Cushman & Wakefield Ukraine have undertaken an analysis of the main trends of the hotel real estate market in Kyiv and compared them to the other capitals of Central and Eastern Europe. The main conclusions: the smallest volume of the tourist market, the lowest number of rooms, the lowest occupancy rates for hotels at the highest growth rates and the major development potential.
Despite the global shock that the world experienced in 2016, from terrorist attacks to social protests, the threat of growing political populism and interethnic intolerance, the tourism industry in the global economy has demonstrated comparative stability. Even in the course of negative macroeconomic and political impacts, it ended 2016 with growth, outperforming the world GDP growth in general.
Figure 1. Tourism industry in Eastern European national economies, 2016
In 2016, the tourism industry's contribution to Ukraine's GDP was $ 5 billion, or 5.6% of the country's total GDP. In absolute terms, this indicator is comparable with the indicators of Slovakia (5.6 billion) and Bulgaria (6.6 billion) and is significantly lower than the one in other CEE countries (for comparison, Poland - 21.1 billion, Hungary - 13 billion, Czech Republic - 15 billion). Austria is the leader of the CEE region with an indicator of 50.7 billion and its share in GDP of 15.6%.
Figure 2. Tourism contribution trend in GDP of Ukraine, 2010-2017*
According to the forecast issued by the WTTC (The World Travel & Tourism Council), in 2017 the tourism industry in Ukraine will show an increase of 3.4% and in the long-term perspective will grow by an average of 3.1% per year. With this average annual increase in the ten-year perspective, this figure in US dollars is unlikely to reach the level of 2013.
Figure 3. Countries’ investment in tourism development, 2016 to 2010
In Ukraine, the amount of investment outlay in the tourism industry has decreased twofold since 2010 and today it amounts up to 2% of total investment, which is significantly lower than in Eastern and Central Europe. For most Eastern European countries, the annual volume of investment in the tourism sector has remained unchanged since 2010. Poland (+ 23%), Czech Republic (+ 22%) and Romania (+ 22%) showed the largest increase in investments.
Figure 4. International and domestic tourists spending pattern, 2016
In Ukraine, unlike most countries of Central and Eastern Europe, domestic demand predominates, which indicates the focus of the tourism industry on the domestic market. At the end of 2016, international travelers spending rate demonstrated a real growth of 6%, which, however, was not of a significant influence on the spending pattern.
Figure 5. Touristic spending pattern: business trips and leisure travel, 2016
In 2015-2016, the indicator of business tourism spending rate started to grow and, according to the results of 2016, exceeded by 7% the indicators of 2015 and reached the level of 2007. This is primarily due to the resumption of the country's international activity - the active work of governmental and non-governmental organizations, the expansion of the missions of other states in the country, the introduction and implementation of educational programs for the public sector.
Based on a set of macroeconomic indicators of the industry and long-term forecasts, WTTC forms the ratings of countries (185 countries in total) by the importance of the tourism industry in the formation of the national product of the country from 1 (high significance) to 185 (low significance).
Current rating (according to 2016)
In the long run (till 2027)
In the long-term perspective, the role of the tourism industry in the economies of Poland, Bulgaria, Hungary and, to a lesser extent, - Ukraine and Romania, is expected to strengthen.
Austria and the Czech Republic lose their positions in the rating in the long-term perspective due to the comparative maturity of the tourism industry, the saturation of the accommodation, tourist, recreational infrastructure (for example, there are practically no free sites for construction of recreation projects in Vienna today). Because of this, the share of the tourism industry in the GDP of these countries will gradually decline.
Until 2014, the inbound tourist flow of Ukraine exceeded the tourist flows of most countries in Central and Eastern Europe, reaching 25 million in 2013. In 2014-2015, the number of foreigners coming to the country has halved, practically to a minimum level for 25 years of the existence of independent Ukraine. The decline in the tourist flow to the country was most facilitated by the fall in the number of tourists from Russia and Belarus.
Figure 6. Inbound tourist flow: trends of 2012-2016
An increase in the inbound tourist flow has been typical for other countries of Central and Eastern Europe during the last 5 years. The structure of the incoming flow has also changed.
Figure 7. Inbound tourist flow pattern in 2012 and 2016
Thus, there was a fall in the share of tourists from Russia (from 9.5 million people, or 41% of the total tourist flow, in 2012 to 1.5 million people, or 11%, in 2016) and Belarus.
In 2016 there was an upward tendency of the tourist flow. This is due to the relative stabilization of the internal political situation, the decrease in the activity of military operations.
As a result of 2016, there is an increase in flows from neighboring European countries, as well as from the far-abroad countries with a small share in the overall structure of the incoming flow, but with significant growth in reference to the previous period (2015) from Israel, Turkey, USA.
According to WTTC forecasts, in 2017 the number of foreign visitors will increase by 5%, but only in the long-term perspective (10 years), it will reach the level of 2013.
At the end of 2016 and beginning of 2017, the cumulative room capacity rate in Kyiv comprised more than 10 thousand rooms in 106 hotels. Prague and Vienna are the supply leaders at the hotel property markets in CEE. From the perspective of the expected growth in room capacity by 2020, the leaders are Warsaw (+21%) and Sofia (+17%). Providing delivery of the announced hospitality property projects, room capacity in Kyiv will be 13% higher by 2020.
Figure 8. Room capacity in 2016 and forecast for 2017-2020
The index of the number of rooms per 1000 inhabitants in Kyiv is the lowest one among the capitals of CEE countries and equals 3.5 rooms per 1000 inhabitants. For comparison: in Sofia and Bucharest this index equals 5.2 rooms, in Prague – 27.3 rooms. The good news is that Kyiv has got the highest average annual growth rate in room capacity, which has amounted more than 5% per year since 2012.
Figure 9. Room capacity: number of rooms per 1000 residents, 2012 - 2016
The area of the circle is the number of rooms (absolute value, 2016). Axis X - the number of rooms per 1000 inhabitants. The Y axis - the average annual growth rate of the hospitality bed availability for the period from 2012 to 2016.
The low room capacity rate gives evidence of the existing market potential in Kyiv but not for all segments. It is noted that the room capacity in Kyiv has been developed in recent years with a quality offer in the high price segment as a result of which upscale and luxury hotels occupy about 19% in the total number of rooms.
Despite the significant ratio of midscale (29%) and economy categories (38%), this segment is represented largely with the properties with a high level of obsolescence and physical deterioration.
Figure 10. Categorized proposal structure
Subject to the delivery on a number of announced projects, the share of midscale will increase from 29% to 31%. Nevertheless, the economy niche remains largely undeveloped, which could be presented by the international networks. At the moment this segment is being investigated by the national network with limited international presence - Reikartz Hotel Group.
Table 1. Potential supply 2017- 2020, Kyiv
Currently, only 23% of the total number of rooms in the capital is represented by hotels of global brands; 4% are formed by the existing on the market Reikartz Hotel Group and Iris Hotel International Hotels Group with a still limited presence at international level. Two Reikartz hotels are in Sweden, and two more in Kazakhstan. Iris, in addition to Kyiv and a number of cities on the coast of the Azov Sea, is also represented in Prague.
Figure 11. Current and perspective proposal in room capacity provided by international operators
Political instability and the economic crisis of recent years have negatively affected the plans for the expansion of international operators to the Ukrainian market.
Today, the supply of rooms managed by international operators is unbalanced with a significant share of the high price segment and almost no quality budget hotels due to the suspension of the development activity of international hotel networks in Kyiv and Ukraine in general.
Figure 12. Proposal structure based on management type, 2016 (left)
Figure 13. Categorized proposal structure for international operators, 2016 (right)
The upward tendency of the main operating indicators of hotels (occupancy, ADR, RevPAR) in the capitals of the CEE countries has strengthened in 2016.
Figure 14. Hotel operational activity rates, 2016
Budapest and Prague initiated this trend in 2015, demonstrating an increase in the average room rate and its profitability. This trend was successfully continued by Bratislava, Sofia and Bucharest with a record increase in ADR and RevPAR in the region. The growth of operational indicators was also promoted by internal factors: the influx of tourists from Russia increased in Sofia as Bulgaria was seen as an alternative to Turkey after "disagreements" in foreign policy between Turkey and Russia
Bulgaria has launched a comprehensive tourism development strategy nationwide. Bratislava is actively promoting the MICE segment, and the push to this was given by the country's presidency of the EU in the second half of 2016. Romania's economy is one of the fastest growing in Europe, and this could not but affect the country's commercial real estate markets, including the hospitality market. The share of private tourism is growing in the country. The hotel market of Bucharest has a significant potential due to the growing hospitality bed availability, which by the end of 2016 exceeded 70% amid the average room rate, which is lower than the one in Prague or Budapest. The lack of qualified personnel and insufficiently developed infrastructure for hosting large-scale MICE events of international level are the containing factors of market development.
The growth in operating performance of hotels has slowed in more developed markets of Vienna, Prague and Warsaw. There was a slight decrease in ADR in Vienna.
The tourism market in most CEE capitals is now dealing with occupancy, which has reached the pre-2008 level and in some cities even exceeded it. This level of occupancy is close to stabilization, and in this case, the average room rate will become the factor of an income growth to a greater extent. As demand grows, and the new supply remains limited, there is a growth potential for ADR, which means that the average yield of the room will likely increase.
All of the above mentioned is not applicable to Kiev because of the events of three years ago. The occupancy of hotels is the lowest among CEE capitals. Its record growth (more than 20% compared to 2015) is explained by the low starting base. The growth of the average profitability of the room was provided solely by an increase in occupancy. The average cost of ADR decreased by almost 2%. As the supply in the Kyiv market is not balanced, with a significant bias towards the high price segment, the average ADR of a quality supply is one of the highest in CEE at the moment. Because of the excess of supply over demand in the luxury and upscale segment, further ADR adjustments are possible in the direction of decline due to the high influence of this segment on the average indicators and the formation of the market price. However, in view of the fact that even after delivery of the declared hotels, the Kiev market will still be far from being saturated, significant adjustments of ADR should not be expected.
Figure 15. Average revenue per available room (RevPAR) in Eastern European capitals, 2013-2016
Figure 16. Investments in tourism development in CEE, 2012-2016
There was an increase in the volume of investment transactions in the segment of hotel real estate in CEE region in the period from 2015 to 2016. Austria and the Czech Republic - the countries with the most developed and saturated markets - were the leaders. The growth of the investment market was facilitated by the willingness of banks to finance the acquisition of facilities, the expansion of groups of potential investors and the overall improvement in the operating indicators of hotels.
Figure 17. Return rates of the highest quality commercial property in Kyiv
In terms of investment, the hotel market is significantly different from other segments of commercial real estate. Whilst owners of office and shopping centers sign medium-term and long-term lease contracts (at least 1 year), the receipt of income from operating activities of hotels is associated with the daily strategy of the owner to attract and retain hotel guests and to find a healthy balance between income from rooms, сafes and restaurants, as well as other services offered by the hotel and expenditures connected with them.
It is due to the fact that specific knowledge is necessary for the effective hotel management, and also because the hotel's operational indicators depend on many hardly predictable factors, the expected return on hotels is typically 1-1,5% higher than the return on the best office or shopping centers.
The almost complete lack of transactions in the segment of hotel real estate in Ukraine reflects the difference between the expectations of owners and investors. Unfortunately in the process of pricing, in most cases, the owners are oriented on the expenditure incurred, rather than on the operating results of the hotels, which in turn does not suit potential investors.
Report is produced by:
Yana Lytvynchuk, Deputy Managing Director, Cushman & Wakefield in Ukraine
Anastasia Kliatska, Deputy Head of Valuations, Cushman & Wakefield in Ukraine
Volodymyr Terzov, Deputy Head of Valuations, Cushman & Wakefield in Ukraine
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