The Hungarian hotel market is booming

This article was originally published on Turizmus.com.

By 2020, the number of newly transferred rooms may double to 2000, and in addition to international hotel chains, mutual funds will be active as buyers or investors. Like last year, significant sales are expected on the market, with buyers looking for 4-star hotels, where the purchase price can be as high as € 230,000 per room.

The reduction in VAT and the fact that the Czech and Polish markets have already experienced significant price increases are driving up the price. Negative trends include rising construction costs, lack of construction capacity, and most of all, the impact of the coronavirus on tourism - these are the main findings of VLK Cresa's hotel market forecast.

Hotel investments continue

The key finding of an independent corporate real estate consultancy market analysis is that the hotel sector is booming: new hotels are under construction, but there is strong customer demand for existing homes as well.

In 2019, close to 1,000 new hotel rooms were opened in 8 Budapest and 3 rural hotels, and occupancy increased, albeit at a minimal level, as supply expanded. Last year, room rates for 4-star hotels in Budapest grew the fastest, with a 13.6% increase explaining that 46% of ongoing hotel developments are in this category.

Developers were also not alarmed that construction costs - with the same technical content - increased by 40-50% over the last two to three years, which for a 4-star hotel means $ 1,600 to $ 1,800 / sqm from $ 2,200 to 2,400 Construction costs jumped to EUR / sqm.

Further evidence of the market boom is that there have been significant sales and purchases last year: there was a 4-star hotel that sold for 230,000 euros / room, says Péter Takács, an expert at VLK Cresa.

Sellers are waiting

Currently, sellers are waiting and expect further price increases. Optimism is partly justified, as Hungary remains a good investment destination, as the Czech and Polish markets are already too expensive and hotel performance is steadily improving.

We also have the opportunity to profit from VAT reductions, and investment funds specializing in hotel investments, which not only buy hotels as financial investments, but also plan to achieve the added value with professional knowledge, international experience, brand synergies, rebuilding and repositioning programs.

However, Peter Takács also warns that customers should pay attention to the return, for example, the price of 230 thousand euros / room can only be realistic for 4-star hotels with more than 100 rooms, because in this case - like the office market, With a yield of 5%, you will have to rent a room for about EUR 950 per month, which can only be achieved with proper location and economies of scale.

Lack of capacity in the construction industry and the impact of the coronavirus

Market prospects are overshadowed by the rise in property prices: all well-located sites suitable for hotel buildings with a useful floor area of at least 5,000 square meters are in the queue for buyers.

Currently, the prices are determined by the proportion of land (land price per square meter of useful floor space), which is very variable in Budapest. in the district it is 1500-2000 euros / square meter, in the VII. and in the district "only" 1000-1500 euros / square meter, depending on whether the building, site has a building permit and how many rooms hotel can be implemented.

The general problems of the construction industry do not escape hotel developments either: lack of specialists, lack of capacity can cause investments to slip or even miss. And in some rural cities, the uncertainty of the European car industry is ringing the local hotel market.

However, according to VLK Cresa, the most significant risk factor is the impact of the coronavirus on tourism. Last year, China came in tenth place in the list of countries of destination, the number of tourists arriving there increased by 6.9% (about 439,000 overnight stays, about three quarters of which are realized in Budapest), and the Hungarian tourism market continued to grow expected this year also due to direct flights. But due to the coronavirus, this trend may be reversed, says Péter Takács, who, based on international analysis, expects a 25-30% drop in Chinese tourism.

Forecast: Ready-made hotels will remain in demand

VLK Cresa predicts that 1,500-2,000 new hotel rooms will be transferred this year.

The expert estimates that profits per room could increase by an average of 3-5% in 2020.

This is due to the positive effect of the VAT reduction and the fact that the weakening forint slightly offsets the rise in forint-based wage costs. This also means that international hotel chains and investment funds are still keenly interested in the Hungarian market, and there is a strong domestic and international interest in any Budapest operator search project.

In the countryside, international brands already present in the capital are actively seeking new opportunities in the countryside, but economic development programs and rural tourist attraction development may generate further interest from operators and investors.

The most popular of the mutual funds will be the rental arrangements where the hotel is operated by a local or regional independent professional partner, but under an international brand, according to its specifications.

“Investors are divided between leasing or management schemes: more conservative developers are looking for a leasing arrangement for a fixed cash flow, and investors with higher risk prefer operating contracts. Investors are similarly divided: institutional, mutual fund buyers prefer rental construction hotel products, private investors and those looking for a higher risk are looking for a management design, "says Péter Takács, who says 5-5 , They change hands at around 5% yield, which is why management contracted hoteliers expect that return at exit, but customers would rather buy these at a 6-6.5% yield.