Mixed signals: Prague’s hotel sector suffers, but not investor demand

After the spring lockdown lifted and people returned to Prague’s streets, it was fascinating to see who actually lives and works in the city. With tourism at an absolute minimum, after all, it was statistically unlikely you’d see many, if any non-residents. With the vaccine machine ramping up and infection rates plunging, there was every expectation that the visitors would be returning by summer. But this hasn’t materialized. While it can be difficult to reserve nice pensions in the mountains, hotel occupancy in Prague got stuck at around 18% (one of the lowest in Europe). Cushman & Wakefield’s latest report puts occupancy levels for the first six months of the year at a stunningly low 10%. Accordingly, room rates in June were 44% lower than they were in 2019. The European average is just 21% lower.

So, why has this summer been so disappointing for Prague’s hoteliers? “I see the principal cause in the restrictions imposed on hotels and travel in the Czech Republic, and also in the trend in the number of infected people,” says C&W’s Bořivoj Vokřínek, Head of Hospitality Research EMEA. “Every increase in this number translated to a decrease in hotel occupancy and booking rates.” Quite reasonably, he suggests that the Czech Republic’s frightening spike in cases at the beginning of the year caused fear among potential visitors. Czech infection numbers were almost the worst in the world, after all.

By contrast, in the initial Covid wave in spring 2020, the Czech infection rate was astonishingly low, inspiring rare (and fleeting) praise for the government for its seeming competence. “Once the restrictions were lifted last July and August, occupancy grew immediately and Prague quickly outperformed other European destinations,” says Vokřínek.

Despite miserable performance leves, however, he claims that investor interest in the city’s hotels has not been impacted. This isn’t immediately apparent from C&W’s European-wide survey of investor demand, which places Prague 13th in a listing of 15 destinations. Asked to rank their interest on a scale of 1 to 5, just 15% of respondents gave Prague a 5 (“Highly interested”), while 22% gave it a 4. Asked about this specifically, Vokřínek says it’s important to realize that Prague is playing in the big leagues, competing with other megalocations.

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“It is important to keep in mind that these are top-15 urban destinations in Europe, and we asked major institutional investors not only from Europe but also US, MEA and AP,” he says. “From this perspective, the fact that only 15% of these investors are not interested in Prague hotel real estate is a fairly good outcome, considering that most investors typically retract back to their core markets, during the time of uncertainty (the so-called ‘flight-to-safety’).”

Of course, investor demand is one thing. Willingness to sell is quite another. As in many other sectors, there’s precious little on offer in Prague and the reasons for this are legion. “The lack of interest to sell is likely to be due to the insufficient pull and push factors,” claims Vokřínek. “In terms of pull factors, many owners don’t think it is the right time to sell in order to maximize value. Also, to some it is hard to come to terms with the realization that they might have missed the peak of the cycle, and there is hope that this will come back soon. Hence, they are deploying a wait and see strategy.”

There’s also a lack of push factors, which is another way of saying Prague hotel owners didn’t go into the pandemic with a lot of debt. In the good times, Prague’s hotel business is generally so profitable that operators appear willing to go into hibernation for a while. But for how long? Will this disappointing summer make them reconsider? In a report conducted together with CMS, C&W that 42% of hotels in CEE could survive another 6 to 12 months without additional capital, while 21% said they could last for less than 6 months. “A large share of hoteliers count on refinancing for this and/or the next two years,” says Vokřínek. “Many owners will need about 20 per cent of additional equity – and not everyone can cover such an amount… Capital structure and sources of financing are issues that should not be addressed when pressed for time, so now is the right time for hotel owners to proactively seek and consider alternative ways of addressing their financial situation for the future.”

 

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