2009_kpmg hotel development costs

8/12/2019 2009_KPMG Hotel Development Costs

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REAL ESTATE, LEISURE & TOURISM PRACTICE CEE

Hotel Development Costs2009Guidelines for new hotel projectsin Central and Eastern Europe

ADVISORY


2/20 2009 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

2 Hote l Deve lopment Costs 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 51,000for 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 participatedin 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 SartoriPartner, KPMG Advisory Ltd.

Head of Travel, Leisure & Tourism in CEE

[email protected]


3/20 2009 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

Overview of the CEE tourismmarket 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

HRSI

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

Guide l ines fo r new hote l p ro jects in Centra l and Eastern Europe 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


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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 economicperformance, 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 tiercountries 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 EUaccession

GDP realgrowth in2008 (%)

GDP percapita in

2007 (EUR)

Inflation in2008

(%)

Unemploymentin 2008

(%)

FDIstock/capita2007 (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 deprec iated and some countries have had to be stabilized by internat ional financia l 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.

2009 KPMG Advisory Ltd., a Hungarian limited liability company and a member firm of the KPMG network ofindependent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.



5/20



Thanks to its culture and heritage, natural assets, combined with the growth of

local economies, increases in disposable income, improved accessibility and thedevelopment 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 lowernumber 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 & TourismCouncil 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 selectedCEE markets(2007)


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The CEE hotel market

The CEE region counted more than 500,000 hotel rooms in approximately 10,000hotels 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 andparticularly 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 forhotel 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 8,5859,006

9,45210,003

507,603

48

5,746465,339463,546

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

Hotels

Rooms




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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.


8/20

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 capitain 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 tourismreceipts/capita

population/room

EUR

Tourism receipts per capita are low

in most of CEE and especially low

in Poland and Romania

5-star2%4-star

13%

3-star42%

2-star32%

1-star11%

Source: National statistical offices,KPMG research and estimates

Overall distribution of hotelrooms in CEE by category (2007)


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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 Repub lic 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 Repub lic 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


10/20

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 andthe 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 sqmStaff/room ratio: ca. 0.1 0.2/roomLimited F&B facilitiesNo amenities

Etap, Ibis, Express byHoliday Inn, easy hotels

Midscale Net room size: 20 24 sqmStaff/room ratio: ca. 0.4 0.5/roomLimited F&B facilities

Limited amenities(e.g. meeting space, gym)

Mercure, Holiday Inn,Courtyard by Marriott,Campanile

Upscale Net room size: 24 35 sqmStaff/room ratio: ca. 0.6 0.8/roomExtensive F&B facilitiesExtensive amenities(e.g. meeting space, retailoutlets, wellness centre)

Radisson, Sofitel, Hilton,Intercontinental, Marriott


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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 asite (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.


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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 morepresence 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 250rooms 16%

151 250 rooms37%

81 150 rooms21%

80 rooms or less26%

by room capacity

City mixed-use hotel 6%

Resort33%

City stand-alone hotel

61%

by type of development

Distribution of the participatinghotels by category

Budget13%

Midscale26%

Upscale61%

Source: Hotel Development Costs 2009survey




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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 oursurvey had costs exceeding EUR 200,000 per room.


160,000

140,000

120,000

100,000

80,000

60,00040,000

20,000

0

EUR/room

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


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Breakdown of costs

When analyzing the breakdown of the development costs of a hotel, we haveobserved 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 hoteldevelopment costs

Pre-opening &working capital 2%

Soft Costs 9%

OS&E 2%

FF&E12%

Technical

Equipment25%

Construction45%

Site and areaimprovements

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

Source: Hotel Development Costs 2009 survey

Growth in construction costs has been

faster in CEE than in Western Europe




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Our survey also aimed to identify developers specific experiences and expectations

about the development of construction costs in the countries where they areactive. 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 costshave increased in recent years

The majority of developers expect

development costs to decline

significantly in the short term

Source: Hotel Development Costs 2009surveyNote: 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 mentionedobstacles by survey respondents(multiple answers allowed)

1st Municipality/building permits (46%)

2nd Obtaining Financing (35%)

3rd Environmental issues (15%)

4th Time constraints (10%)

5th Difficulties with contractors (8%)



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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 requiredtiming 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.




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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 developerstrack 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 reputablemanagement 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 financingany hotelprojects in the forthcomingoneyear 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 criteriafor financinghotel 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



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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 marketsegments (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

Equity5060%

Debt4050%

Preferred destinations fornew 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





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passionate about

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 aglobal

network ofprofessionalservices firmsprovidingAudit,Tax and Advisoryservices.We operate in 144countries and have137,000 peopleworkingin memberfirms 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 thepublic and private sectors:

Mixed use developments

Hotels and resorts

Theme parks and visitor attractions

Golf courses and golfing estates

Restaurant chains

Airlines and airports

Sport and cultural events

Spa and wellness facilities

Convention and exhibition centers

Fitness centers

Our services include:

Market and financial feasibility studies

Valuations

Project conceptualization and investment planning

Project managment

Tourism development strategies

Marketing strategies

Business Performance Improvement (BPI) Franchise and management contract negotiation

Economic impact assessment

Contact

Andrea Sartori, Partner, Head of Travel, Leisure and Tourismin CEE

Tel: +36 1 887 7100, Fax: + 36 1 887 6656, e-mail: [email protected]

kpmg.hu


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kpmg.hu

The information contained herein is of a general nature and is not intended to address the circumstances ofany 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,

2009 KPMG Advisory Ltd., a Hungarian limitedliability 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:

KPMGReal 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: [email protected]

KPMG contacts in

Central & Eastern Europe

The Balkans

(Albania with its branch in Kosovo,

Bulgaria and Macedonia)

GerganaMantarkova

Tel: +359 2 9697 300

E-mail:[email protected]

The Baltics and Belarus

(Belarus, Estonia, Latvia, Lithuania)Stephen Young

Tel: +371 67 038 000


Croatia and Bosnia Herzegovina

Daniel Radic

Tel: +385 0 1 5390 000


Czech Republic

Tomas Kulman

Tel: +420 222 123 111


Hungary

Marnix von Bartheld

Tel: +36 1 887 71 00


Poland

Jerzy Kalinowski

Tel: +48 22 528 11 00


Romania and Moldova

AuraGiurcaneanu

Tel: +40 741 800 800


Serbia and Montenegro

James Thornley

Tel: +381 11 20 50 500


Slovakia

Ladislav Janyik

Tel: +421 2 59984 111


Slovenia

AndrejKorinek

Tel: +386 1 420 11 60


2009_kpmg hotel development costs

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