kpmg eastern europe Hotel-Development-Costs-2009

REAL ESTATE, LEISURE & TOURISM PRACTICE CEE

Hotel Development Costs 2009 Guidelines for new hotel projects in Central and Eastern Europe

ADVISORY

2 Hotel Development Costs 2009

Andrea Sartori

Partner, KPMG Advisory Ltd. Head of Travel, Leisure & Tourism in CEE

[email protected]

Dear Reader,

I am pleased to present the Hotel Development Cost Survey in Central and Eastern Europe (CEE), prepared by KPMG’s Real Estate, Leisure and Tourism practice. Based on the positive feedback we have received for our Golf Course Development Cost Survey, we have taken the initiative to conduct a similar type of research in the hotel sector, with this first edition focusing on the CEE region.

Some of the key findings of the report include:

• The average development costs per hotel room range between EUR 51,000 for a budget/economy hotel and EUR 143,000 for an upscale hotel;

• Construction costs and technical equipment account for approximately 70% of total development costs;

• Development costs have increased by up to 20% in some countries in recent years but are expected to decrease in the short to medium term;

• Average construction time is approximately 12-18 months, depending on number of rooms, location and quality level;

• Obtaining the necessary building permits and bank financing are the major obstacles faced during the development process of hotels in CEE;

• Out survey respondents identified Poland and Romania as hot spots for hotel development in the upcoming years.

We hope that this research will provide useful information and guidelines for developers, financiers and other industry stakeholders venturing into the hotel sector.

We would like to take the opportunity to thank all the developers, banks, hotel architects, construction companies and quantity surveyors who have participated in our survey and for providing valuable input data as well as sharing their experiences with us.

For an electronic copy of this report or if you would like to receive any clarification or discuss the survey results, please feel free to contact me.

Yours sincerely,

© 2009 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

MK

AL

ME

RS

BA

HRSI

HU

SK

Guidel ines for new hote l pro jects in Centra l and Eastern Europe 3

The CEE region covers 1.3 million square km and has a total population of approximately 130 million

AL Albania

BA Bosnia & Herzegovina

BG Bulgaria

HR Croatia

CZ Czech Republic

EE Estonia

HU Hungary

LV Latvia

LT Lithuania

MK Macedonia

ME Montenegro

PL Poland

RO Romania

RS Serbia

SK Slovakia

SI Slovenia

The shared history of recent decades is the most common feature of CEE countries

Overview of the CEE tourism market – an important driver of the regional economy

For the purpose of this research the Central and Eastern European (CEE) region comprises 16 countries stretching from the Czech Republic to Romania and from the Baltic coast in the north to the Balkans in the south, covering an area of approximately 1.3 million square kilometers and bearing a total population of approximately 130 million.

As illustrated on the map below, the region serves as a link between Western Europe and the Commonwealth of Independent States (CIS) to the east.

BG

RO

CZ

PL

LT

LV

EE

The region’s geographic location has cultivated many social, political and economic ties between the neighboring countries. However, it is mainly the shared history of recent decades and the impact of historic events that is a common feature of the Central and Eastern European region.



Borders to the west have only been open for 20 years and these countries have benefited in different ways, which is reflected in their varying levels of economic performance, their competitiveness and ability to attract foreign investment. Whereas countries directly bordering Germany, Austria and Italy enjoyed relatively high Foreign Direct Investment (FDI) and growth in GDP in the 1990s, the “second tier” countries have seen higher FDI and GDP growth mainly in the years following the turn of the century.

The strong overall growth rate in the years prior to the recent global economic crisis, led economists to call the emerging markets of Central and Eastern Europe “the growth engine of the EU”.1

Economic overview of the CEE Region compared to EU 15

Country Population EU accession

GDP real growth in 2008 (%)

GDP per capita in

2007 (EUR)

Inflation in 2008

(%)

Unemployment in 2008

(%)

FDI stock/capita 2007 (EUR) mln %

Albania 3.6 3% – 5.0* 3,940 3.5* 13.2* 460

Bosnia & Herz. 4.6 4% – 5.8 2,880 7.9 39.0 952

Bulgaria 7.3 6% 2007 6.3 3,780 13.0 6.7 3,659

Croatia 4.5 4% negotiating 6.5 8,450 6.5 9.1 7,248

Czech Republic 10.2 8% 2004 4.0 12,390 6.6 5.4 16,058

Estonia 1.3 1% 2004 -1.2 11,380 10.5 5.4 9,329

Hungary 9.9 8% 2004 1.7 10,040 6.4 7.7 7,190

Latvia 2.2 2% 2004 -0.8 8,710 15.4 6.2 3,486

Lithuania 3.6 3% 2004 3.8 8,300 11.3 5.3 2,980

Macedonia 2.1 2% negotiating 5.5 5,170 2.3* n/a 1,073

Montenegro 0.7 1% negotiating 10.7* 4,484 2.1** 11.0* 2,587

Poland 38.5 30% 2004 5.2 8,100 4.4 9.5 2,698

Romania 22.2 17% 2007 8.0 5,640 7.7 4.0 2,006

Serbia 10.2 8% – 7.0 3,940 11.2 18.0 946

Slovakia 5.5 4% 2004 7.0 10,150 4.2 7.4 5,408

Slovenia 2.0 2% 2004 4.4 18,680 6.6 5.0 3,782

Total CEE 128.4 100% – – 7,532 – – 4,130

EU 15 323.2 – – 1.5 27,300 2.1 7.4 10,350

Source: CIA World Fact Book, Unicredit Group CEE Economic Data, UNCDAT *Data refers to 2007 **Data refers to 2006

1 As a result of the escalation of the financial crisis in Q4 of 2008, the CEE region was hit particularly hard. Many local currencies depreciated and some countries have had to be stabilized by international financial institutions (IMF, World Bank). It is expected that a few transition countries will successfully manage to strengthen their economies, while for others this process could take much longer. However, it is a common belief that the growth potential in the CEE region is still significantly higher than in the more developed Western European economies.


0

Guide l ines for new hote l pro jects in Centra l and Eastern Europe 5

Travel and tourism contributes an average of 11.7% to national GDPs in the CEE region

Thanks to its culture and heritage, natural assets, combined with the growth of local economies, increases in disposable income, improved accessibility and the development of infrastructure in recent years, tourism has been a major driver of several national economies in the region. Despite the current economic situation, further growth in tourism demand – especially supported by growing domestic and regional tourism – can be expected in the years to come in many countries in Central and Eastern Europe.

When assessing the direct and indirect contributions of the overall travel and tourism industry to a country’s economy we note that in some countries (e.g. Croatia and Montenegro) this share is significant: more than 20% of total GDP.

Travel and tourism contribution to GDP

%30

25

20

1511.7%

Tourist arrivals in selected CEE markets (2007)

BG

RO

HU

HR

CZ

PL

92% 4,814

96% 6,972

73% 7,371

37% 11,162

76% 12,961

66% 18,947

5,000 10,000 15,000 20,000 Thousand people

� Hotel arrivals

� Other arrivals

Source: National statistical offices

10

5

0 HR ME EE AL SK BG SI CZ BA PL LV HU LT MK RO RS

Source: World Travel & Tourism Council estimates for 2008

With an average industry contribution to GDP reaching nearly 12% in the CEE region, investment in tourism and in the hotel sector have become, and will continue to be, an area of focus for the private and public sectors.

Poland, the largest country in CEE, registered the highest number of tourist and hotel arrivals in the region in 2007, followed by the Czech Republic. Between two-thirds and three-fourths of these tourists stayed in hotels. Although Croatia is ranked third in regard to tourist arrivals, less than 40% of all tourists stayed in hotels in 2007, with the majority chosing other types of (private) accommodation facilities. On the other hand, Romania and Bulgaria recorded a significantly lower number of tourist arrivals, but over 90% of them were registered in hotels.



The average annual growth rate for hotel supply in CEE has exceeded 4% since 2003

During the period 2003–2007, the highest growth rates in supply were recorded in Bulgaria, Romania and Poland

The CEE hotel market The CEE region counted more than 500,000 hotel rooms in approximately 10,000 hotels in 2007. This represents a growth of 20% in the total number of hotels and an increase of 18.5% in room numbers compared to 2003. On average, the supply of hotel units has increased by 4.6% per annum, while the supply of hotel rooms has increased by 4.3%.

Total number of hotels and hotel rooms in CEE (2003–2007)

14,000

8,353 8,585 9,006

9,452 10,003

507,603 485,746

465,339 463,546

428,420

2003 2004 2005 2006 2007

� Number of hotels � Number of rooms�

600,000

13,000 550,000

12,000 500,000

11,000 450,000

10,000

400,000 9,000

350,000 8,000

300,000 7,000

Hot

els

Room

s

Source: National statistical offices, KPMG research and estimates

Growth rates in supply varied significantly by country. More mature markets like Hungary and the Czech Republic, which experienced a “boom” in tourism demand and supply earlier than other markets, grew their hotel room stock by only 7% and 11% respectively between 2003 and 2007.

Within the same period of time, Bulgaria recorded the highest increase in hotel room supply (47%) and, as such, has jumped from third to second behind the Czech Republic. Romania and Poland also experienced significant growth with 23% and 19% respectively.

However, it is expected that as a result of the economic recession and particularly the credit crunch, the growth in hotels in the CEE region will slow down, at least in the short/medium term particularly in countries that have seen a boom in construction in the last few years.



Growth in number of hotel rooms in selected CEE countries (2003 & 2007)

16,700 � 2003 Serbia +8% 18,000

� 2007 22,700 Slovakia +7% 24,400

46,300 Hungary +7% 49,700

49,500 Croatia +6% 52,500 48,700 Romania +23% 60,000

61,200 Poland +19% 72,500 54,300 Bulgaria +47% 80,000

72,900 Czech Republic +11% 81,300

0 20,000 40,000 60,000 80,000 100,000


Czech Republic, Bulgaria and Poland The Czech Republic, Bulgaria and Poland are the top three countries in terms of have the largest shares of hotel room total hotel rooms with each of them contributing between 14% and 16% to the supply in the region total supply.2 Romania, Croatia and Hungary together account for another 33%

of the region’s total hotel room supply.

Almost 80% of the total supply Distribution of hotel rooms by country (2007) is concentrated in six of the 16 CEE

� Czech � Serbia 4% countries

Republic 16% � Slovenia 3% � Bulgaria 16% � Estonia 2% � Poland 14% � Lithuania 2% � Romania 12% � Albania 2% � Croatia 11% � Latvia 2% � Hungary 10% � Macedonia 1% � Slovakia 5%


We have endeavored to identify a correlation between the supply of hotel rooms and the income from tourism in selected countries. To allow for a more meaningful comparison we have compared total population per hotel room with international tourism receipts per capita. As a basis for comparison we have also included France, Italy, Spain and Austria in our analysis.

2 It should be noted that such comparative analysis is limited by the fact that the definition of “hotels” is different from country to country (e.g. in the case of Bulgaria it also includes sanatoriums). This difference in classification might impact the rankings.



Tourism receipts per capita are low in most of CEE and especially low in Poland and Romania

Overall distribution of hotel rooms in CEE by category (2007)

5-star 1-star 4-star 2% 11% 13%

2-star 32%

3-star 42%


Population per hotel room and international tourism receipts per capita in selected CEE countries (2007)

600 2,000 1,800

500 1,600

400 1,400 1,200

300 1,000 800

200 600

100 400 200

0 0 PL RO SK HU CZ BG FRA ITA ESP AUT

� population/hotel room � tourism receipts/capita

popu

latio

n/r

oom

EU

R

Source: EIU, national statistical offices with KPMG elaboration

Although there are several factors limiting the comparison between individual countries (e.g. climate, accessibility and the country’s image and perception), the above chart indicates that the most significant imbalance between population per hotel room as well as international tourism receipts per capita are in Poland and Romania. This also suggests that there may be a degree of hotel undersupply in certain markets and – at the same time – a potential for increasing quality and tourism spend.

Hotels by category In assessing the total hotel supply of a country it is important to analyze the breakdown by category, as this gives an indication of the quality level of tourism in the respective region. For example, the number of hotels by category in the CEE region shows a dominance of 2- and 3-star hotels, still representing 75% of total hotel room supply.

Compared to many countries in Western Europe, the share of 4- and 5-star hotels in the CEE region is lower (15%), reflecting an opportunity for higher quality hotel supply, as demand inevitably shifts towards quality services. Studying the development of hotel room supply by category, we observe a stronger growth in the upscale segment throughout the region.

In Poland, for example, the share of 4- and 5-star hotel rooms has increased from 15% to 20% in the last five years, and similar trends are also apparent in Hungary and in the Czech Republic, to cite just a couple of examples.



Distribution of hotel rooms in 2003…

Poland

Hungary

Czech Republic

0% 20% 40% 60% 80% 100%

� 1-star � 2-star � 3-star � 4-star � 5-star

…and in 2007

10% 28% 47% 11% 4%

6% 18% 46% 23% 7%

7% 17% 49% 21% 6%

Poland

Hungary

Czech Republic

0% 20% 40% 60% 80% 100%

� 1-star � 2-star � 3-star � 4-star � 5-star


8% 27% 45% 14% 6%

5% 10% 46% 31% 8%

5% 10% 50% 28% 7%

This general improvement in the overall quality standards and levels of service in hotels in the region had already begun in the 1990s and is expected to continue in the coming years.

Even though the classification of hotels in stars from 1-5 is broadly used in most of the CEE countries, as in the rest of the world, this is based on national classification systems and standards may differ significantly from one country to another.



Because of this, for the purposes of our survey we are following a categorization which is commonly used by the market and which describes the standard and the quality level of hotel properties.

Classification Typical characteristics/features Sample international brands

Budget/ Economy

Net room size: 12 – 18 sqm Staff/room ratio: ca. 0.1 – 0.2/room Limited F&B facilities No amenities

Etap, Ibis, Express by Holiday Inn, easy hotels

Midscale Net room size: 20 – 24 sqm Staff/room ratio: ca. 0.4 – 0.5/room Limited F&B facilities Limited amenities (e.g. meeting space, gym)

Mercure, Holiday Inn, Courtyard by Marriott, Campanile

Upscale Net room size: 24 – 35 sqm Staff/room ratio: ca. 0.6 – 0.8/room Extensive F&B facilities Extensive amenities (e.g. meeting space, retail outlets, wellness centre)

Radisson, Sofitel, Hilton, Intercontinental, Marriott

All the above stated brands are present in the CEE region, yet their overall brand penetration is still significantly lower than in the more mature markets of Western Europe and North America.



Glossary

In our survey we have grouped development costs into the following subcategories:

Site and Area Improvements

Alterations to land that enhance the utility of any structure placed on a site (e.g. drainage, fencing, utilities, landscaping, etc.)

Construction Works

Direct and indirect costs, associated with the physical construction and erection of a hotel building (e.g. bricks and mortar, labor costs, etc.)

Technical Equipment

Installation of air conditioners, elevators, heating systems, pipelines and networks, etc.

Soft Costs

Fees for architect design, planning, obtaining licenses, advisory services, etc.

FF&E

Furniture, Fixtures and Equipment and includes all furniture for guestrooms and public areas, wall and floor coverings, etc.

OS&E

Operating Supplies & Equipment and includes linen, kitchenware, uniforms, supplies, stationary, accessories, etc.

Pre-opening and working capital

Includes marketing, staff, training, initial working capital, etc. prior to the opening of the hotel property.

Survey methodology

The analysis presented in this report has been prepared based on a questionnaire-survey and in-person interviews with hotel developers, hotel management companies, hotel architects, construction companies, and cost consultants as well as banks active in hotel financing in the CEE region. In our survey we have only considered hotels that have opened since

1 January 2004. Furthermore, to complement our analysis, we have relied on secondary data that was available at the time of the publication of this report.

In order to allow for more meaningful comparisons between different hotels, our survey focuses only on hotel development costs and excludes financing

costs, investments related to land acquisition, as well as in-house costs of

developers.

The collected data was placed into three different hotel categories:

• budget/economy

• mid-scale, and

• upscale hotels.

Please note that our survey did not consider any luxury hotels. Many of these properties in CEE are conversions of existing landmark buildings and consequently have a significantly different cost structure than new developments.

Differences in timing of development, inflation, fluctuation of exchange rates as well as variances in the development stage of the various countries involved in the research are constraints that we could only partially overcome.

It is also important to note that part of our analysis was conducted prior to the full scale unfolding of the financial crisis and economic downturn of 2008. It is still too early to assess the extent of the impact of the crisis, but it is expected that investment activities in the hotel sector will decline in the short term. However, as a result of the fundamental deficiency of hotel supply in some CEE markets, hotel investment is expected to recover in the mid/long term.



Distribution of the participating hotels by category…

Budget 13%

Upscale 61%

Midscale 26%

…by type of development

City mixed-

61%

use hotel 6% City standalone hotel

Resort 33%

…by room capacity

more than 250 80 rooms or less rooms 16% 26%

151 – 250 rooms 81 – 150 rooms 37% 21%

Source: “Hotel Development Costs 2009” survey

Sample Profile

Our sample profile is consistent with that of newly opened hotels in CEE. More than 60% of our sample comprise upscale hotels, followed by 26% mid-scale hotel properties. Budget/economy hotels represent only 13% of our sample.

Sixty-one percent of all surveyed new hotel developments were stand-alone city hotels in contrast to resort hotels (33%) and hotels being part of mixed-use city developments (6%). Although representing the lowest share in our sample, it is expected that hotels forming part of mixed-use developments will gain more presence in the region. The high proportion of city hotels in our sample reflects our finding that developers prefer to build or reconstruct hotels in larger cities of the region than in resort destinations. This trend might also be a result of the banks’ debt financing concentrated in city hotels which seem to present lower degrees of both seasonality and operating/financial risk.

In assessing the capacities of the hotels in our sample, we noted that 37% of the surveyed hotels had between 151 and 250 rooms, and 16% had more than 250 rooms. On the other hand, 21% had a capacity of 81-150 rooms and 26% had 80 rooms or less. Upscale hotels reported the highest room capacities.



Based on our sample, upscale hotels cost almost three times more to develop than budget/economy hotels

Development costs

The average development cost per guest room by category is shown in the chart below.

160,000 143,000 140,000

120,000

100,000 77,000 80,000

60,000 51,000

40,000

20,000

0


As described earlier, in order to offer readers a more meaningful comparison, the figures presented above do not include any costs related to financing, land acquisition or developers’ in-house expenses.

The survey results show that the average development cost for a budget/economy hotel in the CEE region was approximately EUR 51,000 per room. Individual costs per room in our survey ranged from EUR 40,000 to EUR 60,000.

Mid-scale hotels cost approximately 50% more to develop with an average of EUR 77,000 per guest room. Costs per room ranged from EUR 60,000 to more than EUR 100,000 in our sample, depending on concept and positioning.

Mainly as a result of the higher quality of FF&E, sizes of guest rooms, public areas and in-house amenities, upscale hotels in our sample recorded an average development cost of EUR 143,000 per guest room. Several resort hotels in our survey had costs exceeding EUR 200,000 per room.

EUR

/room

Budget/Economy Midscale Upscale



Breakdown of hotel development costs

Pre-opening & working capital 2%

Site and area Soft Costs 9% improvements

5%OS&E 2%

FF&E 12%

Technical Construction Equipment 45%

25%


Breakdown of costs When analyzing the breakdown of the development costs of a hotel, we have observed that the percentage distribution of costs did not show notable discrepancies between the different hotel categories. Similarly for all categories, almost half of the development costs for a hotel are used for the actual construction of the property, with another quarter spent on technical equipment.

In absolute terms this means that for construction and technical equipment approximately EUR 100,000 per room should be budgeted when developing an upscale hotel. Mid-scale hotels only require half that amount and budget/economy hotels only one-third. Costs for FF&E and OS&E, amount to approximately 14% of the total. Another 11% should be allotted for soft costs, pre-opening and working capital.

Breakdown of development costs per guest room

Budget/economy hotels (EUR)

Mid-scale hotels (EUR)

Upscale hotels (EUR)

Site and area improvements 3,060 3,850 7,150

Construction 21,420 35,420 62,920

Technical Equipment 12,750 18,480 37,180

FF&E 4,590 8,470 18,590

OS&E 1,530 1,540 2,860

Soft costs 6,120 7,700 11,440

Growth in construction costs has been faster in CEE than in Western Europe

Pre-Opening & Working Capital 1,530 1,540 2,860

Total costs per guest room 51,000 77,000 143,000


Are hotel development costs growing? As a result of high prices for energy and a growing demand for construction labor and materials, construction costs have increased throughout the world during recent years. Whereas the average growth in construction costs was moderate in Western Europe, ranging on average between 2% and 6%, the growth in the cost of construction in some CEE countries was closer to 10%. Certain countries, like Poland and Romania, have even experienced building tender price inflation of 15-20%.



Two-thirds of respondents say that hotel development costs have increased in recent years

The majority of developers expect development costs to decline significantly in the short term

Five most frequently mentioned

obstacles by survey respondents

(multiple answers allowed)

1st Municipality/building permits (46%)

2nd Obtaining Financing (35%)

3rd Environmental issues (15%)

4th Time constraints (10%)

5th Difficulties with contractors (8%)


Our survey also aimed to identify developers’ specific experiences and expectations about the development of construction costs in the countries where they are active. The vast majority of respondents said that development costs have been growing in the last three years. Two-thirds of respondents even say that development costs have increased between 6% and 15%.

However, with decreasing energy prices, an anticipated slow down of inflation in the region, and stagnation of property developments and hence construction activities, the growth in construction costs in the CEE region is expected to decrease. This trend has also been confirmed by our survey respondents who indicate that development costs for hotels are expected to decrease in the next 12–18 months. In fact, approximately 80% of respondents believe construction costs will decrease by 6% or more.

In your opinion, how will costs change in the next 12–18 months?

100%

45%

35%

11% 9% � increase by more than 10%

90% � increase by 6–9% 80%

� increase by 0–5% 70% 60% � decrease by 0–5% 50% � decrease by 6–10% 40%

� decrease by more than 10% 30% 20% 10% 0%

Source: “Hotel Development Costs 2009” survey Note: No responses were given for the range “more than 10% increase” and “0-5% decrease”

What are the main obstacles to developing a hotel in CEE? Obtaining the necessary permits from local municipalities was the most commonly faced problem during development projects, mentioned by almost half of the surveyed developers. Although the extent of this obstacle differs from country to country, bureaucratic delays and restriction with regard to the necessary building permits was mentioned by developers active in several countries of Central and Eastern Europe.

As a result of the international credit crunch (especially for real estate development projects) most developers expect that financing their projects will become the single main obstacle in the foreseeable future.

Other obstacles mentioned were environmental obligations (especially for resort projects), time constraints as well as difficulties with local contractors (e.g. over budget, interruptions, etc.).



Average construction time is 12–18 months, depending on number of rooms and quality level

Permitting and planning significantly impact the overall duration of the project

How long does it take to build a hotel? The sample hotels in our survey had an average construction time of approximately 12–18 months. This does not include the time spent for obtaining all necessary permits, planning activities and securing financing. Although the actual time required for the construction of a hotel is often a function of the property size (i.e. capacity of rooms) as well as quality standards, the differences in construction timeframe in our sample were not significant.

As obtaining the necessary building permits and negotiations with municipalities are the main obstacles in developing a hotel in the CEE region, the required timing for these tasks is often the crucial variable in the development timeframe of hotels.

The process of obtaining debt financing is also expected to take significantly more time in the near future as a result of the limited bank financing available. A great focus on equity participation will also be inevitable.


Gu ide l ines for new hote l pro jects in Centra l and Eastern Europe 17

Do you plan financing any hotel projects in the forthcoming one year period?

Not at all 30%

Less than last year

50%

Same as last year

20%

More than last year

0% %

0


10 20 30 40 50 60

Aspects of hotel financing

With an uncertain outcome as to the extent and timing of the current credit crunch, many hotel developments are being put on hold because of uncertain market conditions, restricted financing and insufficient equity. As part of our survey we therefore conducted interviews with some of the leading banks active in hotel project finance in the CEE region to get a better understanding of the current situation.

The banks have stated that they will most likely finance fewer hotel projects in 2009. Also they will assess in more detail projects’ key parameters, with a developer’s track record being most important.

Most important criteria for financing hotel projects

Developer 5.0(reliability and references)

Location 4.8

Independent4.5 feasibility study

Operator (brand) 4.5

Unique concept 3.7

Planning and permitting 3.4

1 2 3 4 5

1 least important – 5 most important


Banks preferably finance projects in countries where they already have established subsidiaries or lending policies. In general they prefer inner city upscale hotels in capital cities as well as selected second tier cities across CEE; a reputable management company and the preparation of an independent feasibility study are among the prerequisites, particularly for larger hotels.

Those developers that are able to secure debt financing will be faced with new terms and conditions.



Average Loan to Cost (LTC) ratio

Debt Equity 40–50% 50–60%


Preferred destinations for

new hotel developments

Country City (top three)

Poland Krakow

Gdansk

Warsaw

Romania Bucharest

Cluj

Sibiu

Czech Republic Prague

Olomouc

Croatia Hvar

Zagreb

Zadar

Hungary Budapest

Pécs

Győr


The key financial terms can be summarized as follows:

• Concerning risk premiums, the majority of the surveyed banks are financing greenfield hotel developments with a margin in the range of EURIBOR plus 2.5 – 4.0%.

• Significantly higher equity will also be required. Although dependent on various criteria, on average this is estimated to be up to 50 – 60%. The average Loan To Cost ratio (LTC) varies by bank covering a range from 40 to 50%.

• Regarding the expected performance and debt servicing potential of a proposed hotel project, a Debt Coverage Ratio (DCR) of 1.2 – 1.3 is expected on average by the participating banks.

When asked about the future of hotel project finance in CEE, banks replied without exception that they expect financing to become more restricted and margins will go upwards and in line with increased country risks. At the same time, the required equity contribution is also expected to increase.

However, hotel projects with a good location and concept, a sound market environment and sustainable operations are said to still receive financing, regardless of the current financial crisis.

Outlook More stringent financing conditions are expected to have a significant impact on the future of hotel developments in the CEE region for at least the next few years. Consequently, the project pipeline is expected to shrink as developers/investors are facing the consequences of the credit crunch.

It is expected that developers and investors will focus more on city hotels as opposed to resort hotels, as they will be able to benefit from more market segments (i.e. leisure, business and transit). In addition, all developers have indicated that they want to focus on mid-scale and upscale hotels, not venturing into any projects in the budget/economy segment as there is already significant supply in this category. On the other hand, developers are also less interested in developing luxury hotels, as they are expensive to build and can only attract a smaller target market.

Concerning preferred locations for development, our survey respondents mentioned the destinations seen in the table on the left.


© 2009 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International,

a Swiss cooperative. All rights reserved. Printed in Hungary.

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public and private sectors:

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Contact

Andrea Sartori, Partner, Head of Travel, Leisure and Tourism in CEE

Tel: +36 1 887 7100, Fax: + 36 1 887 6656, e-mail: [email protected]

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For further information please contact:

KPMG contacts in Central & Eastern Europe

KPMG Real Estate, Leisure

& Tourism Practice CEE

Andrea Sartori Partner, KPMG Advisory Ltd. Head of Travel, Leisure & Tourism in CEE

The Balkans

(Albania with its branch in Kosovo, Bulgaria and Macedonia) Gergana Mantarkova

Tel: +359 2 9697 300 E-mail:[email protected]

H-1139 Budapest, Váci út 99 Hungary

Tel: +36 1 887 7100 E-mail: [email protected]

The Baltics and Belarus

(Belarus, Estonia, Latvia, Lithuania) Stephen Young


Croatia and Bosnia Herzegovina

Daniel Radic

Tel: +385 0 1 5390 000 E-mail: [email protected]

Czech Republic

Tomas Kulman


Hungary

Marnix von Bartheld


Poland

Jerzy Kalinowski


Romania and Moldova

Aura Giurcaneanu


Serbia and Montenegro

James Thornley


Slovakia

Ladislav Janyik


Slovenia

Andrej Korinšek


The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. KPMG does not accept any responsibility for errors, omissions or any consequence arising from the use of this report. KPMG reserves the right to alter at any time any element of this report. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.


mailto:[email protected]

mailto:[email protected]

Documents

kpmg eastern europe Hotel-Development-Costs-2009