No attribution requiredCEE hotels book two big deals, but is there momentum?
Two CEE hotel deals signed in Q1 2019 equate to c. 80% of average annual volumes, but where is the market heading?
February 15, 2019Real Estate
Two CEE hotel deals signed in Q1 2019 correspond to more than three quarters of average annual volumes. In January 2019, it was widely reported that the five-star Hotel InterContinental Prague had been acquired by Czech family office and wealth manager R2G for an undisclosed price, estimated to have exceeded CZK 5.7bn (€225m). And in early February 2019, UK-based private equity fund Patron Capital and US hotel chain Marriott International acquired the Sheraton Warsaw Hotel.
Borivoj Vokrinek, head of Strategic Advisory and Hospitality Research for EMEA at commercial real estate consultants Cushman & Wakefield, estimates that, between them, the two deals probably equate to approximately 80% of the long-term average of annual transaction volumes in the CEE-6 (which are c. €400m across 17 years).
However, Vokrinek cautions against drawing too much from the data, which can be volatile: “The CEE market is still relatively small, so one or two big transactions can really shift a trend from downward to upward.” He beileves the CEE hotel sector is still quite bullish, with investors across Europe keen to invest in hotels. "There is actually a trend of institutional investors who are expanding their portfolios from classic asset classes like offices, retail and logistics into hotels, because they provide higher returns."
Market peak or millennial future?
George Mula, principal of Poland-focused real estate investor IFGroup, is also wary of market data when it comes to the CEE hotel market: “People are saying that we’re at the peak, but it depends on what you’re measuring. If you’re measuring Warsaw occupancy, it went down last year by about two percentage points, from 76% to 74%. However, one year doesn’t really tell you very much. When you look at all the other figures, like Polish hotels, business is increasing at 9% or 10% per annum. And the predictions out to 2020/21 are very strong. I think hotels - especially in the right sector - are quite resilient to economic downturns".
Mula puts this resilience down to the fact that people, especially millennials, are spending a far greater proportion of their money on hospitality and travel. “I don’t think that’s going to change, even if there is a massive downturn. Central and Eastern Europe, especially, is a cost-effective option.”
And if there is a CEE destination worth travelling to in the future, Mula reckons that it is Warsaw: “Prague’s probably at the top, in terms of hotel occupancy, and Krakow’s doing extremely well with 86% hotel occupancy, while Warsaw is at 74%, as it’s more about business. But people are starting to understand that Warsaw’s quite a fun place. For instance, the Marriott hotel has cracked the weekend problem and has a very high occupancy rate, up in the mid-80s. I think Warsaw, at the weekend, has more to offer than Krakow for young people".
Putting institutional capital to work
A particular characteristic of the CEE region is that there are very few hotels that can change hands at prices over €50m. However, that may be changing in the longer term, as more assets move into institutional ownership, helped by a new approach to investment, as Frederic Le Fichoux, head of Hotel Transactions for Continental Europe at Cushman & Wakefield, explains: “Institutional investors are looking for fixed income assets - hotels that are operated under long-term lease agreements. This type of structure is very rare in the CEE region, where most hotels in the past have been operated under management agreements, a structure that didn’t work for institutional capital".
In order to secure fixed income, German financial services company DekaBank Group was one of the first investors in the CEE to use a sale and leaseback structure when it acquired InterContinental Warsaw from Warimpex and UBM in 2012. Similar structures were again deployed by German real estate investor Union Investment in its €80m acquisition of two Holiday Inns in Warsaw and Gdansk, January 2018.
“The slight difference,” says Le Fichoux, “is that for Union it was a forward funding deal, where the institutional investor agreed to buy a future lease, two years prior to delivery. These structures are becoming more common and it’s why we see developers of traditional commercial properties, like offices and retail centres, moving to hotels. They are able to sign and structure lease agreements with operators and can secure an institutional investor who will buy the property, even before being delivered to market."
People challenge
One of the biggest constraints facing the hospitality sector in the CEE, says Mula, is people - or rather, getting people. “It’s a massive problem, certainly in Poland and other CEE countries. It’s very difficult to recruit and retain staff. Every hotel manager you speak to will tell you that it is their biggest challenge. It’s similar to what has happened in the construction industry, where prices have gone up 30% because of labour.”
Vokrinek agrees that labour is a challenge in the hotel industry, because of the fact that it is labour-intensive. At the same time, he says, “service is something that adds value, compared to other commoditised products that have no human element. It’s both a challenge and an opportunity. The growth of revenue is still surpassing the growth of expenses and labour. We are seeing substantially improving profitability across CEE markets, to the point that hotels are more profitable in Prague than in Vienna".
CEE real estate markets will be discussed further at CEE GRI 2019 on 14-15 May in Warsaw.
Borivoj Vokrinek, head of Strategic Advisory and Hospitality Research for EMEA at commercial real estate consultants Cushman & Wakefield, estimates that, between them, the two deals probably equate to approximately 80% of the long-term average of annual transaction volumes in the CEE-6 (which are c. €400m across 17 years).
However, Vokrinek cautions against drawing too much from the data, which can be volatile: “The CEE market is still relatively small, so one or two big transactions can really shift a trend from downward to upward.” He beileves the CEE hotel sector is still quite bullish, with investors across Europe keen to invest in hotels. "There is actually a trend of institutional investors who are expanding their portfolios from classic asset classes like offices, retail and logistics into hotels, because they provide higher returns."
Market peak or millennial future?
George Mula, principal of Poland-focused real estate investor IFGroup, is also wary of market data when it comes to the CEE hotel market: “People are saying that we’re at the peak, but it depends on what you’re measuring. If you’re measuring Warsaw occupancy, it went down last year by about two percentage points, from 76% to 74%. However, one year doesn’t really tell you very much. When you look at all the other figures, like Polish hotels, business is increasing at 9% or 10% per annum. And the predictions out to 2020/21 are very strong. I think hotels - especially in the right sector - are quite resilient to economic downturns".
Mula puts this resilience down to the fact that people, especially millennials, are spending a far greater proportion of their money on hospitality and travel. “I don’t think that’s going to change, even if there is a massive downturn. Central and Eastern Europe, especially, is a cost-effective option.”
And if there is a CEE destination worth travelling to in the future, Mula reckons that it is Warsaw: “Prague’s probably at the top, in terms of hotel occupancy, and Krakow’s doing extremely well with 86% hotel occupancy, while Warsaw is at 74%, as it’s more about business. But people are starting to understand that Warsaw’s quite a fun place. For instance, the Marriott hotel has cracked the weekend problem and has a very high occupancy rate, up in the mid-80s. I think Warsaw, at the weekend, has more to offer than Krakow for young people".
Putting institutional capital to work
A particular characteristic of the CEE region is that there are very few hotels that can change hands at prices over €50m. However, that may be changing in the longer term, as more assets move into institutional ownership, helped by a new approach to investment, as Frederic Le Fichoux, head of Hotel Transactions for Continental Europe at Cushman & Wakefield, explains: “Institutional investors are looking for fixed income assets - hotels that are operated under long-term lease agreements. This type of structure is very rare in the CEE region, where most hotels in the past have been operated under management agreements, a structure that didn’t work for institutional capital".
In order to secure fixed income, German financial services company DekaBank Group was one of the first investors in the CEE to use a sale and leaseback structure when it acquired InterContinental Warsaw from Warimpex and UBM in 2012. Similar structures were again deployed by German real estate investor Union Investment in its €80m acquisition of two Holiday Inns in Warsaw and Gdansk, January 2018.
“The slight difference,” says Le Fichoux, “is that for Union it was a forward funding deal, where the institutional investor agreed to buy a future lease, two years prior to delivery. These structures are becoming more common and it’s why we see developers of traditional commercial properties, like offices and retail centres, moving to hotels. They are able to sign and structure lease agreements with operators and can secure an institutional investor who will buy the property, even before being delivered to market."
People challenge
One of the biggest constraints facing the hospitality sector in the CEE, says Mula, is people - or rather, getting people. “It’s a massive problem, certainly in Poland and other CEE countries. It’s very difficult to recruit and retain staff. Every hotel manager you speak to will tell you that it is their biggest challenge. It’s similar to what has happened in the construction industry, where prices have gone up 30% because of labour.”
Vokrinek agrees that labour is a challenge in the hotel industry, because of the fact that it is labour-intensive. At the same time, he says, “service is something that adds value, compared to other commoditised products that have no human element. It’s both a challenge and an opportunity. The growth of revenue is still surpassing the growth of expenses and labour. We are seeing substantially improving profitability across CEE markets, to the point that hotels are more profitable in Prague than in Vienna".
CEE real estate markets will be discussed further at CEE GRI 2019 on 14-15 May in Warsaw.
