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CEE Hotel Investment Report 2020
CEE Hotel Investment Report 2020
eps
Hotel Investment
Scene in CEE
Market Evolution and Diversification of Operating Structures
March 2020
3 Introduction
4
Highlights – hotel investment trends
in the CEE-6 region
6 How much and where?
8 Key recent transactions
9 Convergence among buyers and sellers
11 Interview with Dominik Sołtysik,
Orbis SA
12 Where is the money coming from?
13 Institutional investors are here to stay
15 Interview with Frédéric De Brem,
Schroder Real Estate Hotels
16 Interview with Dominique Ozanne,
Covivio
18 Where are the yields?
20 What were the key investment drivers?
22 019 hotel performance in CEE-6 capitals –
2
Thomas Emanuel, STR
24 Hotel Operating Models
26 Interview with Pieter Moll,
Borealis Hotel Group
29
Interview with Vytautas Drumelis,
Apex Alliance Hotel Management
30 Hotel operating models – legal overview
32 What’s next
2 | Hotel Investment Scene in CEE 2020 Source : Raffles Europejski Warsaw – Courtesy of Accor
Introduction
After years of rapid and turbulent development, the CEE-6* markets were catching up with their
western neighbours, in terms of both investment volumes and sophistication. Hotel transaction
activity reached record levels in 2019, and there is still room to grow. Our initial expectations for
2020 were bullish, underpinned by several significant deals being in various stage of progress.
However, the currently escalating COVID-19 crisis is dwarfing this positive trend and making
2020 extremely unpredictable. Nevertheless, we have left in this report our initial pre-crisis view,
to show the market potential once the virus is contained and things return to normal.
Notwithstanding the current crisis, the CEE-6 region has been experiencing qualitative evolution
and diversification in the hotel real estate sector, driven by the changing needs of travellers, as
well as increasing competition among operators and investors. In our first edition, we focused on
innovation shaping hospitality concepts and issues around shared-accommodation platforms. In
this report, we explore the changing nature of operating structures from the investor/owner
perspective, and discuss the underlying trends driving this evolution across CEE. We again asked
selected international and regional players active in the region, as well as those keen to enter the
CEE market, for their brief opinions.
We do hope you will find the report interesting; please do not hesitate to contact us to discuss
any of these issues further.
3
Highlights – hotel investment trends
in the CEE-6 region
2015 – 2019
2019
CEE-6: Total hotel transaction volume (EUR, m) Transaction volume by hotel class in 2019
(share in % based on transaction volume)
1,500
2%
Running Average (5 years interval)
1,250 14% 24%
x
1,000 2.4 4
844 19% 16%
750
500 530
26%
342
250
205 482 477 459 628 606 646 1,031 493 1,446 Luxury Upper Upscale Upscale
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Upper Midscale Midscale Economy
Hungary Bulgaria
€0.74bn
Romania 29%
Slovakia
€0.33bn
Bulgaria
€0.18bn
1%
3%
Poland 4% Czech Republic
€116m
Poland
Czech 38%
Republic 30%
Hungary
€189.7m Slovakia
€8.9m Romania
Hungary Bulgaria
€147m
Romania Slovakia
€18.6m 24%
Bulgaria
€12.7m
1%
Poland 5%
4% Czech Republic
€391m
Poland
Czech 20%
Republic 43%
Hungary
€620.4m Slovakia
€17.1m Romania
Hungary Bulgaria
€285
Romania 27% Slovakia
€57.9m
Bulgaria
€75.2m
Looking at 2019, by far the largest transaction in the CEE region was the previously mentioned
purchase of the InterContinental Prague for EUR 225m by the family office and wealth
management R2G from the Czech Republic. The hotel is to be repositioned under Fairmont brand
by Accor. Other notable deals included the acquisition of the Sheraton Warsaw by Patron Capital, a
UK private equity real estate fund, the purchase of the 440-room Panorama Hotel in Prague by
Austrian S+B Gruppe, and the acquisitions of the Radisson Collection Warsaw and the Hotel
Don Giovanni by Wenaasgruppen, extending its CEE portfolio.
Buyer Seller
Property Market Keys Buyer Origin Seller Origin
Sofitel Budapest Chain Bridge Budapest 357 Indotek Group HU Starwood Capital US
Kraków
UII EuropeanM Portfolio 527 Union Investment DE UBM Realitaetenentwicklung AG AT
Katowice
Due to ongoing COVID-19 crisis, several deals that were expected to close in 2020 are being put
on hold. Nevertheless, there are investors that see beyond the current issues and continue with
their acquisitions and due-diligence process. There is also a number of deals that were already
completed in the beginning of this year, totalling approximately EUR 297m across 6 assets,
primarily located in Budapest.
With the large amounts of capital raised for real estate investments, interest rates remaining low
and potential for healthy profitability levels of hotels within the CEE-6 area, the number of buyers
scouting for deals in the region is likely to grow, once the current crisis is resolved. Accordingly,
the medium and long-term prospects for transaction activity in the region remain very positive.
3,200
2,000 1,795
1,600
1,446
1,200 1,031
400
0
2015 2016 2017 2018 2019 2020
Initial Outlook
(Before COVID-19)
Individual Property Portfolio Already transacted in 2020 Orbis transaction Total volume
9
10 | Hotel Investment Scene in CEE 2020 Sofitel Grand Sopot – Courtesy of Orbis
Orbis SA
Dominik Sołtysik
Board Member and Chief Investment
and Development Officer
What is your presence in the longer looking for management or Germany and Austria), with three
CEE region? What are your franchises, which is the field of parties involved: investors and real
plans going forward? expertise of our partner Accor. estate owners, lease operators and
2019 was a transition year for international chains acting as
Orbis, until then an owner, Orbis has now fully reconnected manager or franchisor.
operator, manager and franchisor with its roots as an investor, and
at the same time. Following the consequently we aim to focus on In this context, we have seen the
asset-light strategy of Accor Group, the ownership of land and following consequences:
Orbis decided to dispose of its buildings. Due to the attractiveness
asset-light business line to Accor. of CEE, expected returns for — institutional and financial
Consequently, since 31 October investors have lowered, however investors have increased their
2019, Orbis and Accor have been we still see some long-term growth presence and are ready to
two completely separated entities; potential, therefore we believe that accept low but stable
Orbis owns or leases 73 hotels it is possible to build long-term investment yields;
throughout CEE, and Accor remains value with a smart and careful asset — operational risk has shifted to
manager of these hotels under a management strategy. We currently be entirely borne by operators
long-term management agreement. have four hotel projects under that have the leasehold, which
This creates two unique companies, development, and we are reviewing is often made up of a fixed rent
each of them the regional leader in other opportunities that are in the or at least has significant
its core business. pipeline, mostly in Poland. Most minimum guarantees.
importantly, we are steadily
The final stage of this transformation investing in our existing portfolio to If yields continue to compress, we
is the sale of Accor’s stake in Orbis improve, transform, renovate and do not anticipate a shift in this
to AccorInvest, which was upgrade existing assets. trend, because it will always require
announced in December and will more capital to invest and become
be completed in March 2020. This Finally, we still have some hotels an owner, which the operators
transaction, with a value of over under lease, which we will pursue cannot afford.
EUR 1bn, is a record-high in the for the most strategic ones, but it is
CEE hotel industry. not an axis of our development. In this new landscape, Orbis
remains a special case, because we
What is your preferred business What trends/changes do you still think it is possible to capture at
model in CEE? In your opinion, see in terms of business models the same time the long-term value
what structure offers the best adopted in the region? of the real estate and the potential
ratio between return and risk? In recent years, we have seen upside from operating hotels. This
Further to the transformation of significant expansion in the lease requires the operational risk to be
Orbis, it is obvious that we are no model (mostly imported from accepted, but ultimately results in
higher investment returns
11
Where is the money coming from?
Growing diversity of buyers
The increasing volumes transacted across the CEE-6 region have also been accompanied by a
growing diversity among buyers in terms of origin and type. This trend was especially apparent
in 2017 when investment volumes reached a record level with a healthy mix of institutional,
listed and private investors from Europe, the Americas, Asia Pacific and the Middle East.
However, the geographical diversity of investors somewhat reversed in 2018 and 2019, when the
majority of transacted volume in CEE was executed by European investors such as R2G from the
Czech Republic, Norwegian Wenaasgruppen, German Union Investment and Austrian S+B
Gruppe, and UBM. These investors are close to the market and were frequently able to secure
the assets on an off-market basis or get to the tender process very early. Confidence grounded
in a good understanding of the region, strong relationships and an established network of
trusted advisors, allows these players to perform appropriate due diligence and make superior
offers quickly, which is increasingly important in this highly competitive environment.
However, this does not mean that non-European investors were not keen to acquire hotels in the
CEE region. Their interest has been growing, especially when it comes to buyers from Israel,
South Korea and South Asia. Examples of recent major acquisitions include the K+K portfolio by
the Indian fund InterGlobe Enterprises and the Lindner Hotel Gallery Central in Bratislava
acquired by Rotana an UAE Hotel Group.
Total transaction volume invested in CEE hotels; 2015 – 2019 (in EUR, cumulative)
CEE
€4.2bn
Americas
€0.5bn
€2.9bn
Furthermore, many institutional investors such as pension and insurance funds invest for the long
term, have low leverage and, therefore, are less concerned with the temporary headwinds. A good
example has been the Warsaw market where institutional investors see long-term growth potential
and continued to scout for new deals, despite the declining RevPAR in 2019, driven by a supply influx.
All of this makes institutional investors active buyers even in the later stage of the cycle, hence
they represents a critical exit consideration for hotel owners. A growing number of these
investors that were seeking and acquiring assets across the CEE region, is therefore good news
for the market. During the last five years alone (2015 – 2019), institutional and listed investors
acquired hotels worth over EUR 2bn, representing 50% of total volume transacted. The examples
of key players in the region include Union Investment and U-City.
While in 2018 and 2019 the share of institutional and listed investors in total transaction volume
in CEE declined compared to the peak in 2017, it was not for the lack of interest. The primary
reason was that regional private investors were somewhat more aggressive, being closer to the
market, and also because of the relatively moderate deal sizes that are too small for institutional
players. For example, in 2019 the average price per transaction was EUR 31m.
Institutional and listed investors typically look for big-ticket single transactions or portfolio deals,
and these are still rare in CEE. Nevertheless, several institutional investors acquired hotels in CEE
either via smaller portfolios or as part of larger pan-European portfolio acquisitions. Examples
include Covivio, one of the largest European REITs active in hotel sector, acquiring three B&B hotels
in Poland in 2019 for EUR 24m, and a JV of InterGlobe Enterprises and Even Hotel Group acquiring
three hotels in Prague and Budapest as part of a ten-property portfolio under the K+K brand
operating across Europe. This trend has continued in early 2020, evidenced by Covivio’s pending
acquisition of three hotels in CEE; part of pan-European portfolio deal including eight hotels under
the Dedica Anthology brand in Budapest, Prague, Rome, Nice, Florence and Venice for a total of
EUR 573m. Another notable transaction in CEE that closed in March 2020 by an institutional
investor was AccorInvest’s acquisition of an 85.8% stake in the Polish Orbis S.A. from Accor for
PLN 115 per share, corresponding to proceeds for Accor of EUR 1.06bn. This added 14,000 rooms
across 73 hotels to AccorInvest’s portfolio, spread over six countries in the CEE region.
Structure of 6-CEE Hotel investment by Investor type (share in % based on transaction volume)
3% 1%
9%
Private
34%
38% Listed / REIT
47% 28%
50%
56%
Institutional
Other
16% 12% 5%
13
14 | Hotel Investment Scene in CEE 2020 Sheraton Grand Warsaw – Courtesy of Schroders
Schroder Real Estate Hotels
Frédéric De Brem
Head of Schroder Real Estate Hotels
15
Covivio
Dominique Ozanne
Deputy CEO
Since the global financial crisis, hotel yields for a typical deal with a management contract structure
across the capital cities of the CEE-6 region compressed and narrowed from an 8 – 11% range
depending on the market, down to a 5.25 – 7.00% range. Hotels in Prague, Budapest and Warsaw are
being transacted with the lowest yields. In terms of lease structures, the yield spread has compressed
by between 50 and 75 basis points.
Yields have been getting closer to those seen in Western Europe in recent years. However, in 2019
there was still gap of about 50 to 100 basis points between the top cities in the CEE countries and
their close western neighbours, such as Vienna and Berlin.
11%
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Note: The yields are based on actual transactions where available as well as the sentiment indicated by the investors. The initial yield
may vary widely in the region particularly depending on the location, hotel quality/type, deal type, operating structure and upside
potential (applicable to the Management Contract operating structure).
The large amount of dry powder looking for placement should help to keep the yields low,
once the COVID-19 crisis is contained. However, further compression might be challenging,
due to slowing RevPAR growth combined with economic and geopolitical uncertainty and
concerns caused by the coronavirus outbreak.
— Healthy market performance in recent years and — Low brand penetration compared to Western
attractive profitability levels, despite rising labour costs Europe, which creates opportunities for branding
and repositioning
— Unique market characteristics such as a very
limited supply pipeline in Bratislava and Prague, — Expansion of global branded operators, professional
robust commercial development in Warsaw or third-party management companies and specialist
decreased VAT rate for hotel accommodation in hotel asset managers across the region allowing
Hungary and Slovakia institutional investors to enter the sector, thus
increasing overall transaction activity and
— Higher yields relative to many established markets
liquidity.
in Western Europe and other asset classes, combined
with long-term growth potential
90
80
2015
70 11.3%
2019
60
CAGR 2015 – 19
50 8.5%
40 6.5% 6.9%
5.6%
30
20
2.8%
10
0.9%
0
Sofia Bratislava Warsaw Bucharest Budapest Prague Europe
Source: STR
2.8%
0.8% Prague
Warsaw
-0.1%
19.8% -2.9%
9.9%
2% Bucharest
Bratislava
-0.6%
5.1%
-0.8% Budapest
Sofia 1.2%
-2.3%
Note: the ADR change is based on values in EUR.
Occupancy ADR
Source: STR. Republication or other re-use of this data without
the express written permission of STR is strictly prohibited.
21 3.8%
18.5
18
15.9
15
4.9%
12
10.6
8.8 5.5%
9
6.4 5.5%
6 5.2
5.2% 5.8%
3.5
3 2.9 2.8
2.3 2.0
1.6
0
Prague Budapest Warsaw* Bucharest Bratislava* Sofia*
* 2019 forecasts
40 38.5
37.3
35
2018 2019 2020* 2021* 2022*
30
26.6
25
22.6 22.6
20
17.1
15
11.4
10 9.5 8.8
7.4
5.5 5.5
5
0
Prague Budapest Warsaw Bucharest Sofia Bratislava
12 CAGR 2015 – 2019
10 9.7% CAGR 2019* – 2022*
8
6.6%
6 5.8% 5.7%
4.5%
4 3.3%
2 2.0%
0.9% 0.9% 1.0% 1.2%
0.5%
0 0% 0%
Warsaw Bucharest Sofia Budapest Prague Bratislava CEE-6
21
2019 Hotel performance in CEE-6 capitals
Thomas Emanuel
Director, STR
Four of the six major Central and Of the markets analysed for this In Sofia, the market experienced a
Eastern European (CEE) capitals article, Bratislava saw the greatest slight RevPAR decline of 1.1%. This
continued to enjoy growth in ADR and RevPAR increases, 22.1% was due to demand falling 1.8%.
revenue per available room and 19.8%, respectively. The The key reason for this decline
(RevPAR) in 2019. The region as a outstanding growth shown by the would be the comparison with the
whole also continued to improve Slovakian capital was driven by two EU presidency host time, which
from a hotel performance major factors; firstly the decline in VAT Bulgaria held in the first half of
perspective, due to growing from 20% to 10%, which came into 2018. Much like Bucharest, the
economies, political stability, effect on 1 January 2019 and helped market is still dominated by
perception as safe destinations, an increase in net rooms’ revenue. corporate business, with
expanded airlift, demand-driving Secondly, events played a big part, the occupancies below 60% on Friday
events, and relatively low supply highlight being the World Ice Hockey and Saturday nights, and less than
increases (in most markets). Championships in May, which helped 50% on a Sunday. This, however,
boost ADR 32.8% for the month. does also give the market a good
Looking at each of the capitals in opportunity to focus on driving
turn, starting with the furthest north, Budapest has seen significant more leisure business to the city.
we see the dynamic city of Warsaw. RevPAR increases over recent years
The city saw a decline of 2.4% in – 11% per annum since 2014. This In summary, despite a mixed picture,
revenue per available room (RevPAR) past year was also impressive with and supply challenging occupancy
in 2019, the market’s second RevPAR growing 6.3%, but this was in a number of cities, demand grew
consecutive year with a RevPAR all due to ADR increases, as, similar in 2019. More people were
decline. However, that performance to Warsaw, supply growth travelling to this growing region,
was solely supply-driven. Supply outpaced demand and led to a and it has all the fundamental
increased 6.8% in 2019, following an small occupancy decline of 0.8%. demand drivers to ensure that
increase of 7.0 in 2018 – significant Again, events played a major part continues into the future.
amounts for any market to absorb. in the market’s success – the best
With supply outpacing demand, of which was the Hungarian Grand STR provides premium data
occupancy dragged down RevPAR Prix which drove 101.7% RevPAR benchmarking, analytics and
despite an increase in average daily growth from 2 – 4 August. marketplace insights for global
rate (ADR) increases. The pipeline in hospitality sectors. Founded in
Warsaw remains strong, with an Romania held the EU Presidency 1985, STR maintains a presence in
additional 4,156 rooms due to open, during the first half of 2019, which 15 countries with a corporate North
so supply will need to be closely was the key driver in a positive year American headquarters in
monitored in the years ahead. for Bucharest, with RevPAR Hendersonville, Tennessee, an
increasing 11.6%. Supply in the city international headquarters in
Moving to Prague, 2019 produced grew 3.4%, which again was faster London, and an Asia Pacific
a steady RevPAR increase of 3.6%, than demand, leading to a small headquarters in Singapore. STR was
mostly driven by ADR. The market occupancy decline. The city is still acquired in October 2019 by CoStar
benefits from multiple demand a heavy corporate destination Group, Inc. (NASDAQ: CSGP), the
drivers, and enjoyed the strongest with wide variances in occupancy leading provider of commercial real
occupancy of the six capitals – between the weekends and estate information, analytics and
79.3%. Supply growth has been weekdays. In 2019, Sunday night online marketplaces.
low, less than 1% per annum since average occupancy was 57.1%
2011, which naturally benefits versus a far stronger Wednesday
hoteliers in the market. night, which averaged 84.3%.
However, in the CEE region the availability of various operating models was until recently somewhat
limited, with the predominant structure being owner-operated hotels, followed by properties under
management agreements. The main reason behind this lack of fixed income options was the
hesitance of major operators to sign leases and the absence of third-party management companies
to fill the void. This started to change in recent years, driven by the increased popularity of, and
confidence in, the CEE markets. Selected examples of major branded international operators signing
leases in the region include Motel One, the Radisson Group, Barceló, Hotusa, A&O, Louvre Hotels
Group and B&B hotels. This trend is likely to grow with a number of other major operators already
having deals in progress and actively looking for more opportunities across the region. Nevertheless,
this typically applies only to prime projects in prime locations and within a limited number of key
cities such Prague, Budapest and Warsaw.
The “sandwich” model has been further boosted by the increasing number of sale-and-lease-back
transactions, with UBM and Orbis being examples of the key players utilising these structures.
Furthermore, even major branded operating companies support this model as it allows them to focus
on their asset-light franchise business and expand their footprint across the CEE region more rapidly.
10% 2019
2% 2015
Owner operated
37%
Management agreement
34%
Lease agreement
61% 56% Note: Based on an operating structure analysis of
hotels with more than 100 rooms in Prague, Budapest,
Warsaw, Sofia, Bucharest, and Bratislava.
Branding
Contract Type
Income Type
Ris
k,
Owner
Operated
Ret
d
- Br ed
de
No
urn
Bra anded
nd
an
n-B
Bra
nde
Fixed
r
&
Lease
N on
Management
d
Control
Contract
Fixed Variable
Income Income
Hotel
Ownership
Variable
Lease
Semi-variable
Income
es
Lin
g
rin
ur
Bl
Management
Semi-variable Contract with
Lease guarantee
N o n - B ra n d e d
B ra n d e d
25
Borealis Hotel Group
Pieter Moll
Director Corporate Finance / Development
Vytautas Drumelis
Member of the Board
What is your presence in the CEE the owners and our partners. For banks prefer fixed leases as they
region and plans going forward? example, is this an institutional provide stable cash-flows. However,
Apex Alliance Hotel Management investor or a private equity fund we are now seeing greater trust
is currently operating six hotels and do they plan to sell the from banks due to the strong
with a total of 1,202 rooms (three property in the short-term or do performance of our hotels, thus
in Romania, two in Lithuania and they see it as a lifetime investment? management agreements are
one in Latvia). Together with the Depending on the answers, there being increasingly considered.
properties in pipeline, we will are different milestones and Similarly, as western European
operate 16 hotels with 2,997 attention given to different critical Institutional investors have started
rooms across six countries by 2022 points and financial metrics, such as looking eastwards to countries like
whereas this includes seven owned a quick ramp-up or long-term Poland, Romania, Hungary and the
hotels representing EUR 118m of stable cash-flow as well as growth Czech Republic, they too are more
investment (five in Bucharest, one in the property’s value. The majority open to management agreements
in Riga and one in Venice). Our aim of hotels in our portfolio are that offer higher returns. This
is to become the largest and the operated under the management model is more balanced for both
most recommended independent agreements and the owners also the parties than a lease, as it offers
hotel operator in CEE, thanks to have franchise agreements with an a market-upside to owners, while
our creative and attentive international brands franchisor in the operators receive their fees and
approach, focus on efficiency, fast place, such as Hilton, Marriott or are protected against the downside.
decision-making and flexibility. others. The recipe for success is In leases, there can be tension
We intend to expand through our closely related to the fact that we between the parties every time the
own investments as well as via the act both, as an investor and market moves up or down. The
management agreements as a developer; thus, we understand alternative could be a lease with a
third-party hotel operator. Our well the challenges the for owners variable component. However, if
goal is to reach a 100-hotel undertake, starting from the the fixed component is too large,
portfolio in ten years, and, I believe, development, pre-opening period the entire model no longer fulfils
this is the right time and we are in and operations. In terms of regions, its purpose.
the right place to do so. we are currently analyzing the
projects in Poland, Estonia, To sum up, when choosing the
What is your preferred business Romania, Hungary, Ukraine, Turkey, best possible model, it is important
model in CEE and where do you Italy and Germany.’ to consider all possible advantages
expand? and disadvantages, understand
Apex Alliance Hotel Management What trends do you see going the needs of the owner and
prefers management agreements, forward? evaluate the capabilities of the
although leases can be considered The underlying changes in the management company.
for extraordinary projects as well. hospitality industry, such as bank
There are pros and cons associated requirements, taxes, constructions Apex Alliance Hotel
with both models, therefore it is costs and tourism trends, are Management is an
very important to understand the driving the evolution of hotel independent operator which focuses
strategy and further intentions of business models. For example, on establishing and developing
long-standing partnership with
institutional investor, property
owner or private equity fund while
In leases, there can be tension between providing the management services
to their existing or future hotels
the parties every time the market moves
with a committed team of
up or down. passionate hoteliers.
29
Hotel Operating Models – Legal Overview
When considering the allocation of risk and responsibility between the owner and operator of
a hotel from the legal perspective, there are three basic operating models: lease agreement,
management agreement and franchise agreement. Let’s take a look at the three models in their
pure form, as well as various hybrid forms that are appearing on the market.
Lease agreement
A hotel lease agreement is an agreement under which the owner of a hotel property leases the
hotel property to an operator who then runs its hotel business in such property and pays rent to
the owner. The owner bears a very little risk and responsibility under this operating model, as
the hotel business, with all its related risks and liabilities, is owned by the operator, and the rent
would typically be an agreed fixed amount. However, the owner does not have much control
over the hotel’s operation and does not benefit from increased profits if the hotel performs well.
Lease Agreement
∙ Real Estate
Bank Owner
Mortgage
Lease Rent
Management agreement
Under a hotel management agreement, the hotel owner mandates a hotel operator to manage
the hotel’s business on the owner’s behalf. The operator provides hotel management services
and allows the owner to use the operator’s brand and to access its central reservation system,
loyalty programmes and sales and marketing programmes. In return, the owner pays the operator
certain fees primarily based on turnover and profit of the hotel business.
Unlike under the lease agreement model, under a management agreement the hotel owner
takes all the risk and liabilities of the hotel business. For example, the owner will usually be the
employer of the hotel’s personnel and therefore liable for all employee claims. The owner is
also responsible for the hotel’s assets, including maintaining the property, furnishings, fittings,
equipment and inventory, and funding the hotel’s bank accounts.
However, when the hotel is performing well the owner enjoys the benefit of the hotel’s success
under the management agreement model. After paying the operator its fees, the owner is
entitled to retain the hotel’s profits, so it benefits from the hotel’s better performance far more
than under a typical lease.
Management Agreement
∙ Brand
Non-Disturbance Operator ∙ Reservations and CRM Systems
Agreement
∙ Management and Know-How
Mortgage
∙ Real Estate
Owner ∙ Business
∙ Employees
∙ FF&E
Franchise Agreement
∙ Brand
Franchisor
∙ Reservations and
CRM Systems
Hybrid forms
The changing market and the demands made by its players mean that these operating models
are subject to pressure and various hybrid operating models have appeared.
— Reduced Fees. If the operators’ projections show a strong enough performance by the hotel,
the operators might accept a mechanism to reduce or scale down their fees in the early years
of the hotel’s operation.
— Key Money. With newly built or converted hotels, operators are sometimes willing to pay
“key money”, an upfront payment to the owner for entering into a management agreement,
to ease the owner’s burden of the financial investment in the hotel.
— Owner’s Priority Return. Operators may agree to defer their incentive fees to the owner’s debt
service, so that they do not receive their incentive fee if there is insufficient profit to fund the
owner’s loan interest.
— Profit Guarantees. Operators may also guarantee a minimum level of profits, compensating
any shortfall to the owner. When guarantees are given, they are always capped, both annually
and in aggregate, and sometimes subject to clawback when the profits rise again.
Manchise Agreement
“Manchise agreement” refers to an arrangement where the agreement starts off as a
management agreement but contains an option to convert into a franchise agreement once the
hotel owner has developed sufficient skill and knowledge to take over the hotel’s operations
itself. Manchise agreements are an interesting concept to hotel owners who seek to reduce their
fees payable to the operator at a later stage of the operating term.
31
What’s next
With many institutional investors focusing primarily on leased assets, especially those who are
new to the hospitality sector, it is expected that this model will continue to grow in the CEE-6
region. However, the current COVID-19 crisis is likely to result in higher caution among tenants.
Nevertheless, the share of hotels under lease is anticipated to rise far beyond the current 10%,
especially in capital cities across the CEE-6 region. An analysis of the latest transaction activity
confirms this, with 13% of deals in 2019 involving hotels with a tenant in place at the time of
sale, while in 2020 this was initially expected to increase to 17%. Furthermore, as properties that
are being sold on a ‘vacant possession’ basis may subsequently be leased, with buyers frequently
having a preferred tenant already lined up, the final share of leased hotels is likely to be even
higher. A good example is Covivio’s pending acquisition of the Dedica Antalogy portfolio, where
the properties will be rented to NH Hotel Group (owned by Minor Hotels) and rebranded under
NH Collection and Anantara brands.
While these hybrid structures are not necessarily new, they are becoming more sophisticated and
more frequent across the CEE region. This has been pushed by strong competitive pressures on
one side while on the other side it has been being pulled by the rising uncertainties such as
economic and geopolitical concerns and supply influx in selected markets. The unexpected
pandemic outbreak that is currently causing major challenges for hotel sector globally will
undoubtedly further enhance the need for the flexibility and risk mitigating terms in contracts.
The game must go on but the deals need to be smart and incorporate flexibility to handle the
unexpected.
1% 2020*
18%
2019
12% Lease
Management agreement
23%
54% Vacant possession
Franchise agreement
66% 27%
* 2020 initial estimate (before COVID-19 impact)
Who we are CMS advises businesses in all aspects of the hotels and
Our purpose is simple: to put our clients and our people leisure sector. We advise on more hotels and leisure
at the centre of what’s next in the world of real estate. transactions than any other law firm and work with
hoteliers, restaurateurs, investors and developers.
Our promise is consistent throughout sectors, services
and the world. Cushman & Wakefield clients benefit Please visit Hotels & Leisure sector page at cms.law to
from the best insights, which come from: download a Hospitality Matters newsletter.
— an understanding of changing markets and
opportunities Visit cms.law
— an agile approach to every opportunity that
guarantees adaptable, client-centric solutions
— an unwavering dedication to the business of
exceeding the expectations of our clients
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people and creates new solutions others cannot see
— 3.5 bn (SF managed)
— $6.9bn revenue (2017)
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Visit http://cushwk.co/hotels
The information held in this publication is for general purposes and guidance only and does not purport to constitute legal or professional advice.
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