2009 - KPMG Hotel Development Costs

REAL ESTATE, LEISURE & TOURISM PRACTICE CEE
Hotel Development Costs

2009
Guidelines for new hotel projects
in Central and Eastern Europe
ADVISORY
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.
2 Hot el Devel opment Cost s 2009
I am pleased to present the Hotel Development Cost Survey in Central and
Eastern Europe (CEE), prepared by KPMGs 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,
Dear Reader,
Andrea Sartori
Partner, KPMG Advisory Ltd.
Head of Travel, Leisure & Tourism in CEE
andrea.sartori@kpmg.hu
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.
The regions 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.
BG
RO
MK
AL
ME
RS
BA
HR SI
HU
SK
CZ
PL
LT
LV
EE
The CEE region covers 1.3 million
square km and has a total population
of approximately 130 million
The shared history of recent
decades is the most common feature
of CEE countries
Gui del i nes for new hot el pr oj ect s i n Cent r al and East er n Eur ope 3
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
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.
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 countrys economy we note that in some countries
(e.g. Croatia and Montenegro) this share is significant: more than 20% of total GDP.
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.
Travel and tourism contributes an
average of 11.7% to national GDPs
in the CEE region
30
25
20
15
10
5
0
HR ME EE AL SK BG SI CZ BA PL LV HU LT MK RO RS
Travel and tourism contribution to GDP
Source: World Travel & Tourism Council estimates for 2008
11.7%
%
BG 92% 4,814
RO 96% 6,972
HU 73% 7,371
HR 37% 11,162
CZ 76% 12,961
PL 66% 18,947
0 5,000 10,000 15,000 20,000
Thousand people
Hotel arrivals
Other arrivals
Source: National statistical offices
Tourist arrivals in selected
CEE markets (2007)
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%.
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.
The average annual growth rate for
hotel supply in CEE has exceeded
4% since 2003
During the period 20032007,
the highest growth rates in supply
were recorded in Bulgaria, Romania
and Poland
8,353
8,585
9,006
9,452
10,003
507,603
485,746
465,339 463,546
428,420
Source: National statistical offices, KPMG research and estimates
Total number of hotels and hotel rooms in CEE (20032007)
14,000
13,000
12,000
11,000
10,000
9,000
8,000
7,000
600,000
550,000
500,000
450,000
400,000
350,000
300,000
2003 2004 2005 2006 2007
Number of hotels
Number of rooms
H
o
t
e
l
s
R
o
o
m
s
The Czech Republic, Bulgaria and Poland are the top three countries in terms of
total hotel rooms with each of them contributing between 14% and 16% to the
total supply.
2
Romania, Croatia and Hungary together account for another 33%
of the regions total hotel room supply.
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.
Growth in number of hotel rooms in selected CEE countries (2003 & 2007)
Serbia +8%
Slovakia +7%
Hungary +7%
Croatia +6%
Romania +23%
Poland +19%
Bulgaria +47%
Czech Republic +11%
0 20,000 40,000 60,000 80,000 100,000
81,300
80,000
72,500
60,000
52,500
49,700
24,400
18,000
72,900
54,300
61,200
48,700
49,500
46,300
22,700
16,700 2003
2007
Czech Republic, Bulgaria and Poland
have the largest shares of hotel room
supply in the region
Almost 80% of the total supply
is concentrated in six of the 16 CEE
countries
Distribution of hotel rooms by country (2007)
Czech
Republic 16%
Bulgaria 16%
Poland 14%
Romania 12%
Croatia 11%
Hungary 10%
Slovakia 5%
Serbia 4%
Slovenia 3%
Estonia 2%
Lithuania 2%
Albania 2%
Latvia 2%
Macedonia 1%
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.
Although there are several factors limiting the comparison between individual
countries (e.g. climate, accessibility and the countrys 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.
Source: EIU, national statistical offices with KPMG elaboration
Population per hotel room and international tourism receipts
per capita in selected CEE countries (2007)
600
500
400
300
200
100
0
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
PL RO SK HU CZ BG FRA ITA ESP AUT
population/hotel room tourism receipts/capita
p
o
p
u
l
a
t
i
o
n
/
r
o
o
m
E
U
R
Tourism receipts per capita are low
in most of CEE and especially low
in Poland and Romania
5-star
2% 4-star
13%
3-star
42%
2-star
32%
1-star
11%
Source: National statistical offices,
KPMG research and estimates
Overall distribution of hotel
rooms in CEE by category (2007)
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.
Poland 10% 28% 47% 11% 4%
Hungary 6% 18% 46% 23% 7%
Czech Republic 7% 17% 49% 21% 6%
0% 20% 40% 60% 80% 100%
1-star 2-star 3-star 4-star 5-star
and in 2007
Poland 8% 27% 45% 14% 6%
Hungary 5% 10% 46% 31% 8%
Czech Republic 5% 10% 50% 28% 7%
0% 20% 40% 60% 80% 100%
1-star 2-star 3-star 4-star 5-star
Distribution of hotel rooms in 2003
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.
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.
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
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
Extensive F&B facilities
Extensive amenities
(e.g. meeting space, retail
outlets, wellness centre)
Radisson, Sofitel, Hilton,
Intercontinental, Marriott
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.
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.
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.
more than 250
rooms 16%
151 250 rooms
37%
81 150 rooms
21%
80 rooms or less
26%
by room capacity
City mixed-
use hotel 6%
Resort
33%
City stand-
alone hotel
61%
by type of development
Distribution of the participating
hotels by category
Budget
13%
Midscale
26%
Upscale
61%
Source: Hotel Development Costs 2009 survey
Development costs
The average development cost per guest room by category is shown
in the chart below.
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.
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
E
U
R
/
r
o
o
m
51,000
77,000
143,000
Budget/Economy Midscale Upscale
Based on our sample, upscale hotels
cost almost three times more to
develop than budget/economy hotels
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.
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%.
Breakdown of hotel
development costs
Pre-opening &
working capital 2%
Soft Costs 9%
OS&E 2%
FF&E
12%
Technical
Equipment
25%
Construction
45%
Site and area
improvements
5%
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
Pre-Opening & Working Capital 1,530 1,540 2,860
Total costs per guest room 51,000 77,000 143,000
Growth in construction costs has been
faster in CEE than in Western Europe
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
1218 months. In fact, approximately 80% of respondents believe construction
costs will decrease by 6% or more.
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.).
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
Note: No responses were given for the range more than 10% increase and 0-5% decrease
In your opinion, how will costs change in the next 1218 months?
45%
35%
11%
9%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
increase by more than 10%
increase by 69%
increase by 05%
decrease by 05%
decrease by 610%
decrease by more than 10%
Five most frequently mentioned
obstacles by survey respondents
(multiple answers allowed)
1
st
Municipality/building permits (46%)
2
nd
Obtaining Financing (35%)
3
rd
Environmental issues (15%)
4
th
Time constraints (10%)
5
th
Difficulties with contractors (8%)
Average construction time is
1218 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 1218 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.
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 developers
track record being 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.
Do you plan financing any hotel
projects in the forthcoming one
year period?
30%
50%
20%
0%
Not at all
Less than
last year
Same as
last year
More than
last year
0 10 20 30 40 50 60
%
Most important criteria for financing hotel projects
Developer
(reliability and references)
5.0
Location 4.8
Independent
feasibility study
4.5
Operator (brand) 4.5
Unique concept 3.7
Planning and permitting 3.4
1 2 3 4 5
1 least important 5 most important
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.
Average Loan to Cost (LTC) ratio
Equity
5060%
Debt
4050%
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
Pcs
Gyr
We are
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your business
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.
KPMG is a global
network of
professional
services firms
providing Audit,
Tax and Advisory
services.
We operate in 144
countries and have
137,000 people
working in member
firms around the
world.
KPMG's Real Estate, Leisure & Tourism Group in Central and Eastern Europe has a
broad range of skills, experience and knowledge that reaches across both the
public and private sectors:
Mixed use developments
Hotels and resorts
Theme parks and visitor attractions
Golf courses and golfing estates
Restaurant chains
Airlines and airports
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Our services include:
Market and financial feasibility studies
Valuations
Project conceptualization and investment planning
Project managment
Tourism development strategies
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Economic impact assessment
Contact
Andrea Sartori, Partner, Head of Travel, Leisure and Tourism in CEE
Tel: +36 1 887 7100, Fax: + 36 1 887 6656, e-mail: andrea.sartori@kpmg.hu
kpmg.hu
kpmg.hu
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.
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.
For further information
please contact:
KPMG Real Estate, Leisure
& Tourism Practice CEE
Andrea Sartori
Partner, KPMG Advisory Ltd.
Head of Travel, Leisure & Tourism in CEE
H-1139 Budapest,
Vci t 99
Hungary
Tel: +36 1 887 7100
E-mail: andrea.sartori@kpmg.hu
KPMG contacts in
Central & Eastern Europe
The Balkans
(Albania with its branch in Kosovo,
Bulgaria and Macedonia)
Gergana Mantarkova
Tel: +359 2 9697 300
E-mail:gerganamantarkova@kpmg.com
The Baltics and Belarus
(Belarus, Estonia, Latvia, Lithuania)
Stephen Young
Tel: +371 67 038 000
E-mail: stephenyoung@kpmg.com
Croatia and Bosnia Herzegovina
Daniel Radic
Tel: +385 0 1 5390 000
E-mail: dradic@kpmg.com
Czech Republic
Tomas Kulman
Tel: +420 222 123 111
E-mail: tomaskulman@kpmg.cz
Hungary
Marnix von Bartheld
Tel: +36 1 887 71 00
E-mail: marnix.vonbartheld@kpmg.hu
Poland
Jerzy Kalinowski
Tel: +48 22 528 11 00
E-mail: jerzykalinowski@kpmg.pl
Romania and Moldova
Aura Giurcaneanu
Tel: +40 741 800 800
E-mail: agiurcaneanu@kpmg.com
Serbia and Montenegro
James Thornley
Tel: +381 11 20 50 500
E-mail: jamesthornley@kpmg.com
Slovakia
Ladislav Janyik
Tel: +421 2 59984 111
E-mail: ljanyik@kpmg.sk
Slovenia
Andrej Korinek
Tel: +386 1 420 11 60
E-mail: andrej.korinsek@kpmg.si

2009 - KPMG Hotel Development Costs

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REAL ESTATE, LEISURE & TOURISM PRACTICE CEE

Hotel Development Costs

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