Hotel Development Costs 2009
Guidelines for new hotel projects in Central and Eastern Europe

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 Partner, KPMG Advisory Ltd.
Head of Travel, Leisure & Tourism in CEE
• The average development costs per hotel room range between EUR 51,000 for 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 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.

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.3 million square kilometers and bearing a total population of approximately 130 million. As illustrated on the map below. However. All rights reserved. political and economic ties between the neighboring countries.. AL BA BG HR CZ EE HU LV LT MK ME PL RO RS SK SI Albania Bosnia & Herzegovina Bulgaria Croatia Czech Republic Estonia Hungary PL LT EE LV Latvia Lithuania Macedonia HU CZ SK Montenegro Poland Romania Serbia Slovakia Slovenia SI HR RO BA RS ME MK AL BG The shared history of recent decades is the most common feature of CEE countries The region’s geographic location has cultivated many social.3 million square km and has a total population of approximately 130 million 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. © 2009 KPMG Advisory Ltd. covering an area of approximately 1. the region serves as a link between Western Europe and the Commonwealth of Independent States (CIS) to the east. a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International. a Swiss cooperative. .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.

5 4.587 2.782 4.640 3.300 Inflation in 2008 (%) 3. which is reflected in their varying levels of economic performance.880 3.190 3. a Swiss cooperative.0 -1. Unicredit Group CEE Economic Data.2 1. Austria and Italy enjoyed relatively high Foreign Direct Investment (FDI) and growth in GDP in the 1990s.0 18.0 128.9 2.5 22..5 10.4 5.0 6.350 Source: CIA World Fact Book.659 7 . UNCDAT *Data refers to 2007 **Data refers to 2006 1 As a result of the escalation of the financial crisis in Q4 of 2008.6 7 .2 % 3% 4% 6% 4% 8% 1% 8% 2% 3% 2% 1% 30% 17% 8% 4% 2% 100% – – – 2007 negotiating 2004 2004 2004 2004 2004 negotiating negotiating 2004 2007 – 2004 2004 – – EU accession GDP real growth in 2008 (%) 5.4 7 . a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International. The strong overall growth rate in the years prior to the recent global economic crisis. while for others this process could take much longer.329 7 .1 Economic overview of the CEE Region compared to EU 15 Country Population mln Albania Bosnia & Herz.2 4.006 946 5. It is expected that a few transition countries will successfully manage to strengthen their economies.170 4. Bank).6 4.8 6.7 6.7* 5.486 2. Bulgaria Croatia Czech Republic Estonia Hungary Latvia Lithuania Macedonia Montenegro Poland Romania Serbia Slovakia Slovenia Total CEE EU 15 3.9 13.0 7 .0 – 7.1 0.2 5.130 10.4 – 1.4 H o t e l D eve l o p m e n t C o s t s 2 0 0 9 Borders to the west have only been open for 20 years and these countries have benefited in different ways.0 7 .532 27.058 9.940 2.0 6.5 10.5* 7 .100 5.450 12.7 9.1 5.248 16.780 8.0* 9.5 GDP per capita in 2007 (EUR) 3.150 18.408 3.390 11.8 3.2* 39.0* 5.4 5.4 15.8 5.0 4.940 10.4 FDI stock/capita 2007 (EUR) 460 952 3.1** 4.2 10.7 11. the CEE region was hit particularly hard.4 323.484 8.5 6. © 2009 KPMG Advisory Ltd.4 11. the “second tier” countries have seen higher FDI and GDP growth mainly in the years following the turn of the century.5 4.3 6.6 10.698 2.5 6.0 7 . Many local currencies depreciated and some countries have had to be stabilized by international financial institutions (IMF World .7 38.6 – 2.2 5. However.3* 2.040 8.2 1.3 9.1 Unemployment in 2008 (%) 13.3 4. .073 2.680 7.380 10.5 2.710 8.300 5.6 2. All rights reserved.3 2.980 1.2 6. led economists to call the emerging markets of Central and Eastern Europe “the growth engine of the EU”. their competitiveness and ability to attract foreign investment. 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. Whereas countries directly bordering Germany.7 -0.4 7 .2 8.3 n/a 11.2 3.

less than 40% of all tourists stayed in hotels in 2007 with the majority chosing other types of (private) accommodation . investment in tourism and in the hotel sector have become.371 11.972 7. a Swiss cooperative. Although Croatia is ranked third in regard to tourist arrivals. a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International. an area of focus for the private and public sectors. Travel and tourism contribution to GDP 30 % 25 20 15 10 5 0 HR ME EE AL SK BG SI CZ BA PL LV HU LT MK RO RS 11.961 18. two-thirds and three-fourths of these tourists stayed in hotels.000 Thousand people With an average industry contribution to GDP reaching nearly 12% in the CEE region.7% Source: World Travel & Tourism Council estimates for 2008 Tourist arrivals in selected CEE markets (2007) BG RO HU HR CZ PL 0 92% 96% 73% 37% 76% 66% 5. combined with the growth of local economies. Hotel arrivals Other arrivals Source: National statistical offices © 2009 KPMG Advisory Ltd.814 6. Travel and tourism contributes an average of 11.162 12.000 4. improved accessibility and the development of infrastructure in recent years. increases in disposable income.. On the other hand.947 15. Between .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 5 Thanks to its culture and heritage. 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. Poland.000 10. registered the highest number of tourist and hotel arrivals in the region in 2007 followed by the Czech Republic.000 20. the largest country in CEE.g. Romania and Bulgaria recorded a significantly lower number of tourist arrivals. facilities. natural assets. but over 90% of them were registered in hotels. Despite the current economic situation. Croatia and Montenegro) this share is significant: more than 20% of total GDP . and will continue to be. All rights reserved.7% to national GDPs in the CEE region When assessing the direct and indirect contributions of the overall travel and tourism industry to a country’s economy we note that in some countries (e. tourism has been a major driver of several national economies in the region. .

000 hotels in 2007 This represents a growth of 20% in the total number of hotels and . a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International. During the period 2003–2007 . at least in the short/medium term particularly in countries that have seen a boom in construction in the last few years.000 550. All rights reserved.006 9. KPMG research and estimates Number of rooms Growth rates in supply varied significantly by country. Romania and Poland Within the same period of time. Romania and Poland also experienced significant growth with 23% and 19% respectively.000 500.000 7.000 8.000 13. it is expected that as a result of the economic recession and particularly the credit crunch.5% in room numbers compared to 2003. . However.353 2006 2007 Number of hotels Source: National statistical offices.585 9.339 10. the growth in hotels in the CEE region will slow down.000 hotel rooms in approximately 10.003 8. grew their hotel room stock by only 7% and 11% respectively between 2003 and 2007 .000 507.6 H o t e l D eve l o p m e n t C o s t s 2 0 0 9 The CEE hotel market The average annual growth rate for hotel supply in CEE has exceeded 4% since 2003 The CEE region counted more than 500. the highest growth rates in supply were recorded in Bulgaria.603 485.000 9. as such.000 10.000 Hotels 11. an increase of 18.546 428. the supply of hotel units has increased by 4.000 12.. Bulgaria recorded the highest increase in hotel room supply (47%) and. which experienced a “boom” in tourism demand and supply earlier than other markets. More mature markets like Hungary and the Czech Republic.000 300.6% per annum. Total number of hotels and hotel rooms in CEE (2003–2007) 14. On average.000 2003 2004 2005 8.000 600.420 465. has jumped from third to second behind the Czech Republic.746 463. while the supply of hotel rooms has increased by 4. © 2009 KPMG Advisory Ltd.452 400.000 Rooms 450.3%.000 350. a Swiss cooperative.

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. Italy. a Swiss cooperative.000 100.000 61.900 81.500 54..2 Romania.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 7 Growth in number of hotel rooms in selected CEE countries (2003 & 2007) Serbia Slovakia Hungary Croatia Romania Poland Bulgaria Czech Republic 0 +8% +7% 16.000 60.700 60.700 24. Spain and Austria in our analysis.000 40. KPMG research and estimates Czech Republic.000 80. Croatia and Hungary together account for another 33% of the region’s total hotel room supply. To allow for a more meaningful comparison we have compared total population per hotel room with international tourism receipts per capita. Almost 80% of the total supply is concentrated in six of the 16 CEE countries Distribution of hotel rooms by country (2007) Czech Republic Bulgaria Poland Rom ania Croatia Hungary Slovakia Source: National statistical offices. Bulgaria and Poland have the largest shares of hotel room supply in the region The Czech Republic. This difference in classification might impact the rankings.700 49. KPMG research and estimates 16% 16% 14% 12% 11% 10% 5% Serbia Slovenia Estonia Lithuania Albania Latvia Macedonia 4% 3% 2% 2% 2% 2% 1% We have endeavored to identify a correlation between the supply of hotel rooms and the income from tourism in selected countries.300 +7% +6% +23% +19% +47% +11% 20.000 22. .700 18.g. © 2009 KPMG Advisory Ltd.200 72.300 49.300 80.000 72. All rights reserved.400 2003 2007 46.000 Source: National statistical offices. a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International. 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. As a basis for comparison we have also included France. in the case of Bulgaria it also includes sanatoriums).500 48.500 52.

for example. Studying the development of hotel room supply by category. KPMG research and estimates © 2009 KPMG Advisory Ltd.and 5-star hotels in the CEE region is lower (15%).200 1. as demand inevitably shifts towards quality services. as this gives an indication of the quality level of tourism in the respective region. 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. Compared to many countries in Western Europe..800 1. still representing 75% of total hotel room supply. All rights reserved.and 3-star hotels. the share of 4. and similar trends are also apparent in Hungary and in the Czech Republic. 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.000 1.400 1. For example. to cite just a couple of examples. a Swiss cooperative.8 H o t e l D eve l o p m e n t C o s t s 2 0 0 9 Tourism receipts per capita are low in most of CEE and especially low in Poland and Romania Population per hotel room and international tourism receipts per capita in selected CEE countries (2007) 600 500 population/room 400 300 200 100 0 PL RO SK HU CZ BG FRA ITA ESP AUT 2.000 800 600 400 200 0 EUR population/hotel room Source: EIU.and 5-star hotel rooms has increased from 15% to 20% in the last five years. .g. reflecting an opportunity for higher quality hotel supply. climate. national statistical offices with KPMG elaboration tourism receipts/capita Although there are several factors limiting the comparison between individual countries (e. Hotels by category Overall distribution of hotel rooms in CEE by category (2007) 5-star 2% 1-star 11% 4-star 13% In assessing the total hotel supply of a country it is important to analyze the breakdown by category.600 1. 2-star 32% 3-star 42% Source: National statistical offices. the share of 4. we observe a stronger growth in the upscale segment throughout the region. the number of hotels by category in the CEE region shows a dominance of 2. a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International. accessibility and the country’s image and perception). In Poland.

. as in the rest of the world. a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International.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 9 Distribution of hotel rooms in 2003… Poland Hungary Czech Republic 10% 6% 7% 18% 17% 20% 40% 28% 46% 49% 60% 80% 47% 23% 21% 11% 4% 7% 6% 100% 0% 1-star 2-star 3-star 4-star 5-star …and in 2007 Poland Hungary Czech Republic 8% 5% 10% 5% 10% 20% 27% 46% 50% 40% 60% 45% 31% 28% 80% 14% 6% 8% 7% 100% 0% 1-star 2-star 3-star 4-star 5-star Source: National statistical offices.. KPMG research and estimates 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. © 2009 KPMG Advisory Ltd. a Swiss cooperative. this is based on national classification systems and standards may differ significantly from one country to another. All rights reserved. Even though the classification of hotels in stars from 1-5 is broadly used in most of the CEE countries.

yet their overall brand penetration is still significantly lower than in the more mature markets of Western Europe and North America. Classification Budget/ Economy Typical characteristics/features Net room size: 12 – 18 sqm Staff/room ratio: ca. gym) Net room size: 24 – 35 sqm Staff/room ratio: ca. meeting space.8/room Extensive F&B facilities Extensive amenities (e. 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.6 – 0.1 – 0. Courtyard by Marriott. meeting space. .4 – 0. Holiday Inn. a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International..5/room Limited F&B facilities Limited amenities (e. 0.g.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. 0. wellness centre) Sample international brands Etap. Marriott All the above stated brands are present in the CEE region. Campanile Upscale Radisson. a Swiss cooperative. © 2009 KPMG Advisory Ltd. Intercontinental. easy hotels Midscale Mercure. Hilton. Express by Holiday Inn.g. Sofitel. retail outlets. All rights reserved. 0.2/room Limited F&B facilities No amenities Net room size: 20 – 24 sqm Staff/room ratio: ca. Ibis.

Furthermore. However. a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International. 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. labor costs. etc.) Construction Works Direct and indirect costs. and cost consultants as well as banks active in hotel financing in the CEE region. to complement our analysis. etc. investments related to land acquisition.g.. heating systems. uniforms.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 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 a site (e. OS&E Operating Supplies & Equipment and includes linen. stationary. accessories. supplies. hotel architects. initial working capital. It is still too early to assess the extent of the impact of the crisis. and • upscale hotels. Soft Costs Fees for architect design. staff. hotel management companies. advisory services. In order to allow for more meaningful comparisons between different hotels. FF&E Furniture. prior to the opening of the hotel property. a Swiss cooperative. Many of these properties in CEE are conversions of existing landmark buildings and consequently have a significantly different cost structure than new developments. fencing. as a result of the fundamental deficiency of hotel supply in some CEE markets. etc. © 2009 KPMG Advisory Ltd. etc. etc. bricks and mortar.g. our survey focuses only on hotel development costs and excludes financing costs. kitchenware. In our survey we have only considered hotels that have opened since 1 January 2004. pipelines and networks. utilities. obtaining licenses. drainage. etc. . inflation. construction companies. Fixtures and Equipment and includes all furniture for guestrooms and public areas. as well as in-house costs of developers. landscaping. associated with the physical construction and erection of a hotel building (e. Pre-opening and working capital Includes marketing. wall and floor coverings. The analysis presented in this report has been prepared based on a questionnaire-survey and in-person interviews with hotel developers. hotel investment is expected to recover in the mid/long term. The collected data was placed into three different hotel categories: • budget/economy • mid-scale. elevators. Please note that our survey did not consider any luxury hotels. All rights reserved. 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. etc. training. Differences in timing of development.) Technical Equipment Installation of air conditioners. planning. but it is expected that investment activities in the hotel sector will decline in the short term. we have relied on secondary data that was available at the time of the publication of this report.

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. Although representing the lowest share in our sample.1 2 H o t e l D eve l o p m e n t C o s t s 2 0 0 9 Sample Profile Distribution of the participating hotels by category… Budget 13% Upscale 61% Our sample profile is consistent with that of newly opened hotels in CEE.. All rights reserved. it is expected that hotels forming part of mixed-use developments will gain more presence in the region. Midscale 26% …by type of development City mixeduse hotel 6% City stand­ alone hotel 61% Resort 33% …by room capacity more than 250 rooms 16% 80 rooms or less 26% 151 – 250 rooms 37% 81 – 150 rooms 21% Source: “Hotel Development Costs 2009” survey © 2009 KPMG Advisory Ltd. 21% had a capacity of 81-150 rooms and 26% had 80 rooms or less. 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. we noted that 37% of the surveyed hotels had between 151 and 250 rooms. In assessing the capacities of the hotels in our sample. a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International. 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%). a Swiss cooperative. followed by 26% mid-scale hotel properties. Upscale hotels reported the highest room capacities. . On the other hand. More than 60% of our sample comprise upscale hotels. and 16% had more than 250 rooms. Budget/economy hotels represent only 13% of our sample.

000 in our sample.000 20. the figures presented above do not include any costs related to financing.000 per guest room.000 to more than EUR 100.000 Upscale Source: “Hotel Development Costs 2009” survey As described earlier.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 3 Development costs Based on our sample.000 EUR/room 100.000 80. All rights reserved. sizes of guest rooms. The survey results show that the average development cost for a budget/economy hotel in the CEE region was approximately EUR 51. Individual costs per room in our survey ranged from EUR 40. depending on concept and positioning. Costs per room ranged from EUR 60.000 per room.000 120. . in order to offer readers a more meaningful comparison.000 per room.000 0 Budget/Economy Midscale 51.000 to EUR 60. a Swiss cooperative. a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International.. Mid-scale hotels cost approximately 50% more to develop with an average of EUR 77 .000 per guest room. Several resort hotels in our survey had costs exceeding EUR 200.000 140.000 77. upscale hotels cost almost three times more to develop than budget/economy hotels The average development cost per guest room by category is shown in the chart below. 160.000.000 40. upscale hotels in our sample recorded an average development cost of EUR 143. public areas and in-house amenities. © 2009 KPMG Advisory Ltd. land acquisition or developers’ in-house expenses.000 143.000 60. Mainly as a result of the higher quality of FF&E.

060 21. we have observed that the percentage distribution of costs did not show notable discrepancies between the different hotel categories.120 1.180 18. ranging on average between 2% and 6%.860 143. All rights reserved.1 4 H o t e l D eve l o p m e n t C o s t s 2 0 0 9 Breakdown of costs Breakdown of hotel development costs Pre-opening & working capital 2% Site and area Soft Costs 9% improvements 5% OS&E 2% FF&E 12% When analyzing the breakdown of the development costs of a hotel.000 per room should be budgeted when developing an upscale hotel.150 62. with another quarter spent on technical equipment. like Poland and Romania. the growth in the cost of construction in some CEE countries was closer to 10%. amount to approximately 14% of the total.420 18.480 8..750 4.850 35. have even experienced building tender price inflation of 15-20%.000 Are hotel development costs growing? Growth in construction costs has been faster in CEE than in Western Europe 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.540 77.590 2. a Swiss cooperative.000 Upscale hotels (EUR) 7 . In absolute terms this means that for construction and technical equipment approximately EUR 100. Similarly for all categories. © 2009 KPMG Advisory Ltd. Technical Equipment 25% Construction 45% Source: “Hotel Development Costs 2009” survey Breakdown of development costs per guest room Budget/economy hotels (EUR) Site and area improvements Construction Technical Equipment FF&E OS&E Soft costs Pre-Opening & Working Capital Total costs per guest room Source: “ Hotel Development Costs 2009” survey Mid-scale hotels (EUR) 3. . Whereas the average growth in construction costs was moderate in Western Europe. Certain countries. pre-opening and working capital.540 7 .000 3. a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International.530 51.920 37 .440 2. Mid-scale hotels only require half that amount and budget/economy hotels only one-third.860 11.470 1.700 1. almost half of the development costs for a hotel are used for the actual construction of the property.420 12.590 1.530 6. Another 11% should be allotted for soft costs. Costs for FF&E and OS&E.

. Two-thirds of respondents even say that development costs have increased between 6% and 15%. and stagnation of property developments and hence construction activities. In fact. The vast majority of respondents said that development costs have been growing in the last three years. However. Source: “ Hotel Development Costs 2009” survey © 2009 KPMG Advisory Ltd. with decreasing energy prices. mentioned by almost half of the surveyed developers. a Swiss cooperative. 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. All rights reserved.g. approximately 80% of respondents believe construction costs will decrease by 6% or more.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 5 Two-thirds of respondents say that hotel development costs have increased in recent years Our survey also aimed to identify developers’ specific experiences and expectations about the development of construction costs in the countries where they are active. . Although the extent of this obstacle differs from country to country. an anticipated slow down of inflation in the region. time constraints as well as difficulties with local contractors (e. the growth in construction costs in the CEE region is expected to decrease. over budget. In your opinion. etc. how will costs change in the next 12–18 months? The majority of developers expect development costs to decline significantly in the short term 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 9% 11% 35% increase by more than 10% increase by 6–9% increase by 0–5% decrease by 0–5% decrease by 6–10% decrease by more than 10% 45% Source: “Hotel Development Costs 2009” survey 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 obstacles by survey respondents (multiple answers allowed) 1st 2nd 3rd 4th 5th Municipality/building permits (46%) Obtaining Financing (35%) Environmental issues (15%) Time constraints (10%) Difficulties with contractors (8%) Obtaining the necessary permits from local municipalities was the most commonly faced problem during development projects. a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International. Other obstacles mentioned were environmental obligations (especially for resort projects). 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. bureaucratic delays and restriction with regard to the necessary building permits was mentioned by developers active in several countries of Central and Eastern Europe. interruptions.).

e. capacity of rooms) as well as quality standards. This does not include the time spent for obtaining all necessary permits. As obtaining the necessary building permits and negotiations with municipalities are the main obstacles in developing a hotel in the CEE region. the differences in construction timeframe in our sample were not significant. Although the actual time required for the construction of a hotel is often a function of the property size (i. .1 6 H o t e l D eve l o p m e n t C o s t s 2 0 0 9 How long does it take to build a hotel? Average construction time is 12–18 months.. A great focus on equity participation will also be inevitable. the required timing for these tasks is often the crucial variable in the development timeframe of hotels. a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International. planning activities and securing financing. depending on number of rooms and quality level The sample hotels in our survey had an average construction time of approximately 12–18 months. Permitting and planning significantly impact the overall duration of the project © 2009 KPMG Advisory Ltd. 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 Swiss cooperative. All rights reserved.

Also they will assess in more detail projects’ key parameters.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 7 Aspects of hotel financing Do you plan financing any hotel projects in the forthcoming one year period? With an uncertain outcome as to the extent and timing of the current credit crunch. © 2009 KPMG Advisory Ltd. 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. a reputable management company and the preparation of an independent feasibility study are among the prerequisites. % Not at all Less than last year Same as last year More than 0% last year 0 10 20 20% 30% 50% 30 40 50 60 Most important criteria for financing hotel projects Developer (reliability and references) Location Independent feasibility study Operator (brand) Unique concept Planning and permitting 1 2 3 3. Those developers that are able to secure debt financing will be faced with new terms and conditions. All rights reserved. a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International. with a developer’s track record being most important.5 5. a Swiss cooperative. The banks have stated that they will most likely finance fewer hotel projects in 2009.8 Source: “Hotel Development Costs 2009” survey 1 least important – 5 most important Source: “Hotel Development Costs 2009” survey Banks preferably finance projects in countries where they already have established subsidiaries or lending policies. restricted financing and insufficient equity. many hotel developments are being put on hold because of uncertain market conditions. .5 4.4 4 5 3.0 4.7 4. particularly for larger hotels. In general they prefer inner city upscale hotels in capital cities as well as selected second tier cities across CEE..

. the majority of the surveyed banks are financing greenfield hotel developments with a margin in the range of EURIBOR plus 2. a sound market environment and sustainable operations are said to still receive financing. all developers have indicated that they want to focus on mid-scale and upscale hotels.1 8 H o t e l D eve l o p m e n t C o s t s 2 0 0 9 Average Loan to Cost (LTC) ratio Debt 40–50% Equity 50–60% The key financial terms can be summarized as follows: • Concerning risk premiums.2 – 1. the project pipeline is expected to shrink as developers/investors are facing the consequences of the credit crunch. not venturing into any projects in the budget/economy segment as there is already significant supply in this category. the required equity contribution is also expected to increase. When asked about the future of hotel project finance in CEE. a Debt Coverage Ratio (DCR) of 1. • Significantly higher equity will also be required. as they will be able to benefit from more market segments (i. a Swiss cooperative.5 – 4. Consequently. On the other hand. on average this is estimated to be up to 50 – 60%. At the same time. Concerning preferred locations for development. a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International.e. Although dependent on various criteria. The average Loan To Cost ratio (LTC) varies by bank covering a range from 40 to 50%.3 is expected on average by the participating banks.0%. leisure. All rights reserved. . Outlook Preferred destinations for new hotel developments Country Poland City (top three) Krakow Gdansk Warsaw Romania Bucharest Cluj Sibiu Czech Republic Prague Olomouc Croatia Hvar Zagreb Zadar Hungary Budapest Pécs Győr Source: “ Hotel Development Costs 2009” survey 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. In addition. hotel projects with a good location and concept. Source: “Hotel Development Costs 2009” survey • Regarding the expected performance and debt servicing potential of a proposed hotel project. developers are also less interested in developing luxury hotels. However. our survey respondents mentioned the destinations seen in the table on the left. regardless of the current financial crisis. banks replied without exception that they expect financing to become more restricted and margins will go upwards and in line with increased country risks. business and transit). It is expected that developers and investors will focus more on city hotels as opposed to resort hotels. as they are expensive to build and can only attract a smaller target market. © 2009 KPMG Advisory Ltd.

Leisure and Tourism in CEE Tel: +36 1 887 7100. We are passionate about your business KPMG is a global network of professional services firms providing Audit. Printed in Hungary. a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International. Head of Travel.. experience and knowledge that reaches across both the public 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. Fax: + 36 1 887 6656. a Swiss cooperative. Partner.000 people working in member firms around the world. All rights reserved.sartori@kpmg.© 2009 KPMG Advisory . Tax and Advisory services. KPMG's Real Estate. e-mail: andrea. We operate in 144 countries and have kpmg. Leisure & Tourism Group in Central and Eastern Europe has a broad range of skills.

KPMG does not accept any responsibility for errors. a Swiss Bulgaria and Macedonia) Gergana Mantarkova Tel: +359 2 9697 300 E-mail:gerganamantarkova@kpmg. KPMG Advisory Ltd. Estonia. 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. Váci út 99 Hungary Tel: +36 1 887 7100 E-mail: andrea.sartori@kpmg. Head of Travel. © 2009 KPMG Advisory Ltd. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Lithuania) Stephen Young Tel: +371 67 038 000 E-mail: Slovakia Czech Republic Tomas Kulman Tel: +420 222 123 111 E-mail: tomaskulman@kpmg. Leisure & Tourism Practice CEE Andrea Sartori Serbia and Montenegro Croatia and Bosnia Herzegovina Daniel Radic Tel: +385 0 1 5390 000 E-mail: KPMG contacts in Central & Eastern Europe The Balkans (Albania with its branch in Ladislav Janyik Tel: +421 2 59984 111 E-mail: Andrej Korinšek Tel: +386 1 420 11 60 E-mail: The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or Aura Giurcaneanu Tel: +40 741 800 800 E-mail: agiurcaneanu@kpmg. KPMG and the KPMG logo are registered trademarks of KPMG For further information please contact: KPMG Real Poland Jerzy Kalinowski Tel: +48 22 528 11 00 E-mail: jerzykalinowski@kpmg. . omissions or any consequence arising from the use of this report. Although we endeavor to provide accurate and timely information. KPMG reserves the right to alter at any time any element of this report. All rights reserved. a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG Slovenia Hungary Marnix von Bartheld Tel: +36 1 887 71 00 E-mail: marnix. a Swiss James Thornley Tel: +381 11 20 50 500 E-mail: jamesthornley@kpmg. Romania and Moldova The Baltics and Belarus (Belarus. Leisure & Tourism in CEE H-1139 Budapest.

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