Nearly 45% lower occupancy rate is expected at Budapest hotels at an annual level in 2020
Budapest, 19 June 2020 – Although the lockdown has been lifted, Hungarian hotels will continue to suffer from the consequences of the coronavirus pandemic for months. Lower-than-seasonal occupancy rates, lack of foreign guests as well as the phasing out of contribution and wage subsidy schemes create major challenges for the industry despite the opening. Occupancy rates are expected to decline by as much as 40 to 45% at an annual level.
Hotel restrictions were lifted right at the beginning of the main tourism season. Given that hotels, especially those outside Budapest, generate the vast majority of their annual profits in the summer period, they tend to relaunch their services as soon as possible. In some hotel chains, not all members opened at the same time. A proportion of hotels still closed are being refurbished by their owners using the opportunity provided by the temporary decline in demand and the Kisfaludy state subsidies awarded to them.
“Accommodation providers face uncertainty at the beginning of the summer season this year”, said Richard Németh, Managing Partner of BDO Hungary Hotel and Real Estate Services. “While advance bookings for June are very poor across the country, July and August are impossible to predict, as guests tend to make last-minute decisions about travelling this year.”
In June, hotels outside Budapest are expected to have an occupancy ratio between 20% and 50% and this figure is expected to exceed 50% to 60% primarily at Lake Balaton and other lakes as well as at thermal spas and large regional cities in July and August. In Budapest, the situation is even worse with their nationality mix dominated by international travellers, in fact, more than 85% of realised guest nights are of foreign origin in the Hungarian capital. In Budapest, only a fraction of commercial accommodations are open with low and slowly rising bookings. Although Budapest is already receiving guests from EU countries, recovery is not expected until international air traffic is back to normal which is likely to happen in long months from now.
Global hotel industry data provider STR projects a decline of more than 40% in demand and a drop of nearly 45% in hotel occupancy rates in Budapest for 2020. In the meantime, average room rates are likely to fall by about 20%. At the same time, hotel construction and new hotel opening are also likely to lose momentum and get delayed in Budapest. New room supply used to have a CAGR of 4% to 5% which is expected to decline to 2% to 3% in the short run, and then to an even lower level when ongoing projects are completed from 2022 onwards.
Nevertheless, the market may even benefit from slower growth as the more moderate increase in demand will not meet further over-supply that would aggravate the financial conditions of existing hotels. Hotel development sentiments are still positive, but the balance of supply and demand is expected to be restored in 2022 the earliest based on market sentiment forecasts.
BDO’s expert doesn’t agree with the market trend of converting hotels into office buildings. This is a forced, interim and less thought-out solution, since hotels are designed with specific services, layout, technical and engineering content and IT infra and they can fulfil the requirements of a different commercial asset class only to a limited degree, if at all. In many cases, a specific site or building has no alternative other than commercial accommodation from a development perspective. BDO’s expert believes that with appropriate flexibility, changing the concept of a project for ‘mixed-use’ in the planning phase, if possible, can be a winning long-term strategy.
Major new risks emerge
In addition to typical risks (uncertain weather, short high season), further uncertainties are caused by cancelled festivals, the general macroeconomic situation and the lack of available personal holidays overall.
Another challenge is the elapsing of the contribution and wage subsidy schemes that may lead to a new wave of layoffs in the industry. Experiencing the lack or slower-than-expected recovery of demand, hotel owners may face severe liquidity issues in a few months’ time, further exacerbated by the end of the loan repayment moratorium at the end of December. In the past few months, a large number of service providers (hotels, spas, restaurants) suffered major losses and new challenges may push quite many of them to the brink of insolvency. (It would be very useful to conduct a comprehensive industry survey on that as soon as possible.)
“Strangely, reopening is also very risky because you have several fixed cost items (wages, unitilies, operational costs) to pay regardless the number of guests in a hotel. As a result, some hotels may incur further temporary operating losses, if they don’t have a well-thought-out and carefully developed reopening strategy”, added Richard Németh, Partner and Managing Director of BDO Hungary Hotel and Real Estate Services.