KPMG Eastern Europe Hotel-Development-Costs-2009

REAL ESTATE, LEISURE & TOURISM PRACTICE CEE
Hotel Development Costs

2009
Guidelines for new hotel projects
in Central and Eastern Europe
ADVISORY
2 H o t e l D eve l o p m e n t C o s t s 2 0 0 9
Dear Reader,
I am pleased to present the Hotel Development Cost Survey in Central and

Eastern Europe (CEE), prepared by KPMG’s 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:
Andrea Sartori • The average development costs per hotel room range between EUR 51,000
Partner, KPMG Advisory Ltd.
for a budget/economy hotel and EUR 143,000 for an upscale hotel;
Head of Travel, Leisure & Tourism in CEE
• Construction costs and technical equipment account for approximately

andrea.sartori@kpmg.hu 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 participated
in 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,
© 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.
G u i d e l i n e s fo r n ew h o t e l p r o j e c t s i n C e n t r a l a n d E a s t e r n E u r o p e 3
Overview of the CEE tourism

market – an important driver
of the regional economy
The CEE region covers 1.3 million For the purpose of this research the Central and Eastern European (CEE) region
square km and has a total population comprises 16 countries stretching from the Czech Republic to Romania and from
of approximately 130 million 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.
AL Albania
BA Bosnia & Herzegovina
BG Bulgaria EE
HR Croatia LV
CZ Czech Republic LT
EE Estonia
HU Hungary
PL
LV Latvia
LT Lithuania CZ
SK
MK Macedonia
HU
ME Montenegro SI HR RO
PL Poland BA
RS
ME
RO Romania BG
MK
RS Serbia AL
SK Slovakia
SI Slovenia
The shared history of recent The region’s geographic location has cultivated many social, political and
decades is the most common feature economic ties between the neighboring countries. However, it is mainly the
of CEE countries shared history of recent decades and the impact of historic events that is a
common feature of the Central and Eastern European region.
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 economic
performance, 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 tier” countries 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 EU GDP real GDP per Inflation in Unemployment FDI

accession growth in capita in 2008 in 2008 stock/capita
mln % 2008 (%) 2007 (EUR) (%) (%) 2007 (EUR)
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 depreciated and some countries have had to be stabilized by international financial 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.
Thanks to its culture and heritage, natural assets, combined with the growth of
local economies, increases in disposable income, improved accessibility and the
development 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.
Travel and tourism contributes an When assessing the direct and indirect contributions of the overall travel and
average of 11.7% to national GDPs tourism industry to a country’s economy we note that in some countries
in the CEE region (e.g. Croatia and Montenegro) this share is significant: more than 20% of total GDP.
Travel and tourism contribution to GDP

30 %
25
20
15
11.7%
10
0
HR ME EE AL SK BG SI CZ BA PL LV HU LT MK RO RS
Source: World Travel & Tourism Council estimates for 2008
Tourist arrivals in selected With an average industry contribution to GDP reaching nearly 12% in the
CEE markets (2007) 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.
BG
92% 4,814
RO
96% 6,972 Poland, the largest country in CEE, registered the highest number of tourist and
HU
73% 7,371 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
HR
37% 11,162
is ranked third in regard to tourist arrivals, less than 40% of all tourists stayed in
CZ
76% 12,961 hotels in 2007, with the majority chosing other types of (private) accommodation
PL
66% 18,947 facilities. On the other hand, Romania and Bulgaria recorded a significantly lower
0 5,000 10,000 15,000 20,000 number of tourist arrivals, but over 90% of them were registered in hotels.
Thousand people
Hotel arrivals
Other arrivals
Source: National statistical offices
The CEE hotel market

The average annual growth rate for The CEE region counted more than 500,000 hotel rooms in approximately 10,000
hotel supply in CEE has exceeded hotels in 2007. This represents a growth of 20% in the total number of hotels and
4% since 2003 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%.
Total number of hotels and hotel rooms in CEE (2003–2007)

14,000 600,000
13,000 550,000
507,603
12,000 485,746 500,000
463,546 465,339
Rooms
Hotels
11,000
428,420 10,003 450,000
10,000 9,452
9,006 400,000
9,000
8,353 8,585
8,000 350,000
7,000 300,000
2003 2004 2005 2006 2007
Number of hotels
Number of rooms
Source: National statistical offices, KPMG research and estimates
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.
During the period 2003–2007, Within the same period of time, Bulgaria recorded the highest increase in hotel
the highest growth rates in supply room supply (47%) and, as such, has jumped from third to second behind the
were recorded in Bulgaria, Romania Czech Republic. Romania and Poland also experienced significant growth with
and Poland 23% and 19% respectively.
However, it is expected that as a result of the economic recession and

particularly 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.
Growth in number of hotel rooms in selected CEE countries (2003 & 2007)
16,700 2003
Serbia +8% 18,000
2007
22,700
Slovakia +7% 24,400
46,300
Hungary +7% 49,700
49,500
Croatia +6% 52,500
48,700
Romania +23% 60,000
61,200
Poland +19% 72,500
54,300
Bulgaria +47% 80,000
72,900
Czech Republic +11% 81,300
0 20,000 40,000 60,000 80,000 100,000
Czech Republic, Bulgaria and Poland The Czech Republic, Bulgaria and Poland are the top three countries in terms of
have the largest shares of hotel room total hotel rooms with each of them contributing between 14% and 16% to the
supply in the region total supply.2 Romania, Croatia and Hungary together account for another 33%
of the region’s total hotel room supply.
Almost 80% of the total supply Distribution of hotel rooms by country (2007)
is concentrated in six of the 16 CEE
Czech Serbia 4%
countries
Republic 16% Slovenia 3%
Bulgaria 16% Estonia 2%
Poland 14% Lithuania 2%
Rom ania 12% Albania 2%
Croatia 11% Latvia 2%
Hungary 10% Macedonia 1%
Slovakia 5%
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.
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.
Tourism receipts per capita are low Population per hotel room and international tourism receipts
in most of CEE and especially low per capita in selected CEE countries (2007)
in Poland and Romania 600 2,000
1,800
500 1,600
1,400
population/room
400
1,200
1,000
EUR
300
800
200 600
100 400
200
0 0
PL RO SK HU CZ BG FRA ITA ESP AUT
population/hotel room tourism receipts/capita
Source: EIU, national statistical offices with KPMG elaboration
Although there are several factors limiting the comparison between individual
countries (e.g. climate, accessibility and the country’s 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
Overall distribution of hotel In assessing the total hotel supply of a country it is important to analyze the
rooms in CEE by category (2007) 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
5-star
2% 1-star
CEE region shows a dominance of 2- and 3-star hotels, still representing 75%
4-star
13% 11% 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
2-star quality hotel supply, as demand inevitably shifts towards quality services.
32%
Studying the development of hotel room supply by category, we observe
3-star
a stronger growth in the upscale segment throughout the region.
42%
In Poland, for example, the share of 4- and 5-star hotel rooms has increased
Source: National statistical offices,
from 15% to 20% in the last five years, and similar trends are also apparent
KPMG research and estimates
in Hungary and in the Czech Republic, to cite just a couple of examples.
Distribution of hotel rooms in 2003…
Poland 10% 28% 47% 11% 4%
Hungary 6% 18% 46% 23% 7%
Czech Republic 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 Republic 5% 10% 50% 28% 7%
0% 20% 40% 60% 80% 100%
1-star 2-star 3-star 4-star 5-star
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.
1 0 H o t e l D eve l o p m e n t C o s t s 2 0 0 9
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 and
the quality level of hotel properties.
Classification Typical characteristics/features Sample international brands
Budget/ Net room size: 12 – 18 sqm Etap, Ibis, Express by

Economy Staff/room ratio: ca. 0.1 – 0.2/room Holiday Inn, easy hotels
Limited F&B facilities
No amenities
Midscale Net room size: 20 – 24 sqm Mercure, Holiday Inn,

Staff/room ratio: ca. 0.4 – 0.5/room Courtyard by Marriott,
Limited F&B facilities Campanile
Limited amenities
(e.g. meeting space, gym)
Upscale Net room size: 24 – 35 sqm Radisson, Sofitel, Hilton,

Staff/room ratio: ca. 0.6 – 0.8/room Intercontinental, Marriott
Extensive F&B facilities
Extensive amenities
(e.g. meeting space, retail
outlets, wellness centre)
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.
G u i d e l i n e s fo r n ew h o t e l p r o j e c t s i n C e n t r a l a n d E a s t e r n E u r o p e 1 1
Survey methodology
Glossary The analysis presented in this report has been prepared based on a
questionnaire-survey and in-person interviews with hotel developers, hotel
In our survey we have grouped management companies, hotel architects, construction companies, and cost
development costs into the consultants as well as banks active in hotel financing in the CEE region.
following subcategories: In our survey we have only considered hotels that have opened since
1 January 2004. Furthermore, to complement our analysis, we have relied
Site and Area Improvements on secondary data that was available at the time of the publication of this report.
Alterations to land that enhance the
utility of any structure placed on a In order to allow for more meaningful comparisons between different hotels,
site (e.g. drainage, fencing, utilities, our survey focuses only on hotel development costs and excludes financing
landscaping, etc.) costs, investments related to land acquisition, as well as in-house costs of
developers.
Construction Works
Direct and indirect costs, associated The collected data was placed into three different hotel categories:
with the physical construction and
erection of a hotel building (e.g. • budget/economy
bricks and mortar, labor costs, etc.)
• mid-scale, and
Technical Equipment
Installation of air conditioners, • upscale hotels.
elevators, heating systems, pipelines
and networks, etc. Please note that our survey did not consider any luxury hotels. Many of
these properties in CEE are conversions of existing landmark buildings
Soft Costs and consequently have a significantly different cost structure than new
Fees for architect design, planning, developments.
obtaining licenses, advisory
services, etc. Differences in timing of development, inflation, fluctuation of exchange rates as
well as variances in the development stage of the various countries involved in
FF&E the research are constraints that we could only partially overcome.
Furniture, Fixtures and Equipment
and includes all furniture for It is also important to note that part of our analysis was conducted prior to
guestrooms and public areas, the full scale unfolding of the financial crisis and economic downturn of 2008.
wall and floor coverings, etc. 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
OS&E term. However, as a result of the fundamental deficiency of hotel supply in some
Operating Supplies & Equipment CEE markets, hotel investment is expected to recover in the mid/long term.
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.
Sample Profile
Distribution of the participating Our sample profile is consistent with that of newly opened hotels in CEE.
hotels by category… More than 60% of our sample comprise upscale hotels, followed by 26%
Budget
mid-scale hotel properties. Budget/economy hotels represent only 13%
13%
of our sample.
Upscale
61%
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,
Midscale it is expected that hotels forming part of mixed-use developments will gain more
26% presence 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
…by type of development banks’ debt financing concentrated in city hotels which seem to present lower
City mixed- degrees of both seasonality and operating/financial risk.
use hotel 6%
City stand
alone hotel In assessing the capacities of the hotels in our sample, we noted that 37% of
61% the surveyed hotels had between 151 and 250 rooms, and 16% had more than
Resort 250 rooms. On the other hand, 21% had a capacity of 81-150 rooms and 26% had
33%
80 rooms or less. Upscale hotels reported the highest room capacities.
…by room capacity
more than 250 80 rooms or less

rooms 16% 26%
151 – 250 rooms 81 – 150 rooms

37% 21%
Source: “Hotel Development Costs 2009” survey
Development costs
Based on our sample, upscale hotels The average development cost per guest room by category is shown
cost almost three times more to in the chart below.
develop than budget/economy hotels
160,000
143,000
140,000
120,000
EUR/room
100,000
77,000
80,000
60,000
51,000
40,000
20,000
0
Budget/Economy Midscale Upscale
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 our
survey had costs exceeding EUR 200,000 per room.
Breakdown of costs
Breakdown of hotel When analyzing the breakdown of the development costs of a hotel, we have
development costs observed that the percentage distribution of costs did not show notable
Pre-opening & discrepancies between the different hotel categories. Similarly for all categories,
working capital 2% almost half of the development costs for a hotel are used for the actual
Site and area construction of the property, with another quarter spent on technical equipment.
Soft Costs 9% improvements
OS&E 2% 5%
In absolute terms this means that for construction and technical equipment
FF&E
approximately EUR 100,000 per room should be budgeted when developing an
12%
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,
Technical Construction pre-opening and working capital.
Equipment 45%
25%
Breakdown of development costs per guest room
Budget/economy Mid-scale hotels Upscale hotels

hotels (EUR) (EUR) (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
Are hotel development costs growing?

Growth in construction costs has been As a result of high prices for energy and a growing demand for construction labor
faster in CEE than in Western Europe 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%.
Two-thirds of respondents say Our survey also aimed to identify developers’ specific experiences and expectations
that hotel development costs about the development of construction costs in the countries where they are
have increased in recent years active. 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
12–18 months. In fact, approximately 80% of respondents believe construction
costs will decrease by 6% or more.
In your opinion, how will costs change in the next 12–18 months?
The majority of developers expect
100% 9% increase by more than 10%
development costs to decline 90%

11% increase by 6–9%
significantly in the short term 80%
70% increase by 0–5%
35%
60% decrease by 0–5%
50%
decrease by 6–10%
40%
30% decrease by more than 10%
45%
20%
10%
0%
Note: No responses were given for the range “more than 10% increase” and “0-5% decrease”
What are the main obstacles to developing a hotel in CEE?

Five most frequently mentioned Obtaining the necessary permits from local municipalities was the most
obstacles by survey respondents commonly faced problem during development projects, mentioned by almost
(multiple answers allowed)
half of the surveyed developers. Although the extent of this obstacle differs from
1st Municipality/building permits (46%) country to country, bureaucratic delays and restriction with regard to the
necessary building permits was mentioned by developers active in several
2nd Obtaining Financing (35%) countries of Central and Eastern Europe.
3rd Environmental issues (15%)
As a result of the international credit crunch (especially for real estate
4th Time constraints (10%) development projects) most developers expect that financing their projects
5th Difficulties with contractors (8%)
will become the single main obstacle in the foreseeable future.
Source: “Hotel Development Costs 2009” survey 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.).
How long does it take to build a hotel?

Average construction time is The sample hotels in our survey had an average construction time of
12–18 months, depending on approximately 12–18 months. This does not include the time spent for obtaining
number of rooms and quality level 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.
Permitting and planning significantly As obtaining the necessary building permits and negotiations with municipalities
impact the overall duration of the project are the main obstacles in developing a hotel in the CEE region, the required
timing 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.
Aspects of hotel financing
Do you plan financing any hotel With an uncertain outcome as to the extent and timing of the current credit
projects in the forthcoming one crunch, many hotel developments are being put on hold because of uncertain
year period?
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
Not at all 30% project finance in the CEE region to get a better understanding of the current
situation.
Less than 50%
last year
The banks have stated that they will most likely finance fewer hotel projects in 2009.
Same as
last year
20% Also they will assess in more detail projects’ key parameters, with a developer’s
track record being most important.
More than 0%
last year
%
0 10 20 30 40 50 60
Most important criteria for financing hotel projects
Source: “Hotel Development Costs 2009” survey Developer

5.0
(reliability and references)
Location 4.8
Independent
4.5
feasibility study
Operator (brand) 4.5
Unique concept 3.7
Planning and permitting 3.4
1 2 3 4 5
1 least important – 5 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 reputable
management 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.
Average Loan to Cost (LTC) ratio The key financial terms can be summarized as follows:
Debt Equity • Concerning risk premiums, the majority of the surveyed banks are financing
40–50% 50–60% 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%.
Source: “Hotel Development Costs 2009” survey • 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
Preferred destinations for More stringent financing conditions are expected to have a significant impact on
new hotel developments the future of hotel developments in the CEE region for at least the next few years.
Country City (top three) Consequently, the project pipeline is expected to shrink as developers/investors are
facing the consequences of the credit crunch.
Poland Krakow
Gdansk
It is expected that developers and investors will focus more on city hotels as
Warsaw opposed to resort hotels, as they will be able to benefit from more market
Romania Bucharest segments (i.e. leisure, business and transit). In addition, all developers have
Cluj indicated that they want to focus on mid-scale and upscale hotels, not venturing
Sibiu into any projects in the budget/economy segment as there is already significant
Czech Republic Prague supply in this category. On the other hand, developers are also less interested in
Olomouc developing luxury hotels, as they are expensive to build and can only attract a
Croatia Hvar smaller target market.
Zagreb
Concerning preferred locations for development, our survey respondents mentioned
Zadar
the destinations seen in the table on the left.
Hungary Budapest
Pécs
Győr
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KPMG Eastern Europe Hotel-Development-Costs-2009

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KPMG Eastern Europe Hotel-Development-Costs-2009

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REAL ESTATE, LEISURE & TOURISM PRACTICE CEE

Hotel Development Costs

I am pleased to present the Hotel Development Cost Survey in Central and

Some of the key findings of the report include:

• Construction costs and technical equipment account for approximately

• Development costs have increased by up to 20% in some countries

• Average construction time is approximately 12-18 months, depending

Overview of the CEE tourism

Economic overview of the CEE Region compared to EU 15

Country Population EU GDP real GDP per Inflation in Unemployment FDI

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

Travel and tourism contribution to GDP

Source: World Travel & Tourism Council estimates for 2008

Source: National statistical offices

The CEE hotel market

Total number of hotels and hotel rooms in CEE (2003–2007)

Source: National statistical offices, KPMG research and estimates

Growth rates in supply varied significantly by country. More mature markets

However, it is expected that as a result of the economic recession and

Source: National statistical offices, KPMG research and estimates

Source: National statistical offices, KPMG research and estimates

We have endeavored to identify a correlation between the supply of hotel rooms

population/hotel room tourism receipts/capita

Source: EIU, national statistical offices with KPMG elaboration

Compared to many countries in Western Europe, the share of 4- and 5-star

in Hungary and in the Czech Republic, to cite just a couple of examples.

Distribution of hotel rooms in 2003…

Poland 10% 28% 47% 11% 4%

Hungary 6% 18% 46% 23% 7%

Czech Republic 7% 17% 49% 21% 6%

0% 20% 40% 60% 80% 100%

1-star 2-star 3-star 4-star 5-star

Poland 8% 27% 45% 14% 6%

Hungary 5% 10% 46% 31% 8%

Czech Republic 5% 10% 50% 28% 7%

0% 20% 40% 60% 80% 100%

1-star 2-star 3-star 4-star 5-star

Source: National statistical offices, KPMG research and estimates

Classification Typical characteristics/features Sample international brands

Budget/ Net room size: 12 – 18 sqm Etap, Ibis, Express by

Midscale Net room size: 20 – 24 sqm Mercure, Holiday Inn,

Upscale Net room size: 24 – 35 sqm Radisson, Sofitel, Hilton,

Pre-opening and working capital

Sixty-one percent of all surveyed new hotel developments were stand-alone

…by room capacity