by Property Forum | Hotel

The occupancy level in Prague’s hotels was just 10% during the first six months of this year, with revenue remaining far below the average of the pre-coronavirus years. Contrary to initial expectations, their owners are not selling them – definitely not on a mass scale. Investors’ interest in buying remains strong – more than one-third of them are “very” or “highly” interested in Prague, according to Cushman & Wakefield’s current Hotel Investor Beat survey. Investors obviously trust Prague’s hospitality market and perceive its current situation as temporary.


Occupancy and prices: low figures remain

According to STR, the hotels in Prague that were open achieved just a 10% occupancy rate during the first half of this year. The situation improved slightly in June: the occupancy rate of open hotels grew to 18%. Nevertheless, both figures are the poorest result of all benchmarked capitals in Europe.

Bořivoj Vokřínek, Partner, Strategic Advisory, Head of Hospitality Research EMEA, Cushman & Wakefield says: “I see the principal cause in the restrictions imposed on hotels and travel in the Czech Republic, and also in the trend in the number of infected people. Every increase in this number translated to a decrease in hotel occupancy and booking rates. Once the restrictions were lifted last July and August, occupancy grew immediately and Prague quickly outperformed other European destinations.”

Accordingly, we can expect the figures for July and August 2021 to also be more positive than those for the first half of this year. Prague has a better position for the recovery of tourism than certain other cities; today, the recovery depends on accessibility by car rather than by plane; in addition, it is a destination for leisure rather than business and conference travel, which remains deeply subdued.

Bořivoj Vokřínek adds: “For the local hospitality market to rebound, I would recommend focusing on promotion in countries from which Prague is easily accessible by car – in Germany and other EU countries within feasible driving distance. I also believe that the Czech EU presidency, scheduled for the first half of next year, will help to kickstart the market – we have always seen EU presidency significantly boosting both occupancy rates and the accommodation prices in other countries.”

Accommodation prices in Prague are currently markedly lower than elsewhere in Europe. Compared with June 2019, the average achieved price per room was 44% lower this June while the average decrease in Europe is 21%. The double reduction in prices compared with other countries is also attributable to the fact that certain five-star hotels such as the Fairmont (formerly InterContinental) are currently closed due to refurbishment, so the statistics do not include their prices.

Bořivoj Vokřínek comments: “Prices definitely dropped in Prague, but the impact should not be as long-lasting as during the previous crisis in 2009. This is not an economic crisis, from which the market would have to recover for a long time. These are immediate restrictions, and as they end, we expect a rapid return of tourism and prices to pre-crisis levels. We see that, in the countries that have lifted the restrictions, the accumulated demand immediately exceeded supply, enabling hoteliers to restore prices to the former levels rather quickly.”

Investors continue targeting Prague

Investors are also aware that the situation Prague hotels are currently facing is temporary and caused by external factors – and does not characterise the quality of the market as such. They trust in its long-term resilience and continue showing great interest in the local hospitality properties.

Prague ranks 13th in the Hotel Investor Beat survey that maps institutional investors’ interest in hotels in European cities. With an average rating of 3 on a scale from 1 (not interested) to 5 (highly interested), Prague fares the best of all the Central and Eastern European Region cities. In all, 37% of investors are very or highly interested in buying hotels in Prague, and just 15% do not want to invest in hotels in Prague. 

Bořivoj Vokřínek comments “Prague has traditionally been a very popular destination for tourists – and the pandemic will hardly change anything about this in the long-term perspective. This is very important for investors’ interest in the city, as is the relatively modest development of new hotels with one of the lowest rates among Europe’s premier hospitality markets. This should make Prague one of the best-recovering markets once the restrictions are lifted.”

The CEE region as a whole received an average score of 2.6 on a scale from one to five, effectively ranking eighth among other countries/regions.

Interest in buying hotels is increasing

Hotels, in general, are going up on the chart of real properties that investors target despite the adverse effects of the pandemic. Even with the current risk, investors can see a lasting potential and higher rates of return on investment in them. Due to a number of long-term trends, some of which the current crisis has accelerated, the potential of certain types of properties such as hotels is growing – while the potential of other types of properties is deteriorating, which obviously changes the investors’ relative preferences. In addition, hotels offer higher yields combined with an adequate risk, a relatively rare combination in real estate and a major factor from the viewpoint of diversification. This is why hotels attract increasingly more investors – including large funds that did not invest in hotels in the past – who now want a percentage of their capital invested in such properties with a view to optimising their overall investment portfolios.

Almost 40% of the Hotel Investor Beat respondents say they want to buy hotels more than before due to the pandemic; just one-fifth are less inclined to buy hotels, and 30% are not changing their hospitality segment strategy under the pandemic influence.

Few hotels sell and none go bankrupt

This year so far, the number of deals on Prague’s hospitality market has been lower than usual in the pre-crisis times – the biggest transaction was the sale of W Hotel Evropa in Wenceslas Square. The forecasts that expected distress sales on a mass scale due to the onset of the crisis are not materialising. Interestingly, most investors are not expecting major discounts, which is caused by a large amount of capital waiting to be invested in combination with a lack of quality product for sale – and also by the aforementioned trust in the long-term growth potential of hospitality stock. Out of the Hotel Investor Beat respondents, 59% say they would seriously consider acquisitions with discounts of 15% or even less compared with 2019, including 13% of investors who would consider any opportunity to buy, even without a discount. Just 12% of investors are waiting only for opportunities with significant discounts in excess of 25%.

Bořivoj Vokřínek adds: “We currently see an overhang of capital on the market, which the investors seek to use in one way or another, but the supply of properties with good long-term return rates, such as hotel acquisitions, is low. In effect, we cannot expect major reductions in the price of such properties.”

For the time being, no hotel owners in the Czech Republic or worldwide are compelled to sell their hotels save for a few exceptions; there are no bankruptcies on the market. This is not to say, however, that hoteliers are having great times financially.

In another survey, titled Hotel Investment Scene in CEE that Cushman & Wakefield completed in cooperation with the CMS law firm, 42% of the respondents say that their hotels could survive for just six to 12 months without additional capital, and 21% say they could survive for less than six months.

Bořivoj Vokřínek says: “A large share of hoteliers count on refinancing for this and/or the next two years. Many owners will need about 20% of additional equity – and not everyone can cover such an amount. If they do not want to sell their hotels, they will have to find a new capital source quickly – and banks will be more prudent in the mid-term perspective than they used to be before the crisis. Capital structure and sources of financing are issues that should not be addressed when pressed for time, so now is the right time for hotel owners to proactively seek and consider alternative ways of addressing their financial situation for the future.”

Recovery within three years

Respondents expect the hospitality market to recover – i.e., to achieve the RevPAR (revenue per available room) indicator on a par with the pre-crisis year 2019 – within three years. The amount of time that this will take depends on the type of destination: judging from the most frequent answers, leisure destinations could recover next year and regional cities and capitals by 2024.