LONDON—Eastern Europe is the place to be for extensive hotel expansion as the global economy attempts to emerge from a rocky performance landscape that has haunted it for the past three years.
Speaking in front of about 250 attendees at last week’s inaugural Hotel Investment Conference Europe, three executives from major global hotel companies pointed to the eastern part of Europe as the region with the biggest upside.
“Europe is quite consolidated—it’s not easy to find space to build a hotel,” said Francisco Zinser, COO for Madrid-based NH Hoteles. “That will drive opportunities to emerging markets in eastern Europe.”
Simon Vincent, area president of Europe for Hilton Worldwide, said Eastern Europe remained fairly strong for the company’s properties throughout the recession. The company has more than 100 hotels in its European pipeline.
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Thorsten Kirschke |
Thorsten Kirschke, COO for Minneapolis-based Carlson Hotels, said Moscow and the Baltic countries are among the positive markets. “Also, Turkey is an interesting market,” he said. “We have identified 15 cities with more than half a million people living in them, so the hubs are there.”
Vincent echoed Kirschke’s thoughts on Turkey, especially because of the growth there of the Hilton Garden Inn brand. “We’ll double the number of our hotels in Turkey this year alone,” he said. “In some of the towns in Turkey we’re expanding HGI, and it is the only international brand in town.” He added that Russia, the United Kingdom, Germany and Italy also are focal points for the company.
“We concentrate on five core markets, but in a market like Poland we’re seeing good traction as well,” Vincent said.
Financial freeze
Like much of the hotel world, Europe remains mired in a financial malaise that is producing a severe lack of debt capacity.
“It has been a big issue in the development process over the last 24 months, and we’ll continue to see that going forward,” Kirschke said. “There’s a greater level of interest on the investor side, but that doesn’t mean financing is in place.”
Kirschke said the activity that will take place is conversions rather than new development.
Vincent concurred, but said Hilton is willing to step up with financing aid to get the right project started.
“We’re moving away from an asset-intensive model, but we do recognize on some projects that key money might be a way to get the project underway,” he said. “A lot of our partners are looking for that.”
The executives agreed that private equity will return to hotel investing at some point, but until then money will be tight.
Vincent said activity is beginning to heat up at regional banks, particularly in Eastern Europe.
Zinser said the lack of financing is a principal obstacle to growth for the hotel industry.
“It’s about capital, it’s about debt, it’s about certain markets growing faster than others,” he said.
Vincent said that outside of the financing roadblock, the biggest obstacle is the lack of human capital.
“It’s about convincing people that hospitality is a worthwhile career,” he said.
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Climate warming up
Executives agreed that the climate for the hotel industry is positive despite experiencing the deepest recession in memory during the past three years.
“The fundamentals of the hotel sector are still very strong,” Vincent said. He added that Southern Europe remains a concern because of unstable government debt situations, “but the overall trend is quite positive.”
“It is a highly fragmented market in Europe,” Kirschke said, adding that corporate-driven rates have grown in excess of 9%. “It’s good to see they’re fueling the bringing back of rates in markets.”
Zinser said his company has slightly changed its approach, because of the overall general economic pressures.
“We found through this crisis that we needed to be much keener on how we develop hotels and where we develop hotels,” he said. “Big markets are not feeling like they used to, so peripheral markets are hurting.”
Kirschke said the key metro areas are Carlson’s main focus for expansion. “There are still some areas where we are not as well represented as we want to be,” he said.
Changing fundamentals
Zinser said consumer behavior has changed because of the recession, and hotels must adjust quickly.
“The best friend (for consumers) today is price—the industry is being fully driven by price,” he said. “We need to be very smart and differentiate to give the customer a reason to come to us beyond the price.”
In addition, the high concentration of independent hotels continues to provide the most competition for branded properties, and those hotels have much more flexibility in pricing, according to the NH Hoteles executive.
Vincent said that’s especially true in the less mature markets; however, brands will continue to absorb independent properties.
“As markets expand you’ll see a trend toward consolidation, particularly in times like now,” he said. “The safe haven is a large brand with a large distribution system.”
Kirschke said conversions in mature markets have been strong and he expects more consolidation. There is one troubling emerging aspect, however, according to the Carlson executive.
“I do see a little confusing element in what is becoming soft branding by affiliation,” he said. “It can actually blur the brand’s identity and that can be confusing to the consumer. That is risky by every delivery of the consumer promise.”