One size fits all? Challenges for budget hotel development in Central & Eastern Europe (CEE) Friday 5 February 2010 |
 There is a shortage of affordable budget hotels in Central and Eastern Europe. |
Five to ten years ago, there was one pre-dominant budget hotel group in Europe (Accor), hardly any financing available for budget hotels and a lot of investors who snubbed their nose at the thought of developing a budget hotel.
Investors and developers were focusing on luxury or at least upscale hotels. This held particularly true in Eastern Europe, where oligarchs discov-ered, after getting bored with yachts, villas and English soccer clubs, a new toy: luxury hotels. It became de rigueur to own at least one palace-style hotel, and of course, costs did not matter.
Now, as a result of the worldwide economic crisis, trophy hotel owners dis-covered the importance of cash-flows. Luxury hotels became more of a liabil-ity than a smart investment. This rude awakening led to a re-evaluation of the merits and dangers of the hotel business. At the same time, budget and mid-segment hotels showed a remarkable resilience in light of the economic crisis. In fact, some of the few existing budget hotels in CEE benefited from restricted travel budgets of business executives and tourists alike.
Given the large populations of many East European countries, the still rela-tively low income levels and the somewhat insufficient traffic infrastructure, there is a clear case for budget hotels in this part of the world. However, there are still very few modern, affordable hotels in CEE (with the possible exception of Poland). The reasons for this comparative lack of supply are obvious:
- a high barrier of entry
- non-transparent local ownership structures and building regulations
- a lack of road infrastructure
- a limited acceptance of budget products among wealthy business travel-lers (both local and international)
In addition, skyrocketing land prices made budget hotels look less appealing than in more mature (and affordable) markets.
Besides the crisis, two major changes might now lead to a quick growth of budget hotel supply: more realistic land prices and the acceptance of the budget hotel model among local decision makers.
There is, however, one considerable obstacle for budget hotel development: stand-alone budget hotels generally do not make sense from an economic point of view since they lack economies of scale. Therefore, investors and hotel groups generally try to focus on comprehensive roll-out strategies for a whole country or region. In some countries, this is not a valid option because of the relatively limited size and number of population centres in the country (e.g. Slovenia, Moldavia). So it is no surprise that the first major focus of most hotel groups and investors was Poland (followed by Romania), as this country has a large population, a certain number of major population centres and a relatively stable investment climate.
One key question, which is repeatedly asked regarding budget hotels in CEE, is whether hotels there would differ in any major way from their equivalents in West Europe. The answer is straightforward: no ¡V budget hotels in Eastern Europe are fundamentally the same as they are in Western Europe. The one exception to this rule is the food and beverage element in low-budget hotels. Whereas West European low budget hotels might not have any restaurant or bar (or just a very small breakfast area), East European hotels of this kind should offer at least a bistro-style restaurant, including a sufficiently large breakfast area (as there is often no alternative quality offering available in the vicinity of the hotel).
Also, security concerns might lead to enclosed parking areas and 24-hour reception services. In addition, we believe that franchising should be avoided in certain markets, as a high level of control should be exerted on these properties from the side of the hotel groups. In any case, quality and security standards must be uncompromising.
For the years to come, we expect a strong focus on conversions (e.g. from office usage) of existing hotels and other real estate in CEE. In many cases of potential conversions, budget and mid-segment hotel products could be contemplated. With the expected continued shortage of financing in the region, both budget hotels and conversions seem to be attractive options for local investors.
The real battle, however, will not be fought over the question whether budget hotels make sense in CEE, but over the question which budget products are most lucrative? Here, we see a clear advantage for lifestyle-oriented budget products. "Affordable but sexy¨ is the key to a high return-on-investment in the budget hotel segment. This is true anywhere in the world, but is of particular importance in CEE, where an additional bonus might be obtained: the advantage of the first mover. In other words: the first budget hotel in any given market will likely reap an added return-on-investment. By creating attractive and stylish budget products, these hotels could also withstand future competition.
Overall, it is difficult to speedily develop budget hotels in Central and Eastern Europe but it is potentially very lucrative.
Source: PKF hotelexperts GmbH |
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