Few global industries have been as strongly affected by the COVID-19 pandemic as the hotel industry. All over the world, chains and bespoke hoteliers have had to face the impact of travel restrictions on bookings, in most cases leading to dire falls in occupancy rates and, subsequently, income. Now that the pandemic has been wreaking havoc for over a year, how is the hotel industry in CEE coping, and what options do hoteliers have? We spoke with three CMS Partners – Ana Radnev, Gregor Famira, and Lukas Hejduk – to get their opinions on the current situation and outlook on the future of the sector.
A Rough Year
“In the region’s largest cities, Prague, Warsaw, Budapest, and Bucharest, occupancy sharply declined and revenues plunged”, explained Lukas Hejduk, CMS Partner and Head of Real Estate – CEE. Particularly damaging was the fact that “most properties have incurred expensive stop and start costs,” Ana Radnev, CMS CEE/CIS Finance Partner and a finance restructuring lawyer, noted on the severity of the problems hotel operators face. “Uncertainty is the key problem here: if a hotel operator wants to restart operations in a city or country, it must first ask itself what the future holds. The cost of the restart will be wasted if the pandemic resurges in that territory and the hotel has to shut down again.”
Gregor Famira, CMS Partner and Head of Real Estate for Austria & SEE, highlights an unevenness of support in the region to meet such challenges: “The effects varied depending on how much each government offered. Some countries gave bigger subsidies than others, which led to a lot of frustration. In Austria, hoteliers received huge grants and now, with occupancy rates having crashed, they are more bored than bankrupt.”
Ultimately, Famira makes a clear distinction between locations: “While city hotels rely more on business travelers, and have thus suffered badly, countryside hotels have weathered the storm slightly better. This is because they tend to have local owners and have been able to benefit from native populations vacationing in their own countries. In the cities, the large international chains are now relying on new ‘show-stopper’ hotels to generate publicity and get people looking forward to a return to business travel.” When considering the current options for hotel chains, Radnev echoes Famira’s sentiments: “With uncertainty being the biggest problem, the primary objective is to try and preserve the markets. This has seen hotels reorientate themselves to appeal to a more urban customer base, for example, local populations restricted to ‘staycations’.”
“Everyone was expecting to see distressed sales and pick up bargains, but that hasn’t transpired to be the case,” comments Hejduk, but that seems inevitable according to the CMS Partners. “Financially, we can say that – unsurprisingly – healthy businesses have suffered while for those that were already saddled with debt, the outlook has worsened,” Radnev explains. “Banks and other debt providers are therefore concentrating on consolidation while also considering more pragmatic solutions such as offloading assets. Perhaps more than most other sectors, the hotel industry is slowly becoming a buyer’s market. Pressure on hotel operators to take mitigating steps is increasing. For investors, if assets are coming to market relatively cheaply, then it makes sense to invest in anticipation of the assets’ values increasing once the pandemic has passed.”
Famira adds: “The issue here is that some costs were not ultimately avoided, but only delayed. Those landlords who were unable or unwilling to reduce rents to almost zero often agreed on shifting rental payments into the future, and the future is… now! This adds financial stress at a time when businesses have barely picked up. As a result, we’d expect that some of the more challenged operators will have to give up, and so there could be quite an interesting playground for new operators on the market. On the property owners’ side, we expect that the difficulties in operations will lead to a gentle decrease in prices, but as there is a lot of money in the market, and some notable ‘investment pressure’, the effect on values will not be that material. We are expecting a boom in transactions in the near future.”
Hejduk also notes the relative attractiveness of the hotel sector to other property sectors. He says: “We see that investor appetite in the hospitality sector – among international and local investors alike – is increasing. A year ago, there was an element of doom surrounding the pandemic, and many were expecting to see distressed sales. Those forecasts have not been fulfilled, and now with high hopes of the pandemic coming under control, investors look at potential investments in the sector recovering. Compared to other real estate sectors like logistics, offices, residential, and health care, hotels will offer better returns. Generally, we expect to see a quick rebound in the sector with travel restrictions easing.”
Reasons for Optimism
According to Radnev, “banks have been supportive and want to continue to be. In many jurisdictions, the government introduced legal moratoria (either automatic or opt-in). These measures had the effect of ‘buying time’ while the pandemic played out. However, it’s now been over a year and despite the available vaccines, improvement in travel in the region – and thus prospects for the hotel industry – is progressing with agonizing slowness.” But, while progress is slow, Hejduk is optimistic: “While we have all adapted to working remotely, people want to be able to meet face to face again, and I expect a positive rebound in the hotel industry later this year. This applies both in business travel to the major CEE cities, and in broadening tourist travel.” Famira agrees, saying: “Although I would expect business travel to return ahead of tourism, in countries like Austria, Slovenia, and Croatia, people are anticipating the return of tourists this summer.”
Ultimately, Hejduk explains that “despite the current slump, it’s important to note that the fundamentals have not changed. What we are dealing with here is a health crisis, not an economic or structural crisis. People still want to travel, they just can’t right now. But the situation is temporary; both business and leisure travel will come back.”
The consensus between the three CMS Partners is that we seem to have turned a corner and the hotel and leisure industry in CEE can tentatively look forward to better days ahead.
This Article was originally published in Issue 8.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.