After years of rapid development, Central and Eastern European hotel markets had been catching up with those in their western neighbours, in terms of both investment volumes and sophistication, with hotel transaction activity in the region reaching record levels in 2019, a joint report published by Cushman and Wakefield, a real estate services company, and CMS, a global law firm, has found.
According to the research, which looks at Bulgaria, Czechia, Hungary, Poland, Romania and Slovakia, 4.2 billion euros were spent in the hotel investment market over the last five years, with the average deal size in the six countries amounting to 25.1 million euros. The bulk of the deals – 67 per cent – were carried out in Czechia and Poland.
However, the report adds that the number of transactions and their average size over the last five years is still relatively small, which is why “any major transaction that is completed or conversely delayed, can make a notable impact”. A good example was the sale of the InterContinental Hotel in Prague for 225 million euros, expected to close in 2018 but eventually put back to 2019, which led to the transaction volume in 2018 being more than 31 per cent lower than forecast.
In 2019, transaction activity reached 1.4 billion euros, the highest ever recorded. A total of 55 hotels were sold last year, with a room capacity of 10,210, with 58 per cent of the transacted volume involving international investors. Upscale hotels made up the largest transaction volume – 26 per cent.
Between 2015 and 2019, Czechia and Poland accounted for the largest share of hotel transactions with 39 and 29 per cent, respectively. Hungary’s share stood at 18 per cent, followed by Romania (eight per cent), Bulgaria (four per cent) and Slovakia (three per cent). Last year, 70 per cent of transactions were made in the Czech and Polish market, amounting to 1.1 billion euros, while the top 10 largest transactions were conducted in Budapest, Warsaw and Prague.
Transactions between 2015 and 2019 were dominated by private investors – 47 per cent – with institutional investors maintaining a strong presence on the market with 34 per cent. In 2019, 56 per cent of all transactions were made by private investors, while the share of institutional investors stood at 38 per cent.
The study found that investments in the six countries had been driven by healthy market performance, low brand penetration compared to Western Europe, higher yields and unique market characteristics, such as a very limited supply pipeline in Bratislava and Prague, robust commercial development in Warsaw or decreased VAT rate for hotel accommodation in Hungary and Slovakia.
“Yields have been getting closer to those seen in Western Europe in recent years. However, in 2019 there was still gap of about 50 to 100 basis points between the top cities in the CEE countries and their close western neighbours, such as Vienna and Berlin,” reads the report, which adds that “the large amount of dry powder looking for placement should help to keep the yields low, once the Covid-19 crisis is contained.
Analysts at CMS and Cushman and Wakefield say that due to the ongoing coronavirus crisis several deals that were expected to close in 2020 are now on hold, although there are investors who “see beyond the current issues and are continuing with their acquisitions and carrying out due-diligence”. Deals that already completed this year total close to 297 million euros across six assets, primarily located in Budapest.
“Aside from the current Covid-19 crisis, we have been experiencing strong interest from investors in the CEE hotel sector, attracted by healthy yields and long-term capital appreciation potential. This was despite some emerging headwinds such as the rising pipeline in selected markets and growing labour costs. We expect this strong appetite from investors to quickly return once the ongoing pandemic is contained,” the report says, noting that its pre-coronavirus outlook for 2020 projected an estimated two billion euros worth of assets on the market.
While the report projects that the current crisis is likely to result in higher caution among tenants, the share of hotels under lease is anticipated to rise far beyond the current 10 per cent, especially in capital cities across the six Central and Eastern European countries.
“An analysis of the latest transaction activity confirms this, with 13 per cent of deals in 2019 involving hotels with a tenant in place at the time of sale, while in 2020 this was initially expected to increase to 17 per cent,” reads the report, stressing that as properties that are being sold on a “vacant possession basis” may subsequently be leased, with buyers frequently having a preferred tenant already lined up, the final share of leased hotels is likely to be even higher.
