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Budapest, is the downtrend now water under the bridge in The Pearl of the Danube?

After Hungary joined the European Union, Budapest enjoyed strong interest from international investors who made a large contribution to the strong development of the city’s hotel supply. Rising supply later amplified a fall in performances in a country in which economy has been hard hit by the crisis. Recent lack of interest from hotel chains has brought supply growth to a standstill, hotel performances - especialy prices - are yet to benefit from Europe’s economic rebound.

Key figures

  • Population: 9.98 million
  • Surface Area: 93,030 km2
  • Number of Hotels: 153
  • Number of Rooms: 16,000
  • Visitors: 2.8 million per year
  • Primary supply markets: Germany, United Kingdom, Italy

Born out of the union of the cities of Buda, Pest and Obuda, Budapest is now the capital of Hungary and the largest city in Central Europe. The Pearl of the Danube is also the most important political, commercial, industrial and financial center in the country. It hosts the headquarters of the country’s major corporations and the subsidiaries of important multinationals, such as Hungarian Telekom, General Electric, Vodafone, Telenor, Erste Bank, CIB Bank, K&H Bank, UniCredit, Budapest Bank, Generali, ING, Aegon, Allianz, Volvo, Saab, and Ford. After the fall of the communist regime, Hungary was able to make a successful economic and political transition, particularly by implementing a market economy that is more open to foreign investment. Since then the country has developed three competitive industrial axes denerating export: automobiles and automotive equipment, electronics and telecommunications, and pharmaceuticals.

Towards a new visitor profile

The Pearl of the Danube earns its name from its impressive monuments, which for a few years have benefited from a real interest from tourists around the world. The number of visitors continues to grow, and in 2012 the city saw tourist arrivals grow by 17%, to surpass the 2.8 million hotel arrivals reported in 2011. The densification of visitor flows is due to the dynamism of foreign clientele, with the number of domestic arrivals up by only 1.3% in 2012. throughout the year 2011, Budapest’s properties accommodated some 2.4 million tourists from abroad, versus 2.1 million in 2010, and the total number of nights was 6.5 million, versus 6 million the previous year. The primary source markets are Germany, the United Kingdom, and Czech Republic, followed by Italy. Budapest hosts mostly leisure tourists -who make up more than 80% of its total occupancy- and weekend travelers. Hungary follows the trend observed in most Central European countries, and progressively develops tourist activities around wellness, spa and health interests, particularly in Budapest which is renowned for its indoor and outdoor hot springs. Clientele who are wellness enthusiasts already represent close to 15% of tourism demand throughout the country.

In the years to come, the profile of these tourists who travel each year to Budapest should nonetheless change to the benefit of a younger clientele with a tighter budget, due to recent turbulence in the Hungarian sky. The national airline Malev, which serviced 50 cities in 34 countries worldwide thanks to a fleet of 21 airplanes, closed its doors on February 3, 2012, thereby grounding its aircraft. The routes that the company followed in and out of the international airport in Budapest did not remain empty for long, and were quickly filled by other actors in the international airline industry, particularly low-cost companies such as Ryanair, Wizz Air and Smartwings. The Hungarian sky thus metamorphosed to give more room to low-cost airlines which now represent 52% of air traffic versus just 26% in 2011. Benefiting from the democratization of flying, travelers to the destination of Budapest revealed a new face and younger generations with tight budgets now fill a more important position in the landscape of Hungarian tourism. While this transformation certainly makes youth hostels, budget hotels and midscale properties in the capital happy, it has not gained unanimous approval from the tourist accommodations sector and five-star hotels which have observed a drop in activity since Malev ceased operations

While it should benefit from the panorama offered by the new Hungarian sky, business tourism in the city of Budapest currently does not take full advantage of its potential. The infrastructures dedicated to this activity are, in fact, not at all adapted to this demand and have room for growth. “The city of Budapest, like its hotel industry, has a real need to adapt to European standards with a high capacity Congress center to grow business tourism. While Budapest is a popular destination among tourists, its business activity remains relatively weak,” explains Balàzs Kovàcs, vice-president Sales & Marketing at the Danubius Hotels Group, which has 12 properties in the city. Currently, Budapest has an Exhibition Center, Hungexpo, with a total capacity of more than 15,000. The president of the Hungarian group also points out the city’s seasonal character despite the densification of arrivals: “Activity during the winter season is weaker than the rest of the year and the city must develop quality attractions and festivals to improve its competitive position on the European and international scene.”

With significant help from European funds, Hungarian authorities recently allocated most of their investments to the strenghtening of its tourism assets and the renovation of major infrastructures such as Budapest’s prestigious squares. Currently Kossuth Lajos Square and the area around the impressive Hungarian Parliament are experiencing major renovations. Other major worksites are scheduled in the coming years, as authorities have planned to take on the reconstruction of Budapest Castle and the entire Vàr neighborhood, as well as the creation of a museum district near Városliget, the City Park.

Currently low prices linked to the past

Alongside Poland, Hungary is the country in Central and Western Europe whose hotel supply has experienced the most growth in recent years, particularly thanks to many foreign investments made there. The hotel supply at the destination has progressed by close to 35% since 2008, despite a decrease in supply by international chains. Hotel supply surged between 2008 and 2011, then stabilized (+0.8% in 2013). Most properties are concentrated in the capital, which has grown by more than 10,000 rooms in ten years. Of the 990 hotels and 57,800 rooms that make up Hungary’s hotelscape, close to 153 properties are located in Budapest, representing some 16,000 rooms. The majority of the city’s hotels are located on the mid and upscale segments for more than 80% of the supply. The upscale and luxury categories are nonetheless the ones that grew the most in recent years, their capacity in number of rooms having registered rapid growth by more than 40% in five years.
Although the capital has more than 64% of the entire hotel supply under Hungarian brands, the chain hotel supply is still quite poorly developed. Of the 153 properties in the city, only 55 belong to a hotel brand, representing some 11,300 rooms. These figures are up slightly from 53 hotels for close to 11,100 rooms the previous year. Three brands stand out for the size of their network in the destination: the local brand Danubius and the Accor group’s two brands: Mercure and Novotel. These three brands account for 21 hotels with more than 5,300 rooms, or more than 47% of the total supply of branded hotels in the conurbation of Budapest. Danubius remains the primary actor on the market with a network of 12 properties for some 3 279 rooms.

While Hungary experienced strong growth in its hotel supply since it joined the European Union in 2004, today it is experiencing a strong slowdown in the growth of its supply, due, in particular, to an imbalance in the supply and demand of rooms. “Today the hotel supply in Budapest is higher than the demand on most periods of the year and prices are thus not at their highest, and are decidedly lower than those in other European capitals. This is particularly true as far as concerns the five-star segment, where rates are 40% to 50% lower than those practiced in the city of Vienna, for example,” explains Balàzs Kovàcs, Vice-President Sales & Marketing at the Danubius Hotels Group. Increasing hotel rates thus constitutes one of the primary challenges and a possible growth engine for the Hungarian hotel industry for the coming years.

A context recently not very favorable to investments

Hungary was one of the leaders in the economic transition of Central Europe as it was able to attract a high volume of foreign investments. Nonetheless, the situation has changed since then, and is aggravated by the arrival of the economic crisis in Europe and around the world, and macroeconomic imbalances took hold of the country while stricter lending terms came into force, penalizing many economic sectors. To this may be added one of the highest VAT rates worldwide at 27% and the multiplication of special taxes that the government has implemented in sectors with a strong presence of foreigners to make up for the country’s budget deficit.
For a while now, Budapest’s gloomy economic backdrop has not been very encouraging to the development of the hotel industry and investors have been more cautious when investing their money in Hungary’s hotel real estate market. The five-star segment still continues to attract a limited number of investors, with a total of three acquisition operations realized recently in Budapest: that of the Le Méridien Budapest, the Four Seasons Gresham Palace and the InterContinental Budapest. The imbalance in supply and demand for hotel rooms and Hungary’s economic context also dissuaded international brands from strengthening their presence on the market. In fact, there has been little development in the last two years. The French hotel group Accor nonetheless established its lifestyle brand MGallery in the destination with the opening in 2013 of the 117-room hotel Nemzeti near the well-known theater of the same name. Other properties appeared previously on the Hungarian market in 2012, the Park Inn by Radisson Budapest, with 138 rooms, and the Buddha Bar Hotel, with 102 rooms. The primary actor on the market, the Danubius hotel group, meanwhile, does not plan to develop its network at the destination in the next few years; it plans to concentrate more on improving the quality of its properties, which will make it possible to capitalized on increasing demand from tourism in the years to come.

While Hungary may have joined the European Union in May 2004, its membership to the euro zone has not been scheduled prior to the year 2020, although an initial announcement had been made for 2012. According to some experts of the Hungarian economy, the adoption of the single currency could lead to a 30% increase in foreign investments in the country, possibly in the hotel sector. Future performances could be driven by a return to economic growth in a country which had been hard-hit by the crisis, all the hotel supply is now stabilizing after periods of strong growth. 

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