Common sense would say a new luxury hotel in the time of crisis is an unnecessary risk. For sector experts though it may be an investment in the future. Nearly 10 new four- or five-star hotels have either opened or are set to open in Prague this year, with investment generally coming from multinational hotel chains.
International investors have recently been opening luxury hotels in Prague, investing hundreds of millions of crowns. Among the most expensive are the Augustine in Malá Strana, Prague 1, which opened in May after an investment of KÄ 1.6 billion, or Kings Court in námÄstí Republiky next to Obecní dĹŻm (the Municipal House), the cost of which is approaching KÄ 1.5 billion.
Investors agree that deciding to open a new hotel and the timing of the crisis are only partially connected. To build such a facility always takes time, even years, so while the projects were in the planning stages the recession was not yet in full bloom. To then abandon the whole development would probably incur far greater losses than simply going ahead, although the protection and management of the property requires a considerable expense. As the president of the Czech Hotel and Restaurant Association (AHR) Pavel Hlinka explains, owners cannot afford to have their hotels “mothballed,” they need them to be active. They have been built mostly on bank credit—and they would go back to the banks if they were unable to earn and pay back at least something.
You have to get money back on your investment right away
The number of overnight stays by tourists in Prague dropped 9 percent in the first half of 2009. According to the CzechTourism, the number of visitors from Britain to the Czech Republic was 27 percent lower year-on-year in H1, while Russian visitors were down by 18.7 percent.
Hotel operators are looking at the situation optimistically, however. “It is an investment in the future; we can see a good chance to assert ourselves and win a position on the Czech market during the crisis or when it begins to fade off. Before everything returns back to normal, we will be well established among the strong players,” said Johannes Schuschu, the director of the Jurys Inn in Prague, set to open near Florenc metro station on Sept. 1.
The total amounts invested in luxury hotels were not influenced by the crisis; there was no curtailing of building budgets, no efforts to cut expenses on equipment. “With hotels of higher categories there is not much space for savings, the parameters of the building as well as requirements concerning the equipment of the hotel are more or less strict and binding if the savings are not to lower the intended standard,” explained Jaroslav Kepka, business and marketing manager of the Kings Court hotel. The opening of this hotel was partially delayed because the credit requirements of a co-financing bank on the investor were too high. That is why the hotel will welcome its first clients at the end of this summer or the beginning of the fall.
That does not mean the crisis has not touched the operations of top-end hotels. Henning Matthiesen, manager of the Augustine, observed that nowadays his hotel has to cope with challenges he would not even have taken into consideration five years ago. “I can see the main difference in our attitude to expenses—we examine now very carefully if they are as necessary as they might have seemed to be some time ago,” Matthiessen said.
Hotels within chains support each other
According to Tomio Okamura, spokesman and vice president of the Association of Czech travel offices and agencies (AÄCKA), four- and five-star hotels have kept their occupancy rates very high. Last year it was around 70 percent, and this year around 60 percent, while the point of profitability is somewhere around 40. “Three star hotels are 3-4 percent below this line. More luxurious ones are above the point of profitability, but they are not achieving any extraordinary results,” Okamura said.
On the contrary AHR’s Hlinka said he believes that luxury hotels are suffering the most from the crisis. And the situation of newly built three- and four-star hotels is even more difficult. “The best position to cope with the crisis is that of hotel chains; it does not matter there how many stars the hotel has, the chain can support them all. The worst is the situation of big hotels in deep debts, or paying high rents. They are gasping and praying constantly to make their living,” Hlinka said.
It is true that a majority of new hotels are in the hands of multinational chains. For example, the Augustine belongs to Rocco Forte & Family, Kings Court is owned by HMG, which is owned by a Netherlands-registered Israeli family firm, Jafit Company; and the hotel Buddha-Bar near Old Town Square in Prague 1, belongs to one of the largest hotel operators established in the Czech Republic, CPI Hotels. Global hotel corporation Starwood Hotels & Resorts Worldwide opened a Sheraton Hotel in Prague at the beginning of 2009.
The only chain recoiling from its intention to build a four star hotel in the Czech Republic because of the crisis is the Spanish firm Barceló Hotels & Resorts. Spain’s Comsa International, which bought and reconstructed a Renaissance palace in Brno, is operating the hotel now, although Barceló was supposed to buy it from Comsa; a part of interior was even rebuilt on their special order.
A saturation point
It is typical during a boom that many buildings are planned that never see the light of day due to worsening economic conditions. This is true of luxury hotels as well. Experts from the service sector argue about whether Prague is oversaturated with luxury hotels. Those who oppose further construction say that there are more hotel beds in Prague than in Vienna. “This is only part of the truth. Since the year 2000, Prague has been accommodating more visitors than Vienna. We have more beds because we have more tourists. I am sure that Prague has not exploited its potential yet,” Okamura said.
Jury Inns’ Schuschu explains that when a hotel is well established on the market, when it provides all the promised services and fulfils all expectations, it has a big chance of success. On the contrary Michaela Winklerová, PR manager for property company CPI Group, said that there are more than enough hotels in Prague now. She admitted though that some original and interesting hotels with a particular atmosphere can always find their clientele and their places on the market.
“We expect rather the reverse trend [than an increase of hotels]; with hotels, mainly the three star ones, which have been rebuilt in recent years from residential houses, having to return to their original function. I am afraid Prague cannot support this surplus of hotels,” Winklerová said.
Kings Court’s Kepka said Prague cannot absorb any more luxury hotels and is alarmed at the current situation. “Only an exceptional, unique project may achieve success, but the probability that something like that may happen is about the same as the chance of winning the lottery,” Kepka said. He added that it is still possible to distinguish and create a unique identity of a product by providing excellent service. “That is where hotels have really important reserves,” he concluded.
It may seem that investments in hotels are risky and unprofitable now, but some people disagree. “It is an ideal time to buy existing hotels for prices and at conditions that would have been unthinkable three years ago. Those who want to invest now, ideally from their own resources without external co-financing, have an opportunity to do good business in Prague,” Kepka said. AHR’s Hlinka observed that while in the springtime there was a lot of talk about various projects, investors now have stopped and are taking a wait and see approach.
Richard Ness, investment director of Czech-based real estate company Red group, owner of Prague’s Park Inn hotel, admitted that his company introduced the new hotel on the market in an unfavorable economic situation. “The hotel segment is currently experiencing a downturn. However, we hope that next year when the market finally begins to recover a new positive trend will also be felt in the sector of hotel and congress services,” Ness said.
Varying prices
AHR’s president said that luxury hotels are bound to lower their prices during the crisis, but not too much. He mentioned examples from abroad, where accommodation is being offered at prices lowered by around €10, but not much more. “Travel agencies sell accommodation at their standard prices, so their margins increase and hotels take a loss. Even if incoming tourists are less numerous, in the end hotels will be better off, if they keep their prices up,” Hlinka explained.
AÄCKA’s Okamura sees the pricing policy of hotels from a different angle. He points out that the Czech Republic has an exception from the European Union value-added tax (VAT) standard—VAT in this country being only 9 percent, while in EU it is 15 percent.
For several years AÄCKA has been warning about the vital need to develop the Czech Republic’s regional tourism market, especially to generate repeat visits, which Prague alone cannot guarantee. “Prague alone is not enough any more. If standards in the regions can improve, it will bring a profit to Prague as well. Prague’s potential, even in the line of hotels has not been fully exploited yet,” Okamura said.
This view has been supported by some clients of the new Park Inn, who labeled the standard of services in this country as “insufficient.” A similar outcome was achieved among clients of Buddha-Bar. “Clients from this and other hotels of our company have mainly criticized services—thefts in cabs, the unhelpful attitude of personnel in shops and restaurants, high prices for sightseeing tours and the omnipresent efforts to cheat customers,” Winklerová said.
The Augustine’s Matthiesen agreed. He said that Prague cheats itself of its position as a major tourist destination because it is easily accessible, there is beautiful architecture and lovely surroundings. “To maintain the constant interest of tourists in this destination we need to create a new brand for Prague and the Czech Republic as a city and country worth visiting repeatedly because of a varying offer of artistic and sporting events, programs for various generations and events in the world of fashion and show business,” Matthiessen said.
