Eastern Europe’s hotel guest landscape evolves
 
Eastern Europe’s hotel guest landscape evolves
05 NOVEMBER 2012 7:02 AM

Hoteliers in the region are targeting global and domestic demand, rather than intra-regional tourism, sources said.

GLOBAL REPORT—Concern over the eurozone credit crunch is casting a shadow over most of the intrinsically linked Eastern European economies, but a changing guest landscape gives the hospitality sector a reason to look to the future with optimism.

The winning recipe seems to be a mix of global and domestic demand, rather than intra-regional tourism, sources said.

STR Global, sister company to HotelNewsNow.com, identifies Eastern Europe as comprising the following countries: Armenia, Azerbaijan, Belarus, Bulgaria, Czech Republic, Georgia, Hungary, Kazakhstan, Kyrgyzstan, Poland, Moldova, Romania, Russia, Slovakia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan.

“The economic crisis left its mark on the Eastern European travel and tourism industry with arrival numbers down by 5.6% in 2009 … (and hotels hit by) decreased visitors in combination with dropping (average daily rate),” said Mantas Kaluina, Euromonitor International’s senior research analyst for travel and tourism.

Mantas Kaluina
Euromonitor International

But the hospitality industry since has been on a recovery path. Arrivals grew by 7.2% last year, earning Eastern Europe the title of the strongest performer globally, according to Euromonitor.

“Recovery in the hotel sector started with an increase in occupancy, as well as rising ADR, which also led to a 12% growth in hotel retail values in 2011. However, they haven’t reached pre-crisis levels yet,” Kaluina added.

Swings in performance should be taken with a grain of salt, said Sophie Perret, an associate director in HVS’ London. Some of the declines in certain markets, such as in St. Petersburg, Russia were artificially large, “so any bounce back would be similarly dramatic.”

Still, a rebound across the broader Eastern European region is tangible.

According to STR Global occupancy in Eastern Europe increased 2.7% to 60.4% year to date through September. Absolute occupancy is the lowest among Europe, although not by much.

During the same period, ADR in euro terms increased 6.2% to €89.14 ($114.25) and RevPAR increased 9% to €53.82 ($68.98).

“I reckon occupancy and ADR will stabilize or continue growing slowly. The region is now getting a lot of traveler demand from the Middle East and Asia. Before it was mainly the U.S. and Western Europe,” said Frédéric Le Fichoux, associate partner and head of hospitality Central and Eastern Europe for Cushman & Wakefield.

Hilton Worldwide, which operates several hotels in Eastern Europe, reported positive growth in both RevPAR and rate as well for its brands Hilton Resorts & Hotels, DoubleTree by Hilton and Hilton Garden Inn in the region, according to Didier Martin, assistant VP Eastern Europe, Israel, Russia and Turkey at Hilton.

Istanbul, on the crossroads of Eastern Europe and Asia, is one of its winning destinations, benefiting from significant convention business.

HVS International’s “2012 European Hotel Valuation Index” points to a bright future for Russia’s hotel performance as well. Commodity prices and business activity are up as the country prepares for the FIFA World Cup 2018 with airport expansions and relaxed visa regulations.

“Russia accounts for one-third of the region’s hotel market, and with only 10,000 hotels the market is undersupplied. In contrast take Bulgaria, which is experiencing an oversupply with 3,500 properties,” Le Fichoux said.

Hilton, which recently published a report titled “Balancing Russia’s Tourism Deficit: A Report on the Future of the Industry,” found that tourist spend in Russia could double to more than $15 billion by 2016. Russia, together with Turkey, holds the chain’s largest European hotel development pipelines.

“In Russia and Turkey, our mid-priced brands Hilton Garden Inn and Hampton by Hilton have been particularly popular in secondary and tertiary cities,” Martin said.

Concerns over consumer spending
Still, economic experts remain concerned about sluggish consumer spending, despite earlier forecasts setting growth in the double digits compared to the West’s single-digit figure for the period of 2011 to 2015. Eastern Europe’s gross domestic product is also expected to grow faster than in the West, thanks to lower unemployment rates, according to Euromonitor.

Frédéric Le Fichoux
Cushman & Wakefield

“Whether the current and future economic woes will lead to a drop in demand as in Western Europe, probably yes, but Central Europe is always six months behind the West in terms of reaction,” Le Fichoux said.

But it is difficult to paint the region with one brush. While Romania and Latvia already suffer from large budget deficits, Russia and Poland are able to weather many storms thanks to large domestic markets.

Hilton sees opportunities at both ends of the scale. “The likes of Poland and Romania are exciting destinations where our portfolio of brands are being actively sought to provide greater choice to guests,” Martin said.

Countries such as the Czech Republic, Croatia and Hungary, which are mostly visited by Western Europeans, are benefitting from the influx of travelers from the Middle East and Asia. Inbound tourism from further afield versus intra-regional demand is vital for hotel performance to pick up.

“There is quite a bit of cross-border travel between Hungary, Ukraine and Slovakia, locals going to neighboring countries for a cheap vacation, but it’s all low-cost, secondary-type of accommodation,” Le Fichoux said.

Interested in international demand
According to Euromonitor, the five largest Eastern European countries in terms of inbound tourism are:

  • Russia, which attracts visitors from the Ukraine, Kazakhstan and Uzbekistan;
  • the Ukraine (Russia, Moldova and Poland);
  • the Czech Republic (Poland, Germany and Russia);
  • Hungary (Germany, Romania and Austria); and
  • Croatia (Germany, Italy and Slovenia).

Hilton, which has hotels in several of these countries, including Russia, Hungary, Poland, Romania and Bulgaria, counts international travelers as a large proportion of its business in major gateway cities.

“We see a higher level of domestic business in less well-known locations such as Gdansk in Poland and Konya in Turkey, which are less visited by international travelers but often hidden gems,” Martin said.
 
Most intra-regional travelers typically visit friends and family and thus do not stay in hotels at all, Kaluina pointed out, although Russians do favor adjacent markets over Europe, due to the difficulty of obtaining visas for “Schengen” countries, which are countries in Europe where transiting from one country to another is done without border controls.

“They only stay for a few days and don’t dine out often. As a result their average spending is much smaller compared to Western European tourists,” he said.

And many of the Eastern Europeans who do have coveted discretionary income are using it to venture out of the region via a wider choice of flights, packages and online deals. 

“The purchasing power of Eastern Europeans in general is actually improving, and they have more choice than just to visit Bulgaria. For example, new flights have opened up so they tend to visit Morocco or Egypt,” Le Fichoux said.

Sophie Perret
HVS London

This leaves Eastern Europe really no choice than to turn the tables by likewise attracting foreigners into their region. “Many of these markets would have relied, historically, on national and regional travelers, whereas now they are rapidly increasing their source markets through marketing and relaxing visa requirements,” Perret said. 

Poland has jumped onto this bandwagon, albeit from a more favorable starting position. The country sailed through the economic crisis and now boasts a strong domestic market. Warsaw’s RevPAR in 2011 topped 12% and hotel values increased by 9%, according to HVS International.

“Poland is taking the lead in the region as it hasn’t suffered from GDP correction, the demand is generated from local guests. Warsaw receives mainly corporate travelers and has held up well during the crisis with an average occupancy of 55%, due to an oversupply of hotels,” Le Fichoux said.

Poland’s year-to-date occupancies hover just above the Eastern European average at 61.2% after posting year-to-date growth of 2.9%, according to STR Global. Although Warsaw saw little movement through September, it is still outperforming the region in general with occupancy of 68.6%.

Le Fichoux highlighted Prague and Budapest as the next two strongest performers in the region. Both markets saw year-to-date RevPAR increases of 10% or more in local currencies, according to STR Global.

“There was a hotel price war in these countries during the crisis, causing a drop in ADR. But since 2010 Prague improved, followed by Budapest. Occupancy picked up, and ADR stabilized. The recovery was led by occupancy to a point not far from pre-crisis levels but still very far away in terms of ADR,” Le Fichoux said.

Looking ahead to the future, the opportunity for further growth requires a unified approach toward addressing key issues, “such as transport infrastructure, visa processing and destination promotion,” according to Hilton’s Martin.

LONDON—Poland hosted the most hotel transactions during the past year and remains a top pick for investment activity, according to HVS International’s “2012 European Hotel Valuation Index.”

“The volume of transactions might be a result of the country’s strong economic performance throughout the recession (within the European context that is), which I believe is a similar case for other types of assets in this market as well. As a result of this, both debt and equity has been available and deals have been done,” said Sophie Perret, an associate director in HVS’ London.

Poland managed to maintain interest in hotel investment during the downturn, while very few assets changed hands throughout the rest of Central and Eastern Europe.

“A lot are below 100 keys, which are simply not interesting to brand by international hotel operators. Poland is probably an exception with Accor having taking over Orbis, in a strategic acquisition but continuing to operate the properties under that name,” said Frédéric Le Fichoux, associate partner and head of hospitality Central and Eastern Europe for Cushman & Wakefield.

He also highlighted Budapest and Prague as two additional countries that are ripe for investment.

“Prague and Budapest are also quite strong markets with a good mix of demand. There is an opportunity now to pick up a hotel at a good price with yields promising good income growth,” Le Fichoux said.

But investment is expected to increase throughout the region.

“(Central and Eastern Europe) should be enjoying more transactions in 2013,” Le Fichoux said.

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