In this episode, we had the pleasure of hosting Le Fichoux Frederic and Borivoj Vokrinek from Cushman & Wakefield, who shared some amazing insights on the recovery of the hotel market in Europe after COVID-19. Despite the challenges, they noted that most markets in Europe are reflecting pre-pandemic levels by 2022, with the exception of the Central and Eastern European region. However, they suggested that the region should diversify its sources of demand and focus on short-distance trips to attract more international travelers.

Another important topic they discussed was the increasing importance of ESG factors in the hotel industry. Borivoj noted that investors are realizing the value of investing in ESG properties and regulations are coming into place to require owners and operators to deploy capital towards ESG initiatives.

Overall, this episode was filled with valuable lessons and victories in the hotel industry. Let's celebrate the resilience and adaptability of the industry and look forward to a brighter future!

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Transcript

Marina Franolic (00:00:00) - Welcome to the IDEEA podcast, a channel for the IDEEA Hospitality Investment Forum, which is an annual gathering for the hospitality investment community in Eastern Europe. Tune in to insightful conversations between the IDEEA team and hospitality investment leaders and innovators across Europe. And now let's dive right into today's episode.

Marina Franolic (00:00:27) - Today, my guests are Le Frederic Fichoux, his international partner and head of hotel transactions for Continental Europe, Cushman Wakefield, as well as Borivoj Vokrinek, partner for Strategic Advisory and head of Hospitality Research, Cushman Wakefield. We're sitting in the Marriott, Prague, the place where the next IDEEA hospitality event is taking place on September 18 - 20. And of course, Cushman and Wakefield are our partners and the great supporters of over the years. And we since they're based in Prague and very much overlooking the central Eastern Europe as well as the rest of Europe, we're going to discuss today a little bit about the market. Fred, maybe we can start with you, how the hotel market has recovered from Covid. What are your insights?

Frederic & Borivoj (00:01:23) - Yeah, I think maybe looking at a bigger picture, I think everyone has been pretty impressed on the recovery of the hotel market.

Frederic & Borivoj (00:01:32) - You know, when when we look back at kind of the beginning of Covid, like 2020, 2021, you know, and you look at all the forecasts that were coming from Oxford Economics and some other kind of like big institutions, everyone was kind of expecting the market to be recovered in 2024, 2025, and now we are kind of in, you know, looking back at 2022 and most of the markets in Europe were like reflected a bar that was close or like above 2019. So like a very surprisingly recovery on the market, which I think no one was was expecting. When you look at kind of like the CEE region, all the market except Warsaw and Poland are still behind at recovery. And I think this is for my kind of interpretation, mostly made out of like two things. One is that the Russian clientele, who was a big demand driver in the region, is not anymore travelling in the region. And then you have the American clientele who also used to come a lot, especially in destinations like Prague, Budapest and Warsaw.

Frederic & Borivoj (00:02:49) - They are quite still reticent to come back in the region. I mean, they were quite slow to come back to Europe. In Western Europe, I think we see them very, very strongly coming back in Western Europe now because the dollar is very strong. So I think we will see them coming back slowly. But and I think this is where the opportunity is for the region, I think, to diversify a little bit from the traditional source of demand into kind of like more like wider and more international type of.

Marina Franolic (00:03:23) - Do you see where this demand could come? Is it Asia maybe, or is it just focusing more on Europe?

Frederic & Borivoj (00:03:29) - Yeah, I mean, you can touch on the Asia maybe. Yeah, yeah. I think that with the sort of movement towards short destination trips. ET cetera. I think Europe is the right target. Asia, you know, China is opening, but historically it accounted for a fairly small percentage. So I think lots of people are expecting that miracles happen with China coming back.

Frederic & Borivoj (00:03:52) - But I would not see it. I think that refocusing on on travelers within a short distance, you know, driving distance or distance by train is probably the right direction. Okay. You know, just a little bit to add. I think, you know, the latest numbers show actually that in January on 2022 numbers, most of the markets were still behind 2019 levels. But actually in January, we already see that the report is above across most of the markets.

Frederic & Borivoj (00:04:21) - So we have seen actually finally, for example, in Prague, we see quite notable increase of of of ADR despite occupancy being still compressed, but overall is above 2019.

Marina Franolic (00:04:31) - Well, since we're talking about Prague, Prague was a big mass market before Covid and then Miss was strongly hit. It seemed that Prague will not recover so fast. Was the situation now with this market. So you know well.

Frederic & Borivoj (00:04:48) - You know we do asset manage hotels so we get we get some indication of conference demand coming back It's true that it's not fully recovered and it will take some time.

Frederic & Borivoj (00:04:58) - But in terms of forward. Bookings and there is an increase in activity or in demand. And, you know, based on preliminary data from Prague Convention Bureau, we you know, there is quite good recovery, especially when it comes to number of participants. So the the preliminary data shows that last year the number of events were about sort of less than 40% behind 2019 levels. So quite substantial. But the number of participants were only sort of 20% behind 2000. And this is primarily data, but it seems that there is less event, but bigger.

Marina Franolic (00:05:35) - Ones.

Frederic & Borivoj (00:05:35) - Bigger ones. So, so quite interesting.

Marina Franolic (00:05:37) - Yes, Fred, coming back. So we we see the hyperinflation lately on all markets. Is it impacting profitability of hotels and how do hotels also deal with the increasing energy costs here?

Frederic & Borivoj (00:05:55) - Yeah, I think it's an interesting topic, the inflation, because like people are worried about it. But there's been a number of research that have been made that there is a clear correlation between inflation and especially inflation and increase in ADR.

Frederic & Borivoj (00:06:10) - And I think we are seeing that already in most of the markets like ADR has been increasing above the inflation level, which which is a very important point to keep in mind as kind of the sea region has seen significant growth in terms of like HCP, HCP index, right? So this is one element. So the top line is increasing, but typically like the inflation is not being like reflected equally on the cost. And especially when you look at hotel like one of the bigger cost center is staffing. And as we know, generally the salaries are not increasing at the similar level as inflation. So the outcome of that is a profitability of hotel. Assuming the energy costs would would stay the same would be would be stronger. So it's very positive on the hotel side. And when you look at kind of like other type of investments, so like from office retail industrial, where kind of inflation can just be reflected once a year on the rent hotels as a benefit that they can adapt on the inflation. And therefore this is really, really important for investors to who are like interested to to to play the inflation edge to to look at hotels.

Marina Franolic (00:07:36) - But do you think that the staffing, the costs of staffing will be increasing as well at some point or you just don't think it will follow the same as the inflation rate?

Frederic & Borivoj (00:07:48) - What I mean, staffing costs are increasing and I think we were seeing this before the inflation was was coming coming in play. But I think utilities are becoming more knowledgeable on kind of like how to trying to adapt their model through technology and still by serving a sort of or keeping the service level at a certain standard by trying to kind of compensate for this higher salary increase.

Marina Franolic (00:08:21) - What about the hotel investment industry? Do you see any change or is there interest from different types of investors? Everything remains the same.

Frederic & Borivoj (00:08:31) - So the hotel investment market in the sea has been pretty quiet and dormant over the last three years. This hasn't been due to the lack of interest from investors. I think the interest from investors is still here. It's more that kind of owners of hotels have been sitting on their hotels, you know, looking at kind of like repositioning the asset, sometimes spending some CapEx, looking at kind of like recovering from from from Covid, Covid time.

Frederic & Borivoj (00:09:04) - So the market has been pretty slow. They were not many processes on the market, but we see this changing already, like there is much more appetite from owners of hotels to start discussing with investors. And we see the appetite of investors coming, coming back. Just, you know, to explain my point here, we closed last week on a hotel in Prague. We are closing next week on a hotel in Bucharest. We are closing on a hotel in one month in Riga. We are on exclusivity on a hotel in Warsaw, on an exclusivity on a hotel in the regional city in the Czech Republic. So there is a lot happening. A lot of these are often lack of market deals. So like people don't really want to kind of put their assets on the market and. He asking us to kind of like do quiet processes. Okay.

Marina Franolic (00:10:04) - Well, I'll touch upon a little bit. The ESG is very interesting, very in today regarding these investors. Are they looking for ESG properties or ESG, where properties do you see that some investors are spending more CapEx now than before to understand some sustainability aspects? Are they more into real estate buildings or is it more operational? So what do you see that is changing in the industry in the ESG aspect?

Frederic & Borivoj (00:10:40) - Right.

Frederic & Borivoj (00:10:41) - I think that there are many factors in play and it somehow relates to what Frederick was saying, that the lack of assets in the market and, you know, quite a lot of capital being out there to be deployed. And I think many owners are realizing, okay, we might not be able to buy properties because they are not coming to the market, but let's deploy the capital and spend some CapEx and renovate the buildings and improve the ESG. And I think with with increasing energy prices, suddenly things are starting to make a lot of sense in terms of, you know, buying new technology and the major replacements. And as well, there is a regulations coming in place. So so whether the owners and operators want it or not, they will need to deploy capital. And there is a quite good return on those sort of investments. So I think it makes sense financially as well. Ethical in terms of reducing the carbon footprint of the hotels.

Marina Franolic (00:11:33) - Do you see that operators are offering an incentives to owners or just putting something that must be done before they put their own brand on on the property?

Frederic & Borivoj (00:11:48) - You know, there are is the items are becoming part of the brand standards.

Frederic & Borivoj (00:11:53) - So they would have certain requirements. My personal experience is that it's that I feel that investors are actually driving it harder than than than operators because obviously they reporting requirements they corporate commitments on reductions. ET cetera. So I think there is a drive from both investors and operators and there is a surprisingly almost alignment in this regards when it comes to incentives. We we have done a survey among the operators asking them would they be willing to and there's been quite high percentage of operators that expressed that they would be willing to either waive technical services fees or or provide hierarchy money. You know, very few of them would suggest that they would be willing to reduce the kind of long term commitments like base fees or identities, etcetera. But when it comes to one off, they they would like that. You know, and I think that ESG has become attractiveness factors. You know, operators are willing to offer better fees when, you know, for hotels in Paris or in downtown Prague. Right. Or hotels that are 600 rooms because they are big.

Frederic & Borivoj (00:13:00) - So, of course, and I think now now ESG, if the hotel has some certifications like Leed, Reims, Platinum, etcetera, then it becomes more attractive for Operator to be part of it. They have their commitments as well, so they would be more willing to probably negotiate harder and offer better terms, but it's very difficult to single it out. What was the the reason, whether it is location, the size or the issue.

Marina Franolic (00:13:22) - So what about the financing institutions? Are they looking are they saying, okay, you know, green financing is in place, will support you, you'll get a better deal if you if your property is more green.

Frederic & Borivoj (00:13:34) - Right. I will be careful with high expectation on suddenly getting some cheaper capital when it comes to financing. I think that there are you know, we have done as well survey among the bank so we know that some banks everything almost some banks are willing to offer, you know, lower interest rates when it comes to ESG. But it's not more about cheaper capital, but it's more available.

Frederic & Borivoj (00:13:58) - You can get you know, you can get it because you comply with certain criteria. Otherwise you will not get it at all. And, you know, owners need to remember that when they get green financing, there are all strings attached. So, you know, it might be cheaper or you might get more of the capital. But but you.

Marina Franolic (00:14:16) - Need to you.

Frederic & Borivoj (00:14:16) - Need to do to comply with certain criteria. So it's nothing comes for free.

Marina Franolic (00:14:20) - Do you see that any city or any region or any specific market in the sea is actually moving faster forward with the ESG? That there's one city that really implemented strongly and all hoteliers said, yes, let's do this. We want to be the first ones on the market. We want to be the leaders.

Frederic & Borivoj (00:14:39) - Right. I wish there was some sort of alignment or cooperation between hoteliers in this regards. You know, I don't know about this. I know that, you know, we actually did quite interesting analysis of how many hotels are being having this sort of green credentials on Booking.com.

Frederic & Borivoj (00:14:57) - And it seems that the most. Hotels as a percentage are in workshop in Prague and Budapest. So it's around 60% of hotels have certain sustainability practices in place, and they get at least one leaf when it comes to cities. Again, difficult to assess because there are you know, you would have to understand lots of regulations that is changing, etcetera. But there are certain sort of international associations or initiatives like global Sustainable destination index and there are fortunately none of those cities are among the top 30. But if you filter only the key cities, then it is Ljubljana, Prague, Krakow, Tallinn and Budapest that are top five.

Marina Franolic (00:15:44) - Okay. Interesting. Fred, going back to the financing, so the bank financing costs increase significantly. What's the impact of of this on the market?

Frederic & Borivoj (00:15:55) - I think there is a misconception that people think when they think about hotel investment, they think are there is no debt financing available. I mean, we've been through some periods where like debt financing was really scarce for hotel and we are like lenders were like reticent to kind of like refinance or finance hotels.

Frederic & Borivoj (00:16:15) - We not in this period anymore. And so there is bank financing available. It's just it's more expensive. And I think there was a big question at the end of last year on the last quarter on where the cost will, will, will go. And I think now we are having a little bit more clarity. So like we you know, again, it depends a lot on the sponsor. It depends a lot on kind of like the asset, the location and the performance. But we we're looking at kind of like LTV around 50% and in rates like between five and a half and six and a half depending on, again, the location. So, I mean, it's in some way encouraging investors. They kind of know what is available. They can plug this number into their model and then see how this influence somehow pricing. But I think it's encouraging in a way that, yeah, that's out there and it's available.

Marina Franolic (00:17:13) - Yeah. Okay. Thank you both. I think we'll leave the rest of the discussion.

Marina Franolic (00:17:19) - I have many more questions, but I think we need to leave something for September. It was very nice talking to you. Thank you. So thank you very much for joining. And yes, well, I'm looking forward to IDEEA in Prague being again here in this amazing city in just a couple of months. Thank you. Thank you.

Frederic & Borivoj (00:17:36) - Thanks for having us.

Marina Franolic (00:17:38) - Thank you for listening to the IDEEA podcast, the channel for the IDEEA Hospitality Investment Forum. You can find a full transcript of this conversation in the Content Library on IDEEA forum with other reports and insights. We look forward to welcoming you and your colleagues in person at Ideo in Prague on the 18th through 20th of September 2023. If you haven't registered yet, please go to IDEEA Forum to purchase your pass today and save before ticket prices increase. Please feel free to email us with any questions at hello at the bench.com until the next episode. Stay safe and keep well.