In a short interview, Tinu Sebesanu, Managing Partner, Trend Hospitality, reviewed for the Horeca Romania magazine, the hotel investment market of the last 30 years, its particularities at the moment and also what is the best investment on this market and why it is the right time for such investments in Romania.
All this information will also be available during the INVEST Conference, which will take place on November 27-28, at the Crowne Plaza Bucharest.
Cătălina MATEI
What would be a history of hospitality real estate investments in Romania and what is the situation of this market now?
After the historic event of the 1989 Romanian revolution, gradually, all that represented at that time assets in the hospitality industry entered a difficult transition process from the form of state ownership to private ownership. The first steps consisted of the coupons offered by the state and the MEBO program – launched with the slogan – “we are all owners” plus different empirical forms of rent to the administrators existing in the units at that time.
On this basis, the management contracts appeared based on which most of the former hotel or restaurant managers became owners and at the same time managers of the units. These uninspired formulas have delayed a healthy and rapid privatization, causing harmful effects in the medium and long term on the speed of development of the free market and a fair competition. It has been proven over time that the majority of these privileged beneficiaries did not have the entrepreneurial spirit necessary for a coherent development of the industry and even more so, the financial capacity to maintain or improve and develop these properties along with the growing demands of the market.
In the second wave of business transfer from public to private ownership, which appeared after 2000, Romanian entrepreneurs entered the scene. Already owning profitable businesses in other sectors, they wanted to own hotels, mostly attracted by the mirage of this industry or wanting to give birth to new family businesses. Thus, they acquired existing properties in a degraded state as a result of faulty “management” and lack of investment, which they later renovated and reintroduced on the market.
In the same period, new and more relevant developments began to appear. Even if they did not integrate the construction and operating standards valid at that time internationally, they brought a new breath and began to generate a healthy competition in the industry. These renovations and new constructions created the premises for the appearance on the Romanian market of several international operating brands as well as the timid appearance of a few local companies that started to own and manage assets at the national level.
The European integration of Romania and the period of economic growth have generated a significant increase primarily in domestic tourism and to a lesser extent an upward trend in external tourism, so Romania became a destination of interest with a greater emphasis on business tourism for hotels in big cities and leisure, mainly on the seaside of the Black Sea and on the Prahova Valley. These factors have also determined a proliferation of guesthouses in different forms of organization, helped also by the technological developments that simplified the renting process of apartments or private houses.
The impact of the 2008 crisis on the residential market brought a new type of investors, namely Real Estate developers who pursued business diversification. Furthermore, this type of investors is more and more numerous and with a good appetite for investment in the hotel area.
In the fourth decade of transition after 1990, we see an interest from a new category of investors, namely various investment funds or even institutional ones, a phenomenon that certifies a certain degree of maturity and predictability of the market. They almost exclusively choose investments in hotels operated by recognized brands, a segment that in Romania is much undersized compared to other European markets.
These investment funds directly target hotels that display their membership of an international chain or those that are about to take this step because the brand offers them security through a professional management, a predictable and transparent business, based on measurable criteria, standardized and with a system efficient distribution.
Why is distribution so important?
The digitization of distribution and the actual sales process has radically changed access to the market. An important debate in the industry is the relevant control of the distribution over the inventory (rooms). Now the balance is leaning too much towards the distributors and much less towards the owners and/or the brand.
In Romania, we have a small penetration in terms of the category of hotels under international brands that have their own distribution systems and great negotiating power with third parties. Instead, independent hotels are forced to use applications such as Booking, Expedia, etc. for distribution. which charge significant fees, even 20% of the revenue, which for certain hotels can represent the equivalent of the net profit.
What should investors know right now?
That they have the opportunity of a free market, emerging especially for brands and with a significant growth perspective. Unfortunately, the rate of entry into this market by established operators is and will be quite slow because the majority of existing hotels do not have the required construction standards, the allocation of spaces and the safety of both clients and employees. Therefore, a conversion to reach these standards is often difficult to achieve or unprofitable. So, in order to collaborate with a recognized brand, new assets are favored, which integrate the mandatory requirements of both international operators and local legislation from the design phase.
What is the “best investment” on this market today?
You have to put the right brand, in the right place, at the right time. You have to analyze the prospects in the market very well, do the perfect marketing, understand the size of the business, the potential clientele, its needs, the positioning, the competition, etc.
If an investor asks me today where to open a hotel, my answer is “anywhere”, as long as it is properly calibrated and positioned according to the medium and long-term prospects of the respective market.
In Romania, 3- and 4-star hotels predominate, with a share of approximately 80% of the total number of hotel units. On the other hand, from the point of view of accommodation, boarding houses, motels and hostels, as well as other types of accommodation, represent almost 50%. Five-star units represent less than 0.5%. With the increase of the average rate in the main cities, even if still far below the similar value in Europe, luxury hotels are also starting to appear, which is good, because they will help to reduce this gap and such an increase is directly proportional to the increase the investment market. A good average rate per room allows for attractive performance for portfolio investors.
Why is it a good time to invest?
Investors understand that this class of assets, even if it does not have spectacular developments during periods of economic boom, is much more stable in the medium and long term compared to residential, commercial, etc., having a better reaction to the cyclical crises that it registers the world economy and an important added value from the appreciation of the value of the property over time. In general, hotels are evaluated according to their ability to generate profit and less according to the invested value, except for those trophy units with a very high replacement value. These units are special cases that have an intrinsic value far greater than the ability to produce amortization and profit in standard periods and values. There are investors who are looking for exactly this kind of properties precisely because they retain their value over time, they can be well capitalized on resale from the simple appreciation of the property. But all these properties represent only particular cases.
What would be the role of an event like INVEST in the dynamics of this market?
The great added value that this conference brings is precisely the ability to provide an opportunity for investors, owners and developers to meet, which will help Romania move to the next stage of development of this market – a productive market, with the presence of professionals both operators as well as financiers.
Besides the obvious part of networking, this kind of event offers expertise, know-how for effective investments. It is an event that depends a lot on the quality of speakers, and INVEST has no shortage of professional speakers, which helps a lot in educating stakeholders, in understanding the fact that a well-done feasibility with access to information and perspectives determines the success of an investment. It is a way that anyone can learn from the shared experience of the speakers and the participants.
It certainly creates an environment where you can learn to make fewer mistakes and to invest more efficiently.
