Budapest Attracting Ever More International Hotel Brands

When do you expect a recovery in the hotel market and what occupation rate is necessary for projects to be viable?

“When Covid started two years ago we were among those that predicted that the recovery will take 3-4 years. Without the war in Ukraine this would likely be (would have been) possible but now everything is uncertain again. I don’t think anyone can tell when the recovery is finally going to happen. Hotels have learnt to operate in the leanest possible way during the last two years so I am sure they will be able to adapt again. Most hotels could survive the last two years due to bank moratoria, the question is how long they can survive if and when they have to start paying their loan obligations. With bank moratoria you could get by with 25-30% occupancy but with loan obligations looming you need at least 50% occupancy and increasing average rates – not an easy task these days.” – comments Péter Takács, Partner at Newmark VLK Hungary. 

Where do you put the pipeline for 1. Budapest and 2. the wider Hungary?

PT: Offcially there are approximately 4000 rooms in the pipeline for 2022, which seems a very impressive figure but owners’ decisions and construction delays will probably make the final number much less, we expect around 2500 rooms to be actually delivered, with an even split of 50-50% in Budapest and on the countryside.

What strata of the market is most popular with developers?

PT: In Budapest every investor is still looking for central location and minimum 100 rooms for economies of scale but as there are not a great deal of these available everyone is making some sort of compromise. We see a strong preference from investors and developers for existing buildings that only require rebranding, repositioning or renovation, rather than a fully new construction. The countryside is much less active now due to unavailability of non-refundable grants for hotel developments and this is likely to stay.

What do you see as the most notible projects?

PT: In Budapest we look forward to the completion and opening of the M4 Mamaison because we sold the building to the investor and it is a project with a proven operating model which we believe will do very well in that location, close to the Chain bridge. The Radisson Collection at the Basilica will be notable due to its location and the A52 on Andrássy út as well as the Emerald Downtown suites are another two that we look forward to and the wine region Tokaj is finally getting two new hotels, that is good news.

What changes in the design and management have been brought about by COVID?

PT: We get asked this question a lot. Design-wise in the beginning of Covid there was a big move towards contact-less guest experience but this has quieted down. Design is all about efficiency now on two fronts: put as many heads-in-beds as possible and minimise services that are not vital to a brand concept or are not profit centers. For this you see ground floor areas rented to outside retailers, restaurants rented out or outsourced to local operators.  Staff availability and wages are the biggest challange now for operations so designing a hotel that requires less staff for operations are the winners.

Management changes are most visible in agreements between owners, operators and banks. They all have to get more involved and share more of the risk for a hotel investment to work for all stakeholders these days.

Can the redevelopment of classic buildings continue to contribute to the heritage of Budapest?

PT:Absolutely, and it should be that way, perhaps more of these buildings could take on other functions such as offices and residential buildings to make it a bit more balanced.

Is the permitting process and construction costs deterring developers?

Permitting process not so much, constructions costs absolutely.

How attractive is the hotel sector to developers?

PT: Domestic regional hotels and resorts did quite well during COVID, Budapest suffered the most due to lack of international travellers. As most international investors were keen on Budapest they are obviously more cautious now.

The risk for Budapest hotels now is that with the war in Ukraine travellers tend to avoid an entire region for leisure and business. The risk for countryside hotels is the inflation and the domestic economic measures that are looming on the horizon and their potential impact on local demand – which is a key driver of these properties, not to mention the potential long term loss of Russian and Ukrainiaan business to health and medical resorts. Just when we seemed to leave Covid behind and get on the way to recovery, comes new uncertainty. In this situation only the fittest will survive.

To read the full article please click on the following link: https://bbj.hu/shop/real-estate-review-2022

Opinions differ as to how many planned projects are going ahead in a changing market environment regarding financing, leasing, sustainability, design, and investment. Budapest Business Journal real estate editor Gary J. Morrell spoke with leading actors in the local commercial real estate market about its prospects and the issues impacting development in the various market sectors post-COVID.

We expect a couple of Budapest hotels to trade this year and possibly more in the first half of 2022, but the investor demand we experienced back in 2019 is still far away. Foreign investors are looking for downtown flagship properties, but owners are not forced to sell these at a discount yet. Domestic investors are also actively looking at Budapest but also outside Hungary. Many investors are focusing on resort-type hotels as the next asset class to have in their portfolios as the pandemic has shown that there is traveler demand for these holidays. We see a lot of development activity in the near future. The ex-Buddha Bar hotel is under renovation, W (at the former Ballet Institute building) will open soon, the Autograph project in Dorottya utca is on schedule, and there are plans for Sofitel and Gellért to be fully renovated. But those properties that are in the development phase and where construction has not started are mostly on hold. Owners are trying to figure out what to build and how to operate.

Confirms: Péter Takács / Newmark VLK Hungary

The Budapest Business Journal talks with Péter Takács of Newmark VLK Hungary a about the state of hotel development in Hungary. A partner at the commercial real estate advisory firm, he gained some of his professional experience in the successful opening and running of international five-star hotels.

BBJ: Do you see any likelihood of troubled hotel projects hitting the market in large numbers?

Péter Takács: Not yet, not in large numbers. What has helped massively is the loan moratorium. As long as owners don’t have to pay anything to the bank, they are more likely to be understanding of the operators. The best scenario would see international tourist travel returning at the same time as the moratorium is gradually withdrawn, but the real world is rarely ideal, so in the second part of next year, we may begin to see more properties hitting the market. Hotels in Downtown Budapest with a good location, an established brand, and a well-maintained building will be fine. But those in secondary locations, in the suburbs or non-central, especially if they operate in a market that is slower to return, such as conferences, could be among the first.

BBJ: What is the investor appetite for the hotel market in Budapest. Are there still buyers looking for good products?

PT: Investors are actively looking, but there is a significant differential in pricing expectations between them and owners. What is going on now is more like window shopping; investors are looking around, making the occasional aggressive offer, but most owners, especially Downtown, don’t need to sell. A couple of deals are expected to take place this year – we are certainly working on some – but not in any significant volume. Next year will be different.

BBJ: How do you see the market developing over the next couple of years?

PT: It is still a desirable asset class. One thing we keep hearing is that investors increasingly want flexibility among their key criteria. They want a well-designed building so that, if another pandemic or some other disaster comes along in the next 50 years, it can be converted into residential units or offices. The sector will return to profitability, but it is going to take two to three years.