Budapest hotel development market ahead of dreadful times

... Valuation and Research at the Hungarian office of Colliers International. The reason for this is a significant decrease in business tourism and bank financing activity. Balla believes the depression in the area of hotel developments will lead to a reshaping of services in existing hotels and an upgrade at conference tourism.

There are four 5-star and ten 4-star hotels currently under construction in Budapest, which means there could be a total of 14 large-size hotels with 100-200 rooms each handed over by the end of 2010.

While hotel development was especially popular with banks and property developers in the past years, Balla believes the segment will become increasingly neglected and under a worst-case scenario he even sees forced sales possible.

Balla recalled discussions with banks where, he said, it is already clear that the hotel market is not exactly a preferred area for the lenders - in some cases it has even become a taboo subject. Property developers also ask for advice more frequently as to how they could use a plot originally chosen for hotel development for another type of project.

There was a dramatic decline in the number of “classic" business trips as global companies have cut their travel budgets and the visitors on holiday tourism are also often less well-off and sometimes downright raffish. A long craved boom in conference tourism might offer a way out but in order to get there hotels would need high-quality conference venues with a capacity to accommodate 500-1,000 people. The truth is that smaller conference locations large enough for no more than a few hundred people often do not meet the current requirements.

Balla could not recall any case when an ongoing construction was called off, saying that the financing banks would also incur massive losses on such a project stop. At the same time he noted that some projects are indeed slowed down or rescheduled in the land phase, and sometimes a 5-star hotel ends up in a lower category.

Colliers expects fewer hotel investments in the future, as banks have tightened borrowing conditions and projects on this market are generally carried out from loans. The caution in hotel developments roots in this and is further fuelled by market analyses and statistics showing declining occupancy ratios and waning revenues.

Summing up the visible trends Balla said the hotel development market has entered a period of stagnation and decline, which puts greater responsibilities on hotel management - i.e. the manager, the operating director and the chef - regarding the upgrade of services. In Balla's view, a professional management will be valued more both by banks and guests than a distinguished hotel brand name that may be able to keep its occupancy rate steady, but it cannot adapt swiftly to rapidly changing market demand.