• Crisis situation - hotels with less capital reserves

Crisis situation - hotels with less capital reserves

28 September 2020

Although the hotel market in the Hungarian capital has started to show signs of life as July and August brought some slightly encouraging trading figures compared to previous months, these signs disappeared completely with the imminent travel restrictions. As September’s demand collapse is a combination of these restrictions and only partly market trends, an element of the otherwise slow but gradual demand growth is perceived as artificially suppressed that has now emerged. It is seen as most likely that as travel restrictions are released, this supressed demand element is expected to quickly resurface, yet timing for this to happen is more than uncertain.

Budapest is facing a tremendously difficult situation due to the largely out of the ordinary or frankly, lack of revenue streams otherwise generated by both leisure and conference/meetings/exhibitions travellers. Regular seasonality pattern shows that summer months are the strongest in leisure guest demand, whilst during the autumn and spring seasons, the events and conference demand account for a significant proportion of the 4-5-star Budapest hotels’ revenues. Due to a growing number of Covid-19 cases, there is a great deal of responsibility amongst small and large national and international corporations and event organisers and it is hard to estimate whether, regardless of travel restrictions, in other times regular shoulder season major events are going to be held soon again.

Historically, as close to 90 per cent of hotel demand in Budapest is of foreign origin,  hotels with less capital reserves could potentially find themselves in a difficult or even crisis situation. If longer-term state-imposed travel restrictions remain and no general ease from the pressure of the virus occur, and market players are not able to generate sufficient revenues to reach the bare minimum of a break-even for months to come, an open and constructive, solution-seeking negotiation in-between the triangle of hotel operator, owner and financier should commence as soon as possible. This named triangle is now enhanced with the state as a fourth player as the extension of debt-service moratorium has just been announced with eligibility limited to companies suffering at least a 25 per cent decrease in total revenues in 2020 vs 2019. This extension of debtors’ option of temporary halt in debt-service is seen to help overall liquidity, stability of the domestic economy and a helping hand in avoiding growth in debtor non-performance cases and defaults, although, this help naturally comes at a steep price tag for creditors (and in mid-to longer-terms for the debtors, too). We have to note, that several measures have been introduced to protect companies and employee interests namely salary subsidies, contribution and some taxation reliefs yet some were only temporary and it clearly seems that besides the likes of Széchenyi Turisztikai Kártya featuring a 0% interest rate with a fairly free utilisation scope though putting further burdens on the companies the situation is still to worsen in the forthcoming period of time.

With regards to market trends outside Budapest, the Hungarian holiday-seekers seem to have quickly adapted to the forced shift from international to domestic travels which during high-season summer months saved or at least gained a momentum for domestic destinations. Some market participants with a generally higher exposure to international demand stagnated but some achieved even higher revenues compared to 2019, such as destinations around Lake Balaton, Hévíz, Egerszalók, Hajdúszoboszló meeting and accommodating exceptional demand in July and August. This was properly interpreted, analysed and communicated by the Hungarian Tourism Agency. The summer performance, though, was only able to partially compensate for the losses recorded in the lockdown and very low months of March, April and part of May. This also resulted in the re-boarding/recruitment of staffs, but the autumn/winter months could easily lead to these jobs to be once again jeopardized and eventually vanished.

In regional Hungary, the performance of the autumn-winter period will largely depend on the evolution of the number of COVID-19 cases and the extent of individual risk-takings. Even with the new restrictions lifted, summer’s extreme domestic demand is likely to discontinue in these volumes, however, if there is no dramatic health crisis either, hotels can anticipate lower but still healthy guest flows on usual dates characterised by strong demand such as any long weekends, public and school holidays, select sport and cultural events.

On a brighter note, it is fair to conclude that the market showed that even after a severe state issued lockdown and general uncertainty, people started to travel both domestically and internationally in a rather quick and ”old-normal” way, showing a very deeply rooted drive to do so. This is also reflected in investment activity as despite a significant lowered hotel development and transaction volume in Q2 and Q3 2020, the largest market players remained active and it is understood that new management contracts have been and are still signed in the market, indicating maintained and long-term confidence on both developer and (national and international) operator sides. This is valid for the long-run, albeit short-term issues and challenges yet to be addressed for the survival of the hotel and hospitality sector.