LONDON—Though the outlook for hotels in Poland and the Baltic countries is largely rosy, several hurdles will slow the pace of growth, according to a panel last week discussing the region at the Hotel Investment Conference Europe, held at the InterContinental London Park Lane.
Among the challenges panelists cited were: an atmosphere not conducive to branded hotels; demand mostly being intra-national and intra-regional and smaller to begin with, especially in the Baltics; and an inconsistency of airlift.
“The Baltics have recovered tremendously, albeit coming from a low level, although (revenue per available room) remains low, at €44 ($59.42) in Estonia and Latvia and only €33 ($44.56) in Lithuania,” said Anders Braks, managing director of Cologne-based Event Hotel Group.
The Baltics comprise Estonia, Latvia and Lithuania.
“With the expected growth in gross domestic product, the predicted future is good in the Baltics, although demand will not likely increase by much. People still are not willing to pay for it,” Braks added.
“But one plus is that staff in the region is relatively cheap, even in Estonia, and it is motivated, proud and engaged,” said Ireneusz Weglowski, VP of Orbis S.A. “As for the classes represented, most hotels in the region are 3- and 4-star. The market is not there for those big boxes, especially in the Baltic countries, which are just too small.”
Weglowski said Poland had a successful 2012 as well. The country hosted both the European football championships and, in the third and fourth quarters, the presidency of the European Union. Both events significantly increased average daily rates.
“There was a big program in improving Polish infrastructure before 2012, but not all Polish cities followed at the same pace that did Warsaw, Krakow and Gdansk, and the secondary and tertiary ones suffered from a lack of traffic and from demand being mostly domestic,” he said.
Demand from investors
“We have some plans in the offering in Poland, but we have never had any in the Baltics,” said Franz Jurkowitsch, chairman and CEO at Warimpex Finanz und Beteiligungs AG.
“Typically, we also combine hotels with serviced and luxury apartments, to offset start-up costs. One fallacy is that the area is cheaper to operate in,” he said. “Probably it is, but not significantly so compared to other parts of Europe. In Warsaw, land per square metre (10.764 square feet) is €6,000 ($8,119) to €7,000 ($9,472), as opposed to €20,000 ($27,062) in Vienna. Construction is certainly cheaper, as are salaries, and, with one exception, we have Polish general managers who are motivated and want to learn.”
“Capital expenditure rates are comparable with western Europe, around 6.25% to 6.5% for fixed leases in the larger cities,” said Markus Beike, managing director of Germany and Austria at Christie + Co.
“Finland and Russia needs to come in more. Our largest investors are from Sweden and Norway, from their banks,” said Event’s Braks.
Jurkowitsch saw regional financing easing up slightly. “Until 2009, all our projects were financed from Austrian banks, but after the crisis, not so much. Today, Polish banks are offering very good terms and conditions. So with all that in mind, I believe that in Poland mixed-use developments have large potential, especially in Warsaw.”
Jurkowitsch also spoke of adjacent regions to Poland and the Baltics. Of them he said that “the only market where I would not invest is Prague, which suffers from oversupply after a few very good years, while the biggest growth potential is Russia.”
Demand for brands?
Weglowski said international brands tend to shy away from the Baltics because demand is mild and from Poland because individuals own most of its hotels, which mostly underperformed during the crisis.
“Typically, Poland is not attracted to this type of investment, and it is does not do leases. The direction we need to take is to increase the awareness of brands,” he said. “Today, people in the region are more educated, and they want to see the promise of the brand being given.
“That said, in a recent questionnaire, the most recognized brand in Poland was Marriott, which has only one hotel in the whole country. Why? Because when it opened, there was a successful media campaign that people remember,” Weglowski said.
Banks in the region favor international brands for both new builds and conversions, he added.
Demand overall?
One major drain on overall growth was a lack of meetings, incentives, conferences and exhibitions business, a decline mirrored in most of Europe.
“This business will come back, especially when GDP growth is more impressive,” said Weglowski. “Also worrying is that weekends are becoming empty, and that together with the drop in current MICE business means that overall occupancy cannot reach much beyond 70%. In addition, travelers typically tend not to overnight in Warsaw if they are doing business in other Polish cities.”
Demand does exist for conferences in Estonia, Braks said. “Demand, however, in the region was not helped by some low-fare airlines suspending service in 2012 due to low demand, but now the airlines are generally back.”
Airlift was also hurt when Warsaw-Modlin Mazovia Airport closed for nearly a year for infrastructure upgrades, he added.
Jurkowitsch focused on the positives. “On the other hand, Emirates Air started flying to Warsaw in February, and Krakow is getting a new terminal, which is based on growth from low-fare airlines such as EasyJet and Ryanair.”
Demand if the money was yours?
To finish the session, the panelists were asked where they would spend their own money in the region.
Jurkowitsch, whose company is looking at new projects in Warsaw, said, “I’d always be most interested in a property with conference facilities, between 200 and 250 rooms and with approximately 30,000 square feet of meeting space.”
Weglowski said he’d invest in city centers “and in those with MICE markets—most likely in Krakow and Warsaw—in the lower-midscale and midscale classes, and with between 120 and 150 keys.”
Braks was more general in his comments. “My parents are Estonian and Swedish, and I live in Germany and I work throughout the whole region. Nothing is not of interest.”