hungarians only – see comment above

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FUTURE SUPPLY

Is there room for more players?

• Limited pipeline of hotels – as the market recovers those who offer better quality than competitors could maximise profits and values

o In 2012 – about 4-5 hotels opened in Budapest (of which Mellow Mood alone 3 hotels)

o Little if any activities in the provinces – ETO Park (after delays) Four Points (Mercedes impact?)

o EU Fund programme

• Though the market is fragile and profits are thin, there is some cash flow in the hotel scene

o Operators have employed and still maintain strong control over costs

o Whatever has been possible to outsource it has been

o Apart from the low periods when CF balancing is an issue, hotels can produce stable cash flow – yet it is always a questionmark if it is sufficient to cover bank financing eventually return expectations

• Once growth will be sustainable the hotel market is anticipated to see some activities, yet all will be subject to see how 2013’s main season towards mid summer performs

o We believe that for the right priced developments, good products in a good location upon sustained demand growth and upturn in rates there will be a road to succeed

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FUTURE SUPPLY

• Insufficient Hotel EBITDAS did not sustain loan repayments, solution from banks:

- Take the asset and become Owner

o Appoint new management – is there a willing lessee or open book policy

o Keep the previous owner/manager – appoint an asset manager

- Goal: Transparent operation

• Restructuring the loan – very few examples exist

- Bank becoming a co-owner for a certain period – maximum control

- Payment period releases – pay as much as you can

• Worst, but existing solution – close the hotel

• All above are evidences

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AND COMES THE BANK – THE BLACK SOUP SIR…..

Hotel is for sale and who is buying?

•It is rather an opportunistic than a hot market

o Largest deals – Four Seasons and Le Meridien – both trophy asset deals

o The above were long term on the market for sale

•On the basis of rumoured transaction prices: difficult to justify a sound and applicable multiple

•Little transaction volume (and not only in this Budapest is similar to Prague – rebound in demand, soft rates, small hotel openings and seldom transactions)

•Long term thinking from buyers – since there is no visible return beyond 12-15 years, the latter figure especially for large and upper end developments

o The driver could be sustained cash flow vs. offices where vacancies and potentially non paying tenants could be a headache

•Yield scissor between office and hotels could be closing – hotels can and do deliver cash-flow

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TRANSACTION MARKETS

BC:

• Strong GOP levels in Budapest – even full service hotels did above 45%, limited service properties could have reached around 60%

• Predictable GOP in the provinces – high 30s (especially in hotels with large water facilities)

AC:

• Everyone tries to manage the numbers – though some are managed by the numbers…..

• Hoteliers have become cost cutters and optimisers – staff, suppliers, managements – slogan: Cluster if you can (except individual hotels…

• Outsource, outsource (except the Provinces where this word does not exist)

• Budapest – GOP levels falling to the region of 35-40% at the better properties

• Provinces – 20-25% is a great number

Everyone’s fear or reality:

• Drop in revenues, increase in cost and shrinking margin could not help the high CHF rate

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MANAGING NUMBERS OR…..

Is there a bright side?

•A conference centre would do us good – there is a place on the map waiting for Budapest

•Diverse offerings in the Hungarian provinces – yet domestic demand will remain the fuel for growth

•Promotion, promotion – We have a beautiful destination

•Life after MALÉV – will someone raise the flag?

•Airport – new airlines want to come – What about landing fees?

•Hotels do need to cooperate – Nothing is easier than undercut no redline watch in place

•The market shows recovery, there is rebound BUT the times of bonfires is still ahead…..

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FUEL FOR GROWTH… IS THERE A MOTOR ANYWAY?

THE MEANING OF WWW…..

• A dynamically growing online sector despite the crisis – corporate and FIT bookings primarily

• A growth of 248% on the online market (nearly 770 thousand guest nights in 2010)

• The significance of OTAs (620 thousand guest nights in 2010)

• Big TOs also on this market

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BUDAPEST COUNTRYSIDE

• In 2010, 35% (2,5-2,7 million) of the total guest nights in 3-5 star hotels were booked online

• A yearly average growth of 20%, outstanding growth in the 4 – 5 star and wellness segments

• As opposed to the nearly stagnating total number of guest nights, a 42.2% growth in online guest nights

KILLING ME SOFTLY

Adverstised as a community tool – yet it can be a

lethal injection for an unfamiliar and naive user (hotel)

Coupon pages do agressive marketing

Customers will develop loyalty not to the hotels but

to the pages

Coupon pages build on sales and volumes

OUTLOOK• An increased emphasis on online marketing and sales

• Cost efficient operation

• Service level and guest attention shall be kept high

• Still hotels can generate cash flow – seldom to see guests leaving without payment

• Patience from owner, operator and financiers

• Some of our neighbours (Slovakia, Romania, Serbia, Ukraine even Poland) still do not have adequate hotel facilities – especially in the wellness segment

• As for Budapest, there is volume and one has to believe that quantity kicks into quality after a certain point

• Budapest: a double digit demand growth is ambitious but likely to soften

• Provinces: marginal demand evolutiuon if any

• Prices: at best stagnation

• AND UNTIL: PROMOTION, BRAND, AWARENESS and so on…..

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More information:

www.bdonline.hu or www.bdo.hu

Thank you for your

attention!

Attila Hegedűs

attila.hegedus@bdo.hu

+36-20-9-264-227