Hungary’s hotel market has shown modest growth in the last five years, with demand increasing annually at an average of 4.5%. In 2007, Hungarian hotels registered an increase of 40% in domestic guest nights compared to five years earlier. At the same time, the number of foreign guests per night increased by 8%. Hotels have managed to improve their occupancy rates in recent years with hotel prices remaining stable due to strong competition from new players, particularly in Budapest. Furthermore, two recent external factors have impacted the profitability of hotels: The high VAT rate (which has risen from 12% to 20% between 2003 and 2006) and the strength of the Hungarian forint (as the majority of the hotels rely on foreign business).
BUDAPEST'S IMAGE
For many years Budapest attracted the majority of the hotel market’s investments. With a hotel stock that lagged a bit behind Vienna and Prague (especially in terms of quality), Budapest has always been on major international hotel brands’ radar. This has contributed to the increase in quality and standards of the hotel supply over the years. With a good number of the major brands present, it’s now in fashion to development smaller, boutique and design hotels. Contrary to the idea of luxury and fashion, the city is also seeing an increase of budget hotels too.
By the end of 2010 (when the current hotel boom is likely to come to an end), Budapest will be host to nearly 20,000 hotel rooms, including another 3,000 bedrooms in the pipeline. By offering an extensive choice of brands, services and products, Budapest is finally reaching maturity in terms of diversity and the quality of its hotel stock and is finally offering a supply that meets Western European standards.
NEW TRENDS
One notable opportunity for hotel investors is the development of branded residences, accommodation that serves as part of a mixed-use development which includes a hotel plus other facilities. Branded residences are real-estate developments carrying hotel brands names like Starwood, Marriott or Ritz-Carlton. Although branded residences are a trend in Western Europe and in America, they have not yet reached the Hungarian market. Branded residences can add a significant premium to an investment, attracting high-end buyers and helping to finance the hotel (which is usually branded by the same hotel operator as well). This promising market has proved profitable and efficient both for the investor and the hotel operator.
With the supply of hotels in Budapest reaching its peak, developers that have already invested in Budapest are beginning to look at investment opportunities in lesser Hungarian cities. While budget hotels are the focus in cities such as Győr, Pécs and Debrecen, mixed-use developments are gaining ground in the Lake Balaton region and throughout the Hungarian countryside.
Not only in Hungary but elsewhere in Europe, the current trend has swung toward the development of integrated leisure developments including hotel, spa, wellness, golf and sometimes residential real-estate. The ability to attract demand in different niches, offering vast product options, is greater with these types of developments - especially in cities where seasonality is the biggest issue in terms of maintaining high occupancy rates for a hotel.
I believe that opportunities do exist for developers who aim to invest in the hotel industry. However, the success of a project inevitably depends on location, concept, positioning and branding.
Marnix Von Bartheld, Senior Manager, Real Estate, Leisure and Tourism, KPMG in Hungary
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