A Tale Of Two Europes

Mature markets in Western Europe still offer opportunities, but Central and Eastern Europe tend to dominate the investment/development conversation.

By Derek Gale, Senior Associate Editor -- Hotels, 6/1/2008

The Art Deco Numbers restaurant reflects a mix of traditional Europe with the hot, impulsive East.

While leading European hotel companies like Accor and Rezidor still see significant potential for growth in Western Europe, emerging markets in Central and Eastern Europe (CEE) are what everybody, including the likes of Accor and Rezidor, is talking about.

In fact, two different industry consultants—Stewart Coggans, director of Central and Eastern Europe for Cushman & Wakefield Hospitality, and David Mongeau, chairman and founder of Avington, a London-based investment banking advisory firm—offered nearly the exact same words to describe this phenomenon. Both noted that there is currently a “huge focus on Eastern Europe” that “started with Prague” and that now “Poland is coming more in focus as a place people want to be” because it is “a gateway to developing Eastern European countries.”

That said, what do investors, developers and brands all see in the CEE? Perhaps it is the strengthening economic climate with regional GDP growth forecast at 6.6% for CEE-EU members, a drop in unemployment and an increase in disposable income throughout the region, according to Cushman & Wakefield’s MarketWatch year-in-review. Or perhaps it is the increased investment in infrastructure development by CEE governments. Or maybe the 90 million international tourist arrivals each year—driven by the presence of low-cost air carriers and Western Europeans, who are taking more frequent short breaks to the region—has something to do with it.

As if these were not reasons enough, a lack of internationally branded hotel supply in many of the emerging markets, coupled with strong growth in hotel performance, is without a doubt fueling investment and development with operators looking to secure a brand presence in key markets as early as possible.

Before getting into the breakdown of which players are developing where and why, it is important to repeat what has been said in the pages of this magazine in years past, as it continues to ring true: Throughout Europe, the potential for branding is huge. Whether through development or repositioning, chains will look to drive the hotel product ratio from about 30:70 branded versus non-branded to 50:50 or even 60:40 in the short- to mid-term.

Leaders Look To Maintain Lead

The 84-suite MaMaison Pokrovka in the heart of Moscow is part of a group of hotels achieving outstanding rates and profit due to the city’s lack of supply at the mid-scale.

Not surprisingly, market leaders Accor and Rezidor are at the forefront of both this continental brand expansion and the expansion into CEE markets. As evidence, look no further than Accor’s rollout of the All Seasons brand (a franchise vehicle meant to affiliate a section of the mass of existing 2-star hotels across Europe), its increased holding of the Orbis network of some 70 hotels in Poland, and its desire, according to Michael Flaxman, COO of Northern, Central and Eastern Europe, to work with local partners to develop domestic chains of budget/economy hotels (think Ibis and Etap) in countries like Russia, Romania and Hungary.

Rezidor, meanwhile, will look to maintain its pole position in Russia, including expanding into regional cities, says senior vice president and chief development officer Puneet Chhatwal, while also pushing its Radisson brand from Eastern European capitals to secondary cities and its Park Inn brand into various markets across countries like Poland, Russia and Romania.

But American brands like Marriott and Hilton also are well positioned to build their brands and expand in CEE markets moving forward. Marriott already has a number of Courtyards in the Czech Republic, for example, giving the company some brand recognition in the region. And Hilton, while still in the infancy of taking its U.S.-based brands to European markets, could very quickly “become a force to be reckoned with,” as it rolls out the likes of Hilton Garden Inn to Poland, Russia and Turkey, Coggans notes.

Smaller, more regional “soft brands” like The Rocco Forte Collection, The Dorchester Collection and Steigenberger Hotel Group also continue to expand, albeit much more slowly. The Augustine, set to open this fall, will be the 12th hotel in The Rocco Forte Collection, and the second CEE property (Hotel Astoria in St. Petersburg was the first).

Steigenberger, meanwhile, recently named André Witschi, a former Mövenpick and Accor executive, chairman of the board, “to ensure the future expansion of the company,” and already has announced a new hotel on the Baltic island of Usedom.

And Dorchester Collection CEO Christopher Cowdray earlier this year mentioned two pending deals in Europe and an openness to expand into “other major European cities which show future growth.”

Hitting The Hot Markets

For brands and developers, the most exciting CEE market besides Russia and its regional

Poland is a focus area for Hilton, which opened its first property in Warsaw last year. The company sees opportunity to take its U.S. brands there and to use the country as a gateway into Eastern Europe.

cities—which is without a doubt the toughest market to penetrate—may well be Poland and its regional cities, where it is easier to do business and labor costs are low, Coggans says. Poland is seeing growth in visitors from non-adjacent European Union countries, thanks to increased flight arrivals from low-fare airlines, as well as increasing occupancies and RevPAR. Warsaw remains the primary market, but Krakow, which has limited hotel capacity, is quickly becoming a tourist destination.

Coggans also calls the Ukraine—with its lack of quality hotel stock—an “interesting” market, and says Romania, a hotel market in its infancy, could achieve a similar status in two to three years with opportunities in Bucharest and resort opportunities along the Black Sea.

Meanwhile, key capitals like Prague and Budapest that attract some leisure travel as well as business travel, while perhaps getting built out in the luxury category, hold great potential for lifestyle hotels, he says. And in terms of resorts, he also sees the Croatia coastline emerging in due course as a family holiday hot spot, especially for Russians.

Not to be forgotten is Istanbul, which is still undersupplied and in need of 3- and 4-star business hotels, and Turkey in general, a large country where regional demand is high thanks to Turkey being a popular holiday destination.

The Augustine, created from a complex of historic buildings and set to open in Prague this fall, will be the second CEE hotel in The Rocco Forte Collection. Its location in the city should draw both business and leisure travelers.

For investors, “Prague is a stable place to own a hotel if you buy the right one,” Coggans says, with the same holding true in Budapest. Warsaw, meanwhile, “has risen from the ashes” of previous oversupply to steady RevPAR growth. If he were spending his own money, Coggans would purchase “a trophy asset in Warsaw and mid-market products in the regional cities in the Ukraine and Poland, with a few in Romania.” Regional cities offer the best opportunities for pure return-driven investors, he says, while trophy assets in key capitals are the safest long-term investments.

Rushing Into Russia

Market demand, especially at the mid-market level, is exceptionally strong throughout Russia thanks to the continuing extreme undersupply of international standard hotels—both in Moscow and the regional cities. This situation drove chain hotels in Moscow to be the most profitable in Europe for 2007, according to London-based TRI Hospitality Consulting, despite low weekend occupancy (average rates, while down from previous years, still hovered around €300, making Moscow the most expensive European market, according to Cushman & Wakefield).

Needless to say, there is great interest among brands to get into these markets, but Russia is a notoriously difficult place to do business—issues like ownership and title to land slow things down and brands are unlikely to see success without working in conjunction with a proven local developer or partner with good contacts in the planning/administation system, Coggans notes.

A few examples of operators doing business this way include:

Park Plaza Hotels Europe partnering with Ferens Management—a subsidiary of the Moscow-based Renova StroyGroup—to create up to 20 Park Plaza hotels in Moscow, St. Petersburg and other key cities over the next four years.
Hilton working with London & Regional Properties Ltd. to develop 25 new properties across Russia encompassing select Hilton family brands.

One brand that has had particular success already in the Russia market is Holiday Inn, with four hotels open in Moscow and three more under development. Parent company IHG sees Russia as a key strategic market, and in the short term has seven other hotels in its Russia pipeline, which will give the company a presence in six of Russia’s 13 largest cities. In addition, the company already has launched a Russian language Web site.

Hilton, meanwhile, expects to rival IHG and other international players as executives anticipate opening more than 70 hotels across Russia in the next 10 years, including the newly opened Hilton Moscow Leningradskaya and the company’s first Doubletree and Hilton Garden Inn properties, which are set to open in other Russian cities later this year.

“For us, Russia is one of the hottest markets in
Europe in terms of opportunity, which is

Starwood is expanding W globally, and Istanbul, which needs 3- and 4-star hotels, is the first European outpost.

tremendous,” says Patrick Fitzgibbon, Hilton’s senior vice president of development for Europe and Africa. “It’s one of the biggest markets in the world where we never had a presence. The challenge in Russia is the speed with which we can deliver.”

Economy, Mid-Scale Shortage

Taking a more big-picture look at all of Europe, “We think there’s a huge hole in terms of opportunity for really good, strong mid-market hotels,” Coggans says. “There’s a lack of international brands at the mid-scale.”

Everyone seems to agree that is the case, with Hilton’s Fitzgibbon sharing almost those exact same words, and Accor’s Flaxman talking about the potential for the Mercure brand in terms of conversions or franchising and the opportunity to take the SuiteHotel concept to emerging markets.

And it is only a matter of time, Coggans says, until other business brands like Courtyard by Marriott and Four Points by Sheraton make their way into the regional cities in markets like Poland and the Czech Republic.

The budget/economy sector is ripe for growth as well, Flaxman opines. “We still believe that in most of the countries in Europe, the economy segment still has a great deal of potential. He cites Germany, in particular, where there is less than 10% penetration of the segment by hotel chains, as well as the CEE markets, but notes that even France and the UK have room for growth.

“In the UK this year, we will open roughly 20 Etap hotels,” he says. “In terms of numbers of hotels and rooms, the budget and economy segment will lead the way” for Accor’s growth, he continues.

Mapping The West

In addition to its Holiday Inn product shown above, IHG is looking to take hold in the UK with its Staybridge Suites extended-stay offering.

The major tourism capitals in Western Europe, including London, Paris and Frankfurt, continue to be desirable places to have hotels, as they are performing well in terms of occupancy and RevPAR, but getting deals done in these mature markets is difficult, “not just because things are expensive but because there is so little land available and it is so highly regulated in terms of zoning, historic buildings and density,” Mongeau says. “There is limited ability to create new stock.”

In the UK, with mid-market domestic business remaining strong, the story is continuing brand development, especially in the extended-stay segment, where IHG is looking to take hold with Staybridge Suites and Hilton is likely to look for opportunities for its Homewood Suites brand.

Hilton also is aggressively rolling out its Doubletree and Hampton brands in both established and newer markets, trying to raise the brands’ profiles while looking to double its portfolio of hotels in the UK and Ireland over the next five years. The first UK Doubletree opened in Cambridge in April, and with the success of economy brands like Premier Travel Inn and Travelodge in the last 15 years, Hilton also sees significant opportunity for Hampton in the UK, Fitzgibbon says. He is especially excited about a deal to do 25 Hamptons by Hilton in the UK with an experienced, high-volume developer, as it will quickly give the brand scale.

In France, Paris continues to outperform, with high occupancy, RevPAR and profit growth, and while Accor dominates the market, Rezidor has seen success with its Radisson and Regent brands outside Paris and hopes to continue building on that.

Germany is seeing quite a bit of change and interest these days, with the traditional lease-driven business model starting to give way to different operating structures, including management contracts and franchising. Hilton considers the country one of its four strategic European markets, and is driving forward there with its Hilton Garden Inn brand.

“There is a strong presence of regional hotel companies [in Germany], so we see opportunity to talk with unbranded, unaffiliated hotels to convert,” Fitzgibbon says. “When markets soften, or when there is talk of that and people get nervous, owners tend to fly to brands.”

Meanwhile, on the franchising side, Golden Tulip Hospitality recently won franchise agreements for 27 hotels formerly affiliated with the Mercure brand, greatly expanding that company’s footprint in the country.

Italy is another market that has previously confounded international operators with its ownership structure and competitive domestic operators—brand affiliation thus far has been extremely low across the country. But after a few years of groundwork, the landscape is changing there, too, with Hilton teaming with local partners to add six new properties by 2009 and Sol Meliá announcing plans to open five new hotels in the country by 2010.

Interest in Italy is high not only because of its domestic market and inbound tourism market, but also because of its potential as a gateway to Montenegro, Turkey and the Middle East.

Direct comments to: derek.gale@reedbusiness.com

Credit Crunch Not Impacting European Hotel Performance To Date

Operational performance has remained strong in Europe through the first quarter of 2008, and although there is some nervousness about real estate and future trading performance, investment prospects for hotels are still considered modestly good and development prospects are thought to be even slightly better, according to the latest report from PricewaterhouseCoopers UK.

“Europe isn’t sensing anything at all like what we are seeing in the United States,” says David Mongeau, chairman and founder of Avington, a London-based investment banking advisory firm. “Things are still relatively strong, both in occupancy and RevPARs. The downturn in U.S. tourism visitation has been more than replaced by other inter-European continental business or Eastern European business, or further east—I’m startled by the number of Chinese [visitors].”

Graham Craggs, managing director for Jones Lang LaSalle Hotels’ pan-EMEA advisory team, agrees. “From an operational perspective, rather surprisingly perhaps, we haven’t seen too much of an impact of what’s going on in the financial markets on the trading performance of hotels. Generally, it is difficult to discern much of an impact in operational markets from the credit crunch. There is not much evidence of a downturn to date.”

Whether this will continue is anybody’s guess, and there is no shortage of opinions coming down on either side, but Craggs notes that after analyzing metrics, it seems that many Western European markets have not actually reached their peaks (year 2000 performance levels), and that some, like Paris, continue to go ahead strongly in 2008, in spite of any outside factors.

“You would have thought, if there was an economic crisis, it might have affected [the region] more already than it has,” he says. “So maybe the market won’t be affected to the extent people think it will be.”

The development side is slightly different: “People hoping to do high-level development may not be able to get that finance, as banks are reviewing their risk strategy,” notes Alister McCutchion, executive vice president of Jones Lang LaSalle Hotels. “But people out there are still prepared to lend” for the right projects, he says: “You need a good, well-located product with a good brand.”

The bottom line? European debt is still available—it is simply not as easy to find and will not come at as cheap a price in 2008.

As for investment and transactions, expect far fewer private equity deals and big portfolio transactions, and more activity from sovereign wealth funds, pension funds and dynastic families, all of which have more available capital and can pay more because of lower return hurdles and longer-term investment horizons, Mongeau says.

GIST

Russia and Poland and their regional cities seem to be the hottest development markets in Europe.
Russia remains a difficult place to do business and thus is likely to continue to suffer from lack of international standard supply in the short term.
Central and Eastern Europe is abuzz with GDP growth, lower unemployment, greater disposable income, growing tourist arrivals and increased investment in infrastructure.
A lack of internationally branded supply, especially at the mid-scale, continues to drive interest across many European markets.
Business, extended-stay and economy brands seem to be fits in regional cities outside key capitals.
Affiliating or converting existing product will be a key strategy for the major international players as they look to increase their footprints across the continent.
Gateway locations in Poland, Russia, Italy and Turkey, see great interest from brands.
Even Western Europe is far from brand saturated, and key cities like London and Paris, along with their suburbs, continue to be highly desirable locations for hotel presence.