Major foreign investors are looking to acquire large hotels affiliated with international brands in Bucharest, but owners either demand unrealistically high offers for these properties or are unwilling to sell, stated Alexandru Sorin Ionescu, founder of the hotel consultancy firm Fivestar Hospitality, which also manages the website hotelsforsale.ro.
The situation regarding real estate transactions in the hotel sector is currently controversial. On one hand, there is evident interest from foreign investors who have had no prior activity in Romania—a first for the market, likely triggered by the sale of the Radisson at the end of last year, the largest hotel transaction in the history of Romanian tourism. On the other hand, interest has also grown among foreign investors with prior experience or activities in other real estate sectors in Romania.
The former group is trying to find well-known hotels in Bucharest with over 100 rooms, affiliated with an international chain (as a guarantee for a certain level of building quality that, at least at some point, had to meet affiliation standards).
These investors are looking for operational hotels without major renovation needs that offer solid cash flow.
On the other hand, investors already present in the Romanian market are trying to be more flexible, being willing to assume a certain level of involvement in developing a hotel from scratch or converting a historic building, taking on the role of developer. An example of this is the Lithuanian investors who found an empty market, developed the Hilton Garden Inn in the historic center, and are set to build four more hotels to be affiliated with strong brands such as Marriott and Hilton.
The problem is that investors wanting to enter the market have little to analyze, as eligible properties are either not for sale or are offered at a price level that exceeds the investors’ risk expectations.
„I can describe how these investors think quite simply. It is about the risk associated with the investment. If you hold a larger sum and don’t know what to do with it, you go to the bank to make a deposit and are offered, say, 1% interest, but that doesn’t suit you and you are willing to accept more risk and involvement. Then you consider investing in real estate; you can invest in residential, and if the sums at your disposal are truly large, opportunities open up in the office or logistics sector and, up to this point, all opportunities are based on rental income. That rental income calculated over one year, divided by the investment value, called the yield, leads to a percentage that can be compared to that 1% from the bank. It increases in direct proportion to the associated risk. The hotel sector has an associated risk considered to be approximately 1%-1.5% higher than that associated with office spaces,” explains Alexandru Sorin Ionescu.
Returning to the sale of the Radisson hotel, the reported yield was 7.5%, but the consultant reminds us that the complex also included other types of leased commercial spaces which, if traded separately, would have recorded a lower yield. "As far as I know, no one has calculated the yield separately strictly for the hotel components, but I expect it would have been slightly higher than 8%," the consultant adds. Any hotel seller in Romania should refer to this universally recognized yield, including by investors wanting to enter the Romanian market, and think about how much they should personally add to this 8%, considering the difference between the Radisson product and their own hotel product. For an operational hotel, the sale price calculated by the "rule of thumb" starts with finding the EBITDA for the last available year, from which the investments necessary to maintain the property at a good level in the following year (including fixed assets) should be subtracted. This value is called Net Operating Income (NOI), which is divided by the yield, resulting in an indicative price that the owner might expect to receive.
Currently, the few hotels that would be attractive to buyers are valued at very low yields compared to buyer expectations, the consultant claims, and this is also happening due to the scarcity of supply.
All in all, the market for hotels that meet attractiveness criteria must grow in terms of supply through greenfield developments and conversions, believes Sorin Ionescu.
„In 2018, if we have 3 notable transactions in Bucharest, it will be good, but wouldn’t it have been better to have 10 in Bucharest and as many outside of Bucharest?” he asks rhetorically.
Source: Profit
Frequently Asked Questions
What are foreign investors looking for in the Bucharest hotel market?
Investors are primarily seeking operational hotels with over 100 rooms, affiliated with international brands, that offer solid cash flow and require no major renovations.
Why are there so few hotel transactions currently?
The main obstacles are the limited supply of eligible properties and the fact that owners often demand unrealistically high prices that exceed investors’ risk thresholds.
How is the sale price of an operational hotel typically calculated?
The price is generally estimated by dividing the Net Operating Income (NOI)—which is EBITDA minus maintenance investments—by the expected market yield.