This document summarizes recent trends in the Hungarian hotel market. It notes that the 4-star and 5-star sectors in Budapest have seen the most growth, while 2-star and 3-star categories are shrinking. The provinces are also experiencing growth driven by EU funds, leisure travel, and facilities like wellness hotels. Overall demand for hotels has increased but prices have remained flat or declined since the financial crisis. The market remains fragile to global economic events. Future supply is limited but some new operators may enter the market if demand growth becomes more sustainable. Many existing hotels struggle with debt obligations, and banks have taken over troubled assets. Transaction volume remains low and values are difficult to determine. Strong cost management will be needed as

1. IMPROVING TRENDS ON THE HOTEL MARKET?
TIME TO JOIN?
HSM Szakmai Baráti Kör
Attila Hegedűs MRICS
Partner, Managing Director of BDO Hungary Hotel and Real Estate Services Ltd.
19.02.2013

2. Main Topics
 ESKIMOS VS. FISH(ES)
 IS THERE FUTURE FOR SUPPLY ? IS IT NEEDED?
 BLACK SOUP – IS THERE A PILL AGAINST HEADACHE?
 FUEL FOR GROWTH? WHAT IS MISSING? MAYBE THE MOTOR?
 CAN WE MANAGE THE NUMBERS OR NUMBERS MANAGE US?
 WILD, WILD WEST OR WORLD WIDE WEB?
 DOES THE WORLD OUTLOOK MEANS MORE THAN A TOOL IN MICROSOFT?

3. THE ESKIMOS
Budapest (42% growth)
• 4- and 5-star sectors perceived as best
to develop
• 2- and 3-star categories shrinking
Provinces (34% growth)
• EU Funds, leisure and conference
sector growing
• Wellness and conference hotels are
hot – size does not matter
• Anyone can operate a hotel, no need
for brands in numbers
Recent Developments - General
• Slowdown since 2008
• Shrinking pipeline
• Major openings were planned pre-crisis
(also inclusive some openings nowadays)
• 2012 new entrants:
- Budapest: Park Inn, Buddha Bar, Zenit
- Countryside: ETO Park, Mirage Hévíz
Page 3

4. THE FISH(ES?) AND THE COST OF FISHING….
Budapest (53% growth)
• Visible milestones in growth – 2001, 2003-2005
and 2009-2012 all with different attributes
(2004,10,11,12 – double digits)
• Still the market is feeding off leisure (both
individual and group) demand
• The market is fragile, any international event
(911, crisis etc.) results in quick drops – especially
in rates
• Lower end of the market is at the mercy of higher
hotels’ market share approach
• Rates: only 1% growth in 12 years
Provinces (32% growth)
• Supply driven demand with the advent of new
hotels (quality) – domestic travellers tended to opt
for domestic holidays
• Travel cheques and recently the SZÉP card are
demand drivers
• Historically the provinces trendline was in a year
delay to Budapest
• 2012 data shows rebound (5.1% in rates) yet price
levels are still on 2006 levels
• Provinces started off from a low base therefore
the 83% growth may seem extremely good – reality
is much sourer
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5. SUPPLY SNAPSHOT – STATUS QUO
Budapest Hotel Room Stock 2012
Page 5

6. DEMAND SNAPSHOT – A SHOT IN THE HEAD?
Budapest Hotel Demand 2007 - 2012
2007 2012
Net ADR - 20% Net ADR
- 24%
- 12%
Page 6

7. TRADING PERFORMANCE – IF WE CAN CALL IT THAT….
Performance Indicators of Budapest Hotels
DEMAND
Year OCC % ADR (EUR) Net.RevPar (EUR) Net.
(guestnights)
2007 5 646 857 58,7% 63 39
2008 5 646 857 57,6% 62 36
2009 5 121 522 49,9% 53 26
2010 5 607 444 51,1% 54 28
2011 6 049 196 56,8% 54 31
2012 6 897 168 57,4% 51 29
A look back Performance Indicators
Source: KSH, Hungarian National Statistical Office
• Budapest, like most of Europe saw growth • Steady growth of ADR until 2007 , followed
by sharp decrease especially in 2009
in H1-2008 and suffered thenafter
• Prices fell dramatically by 20% after the • Rate softening/stagnation continued in 2010
outbreak of the crisis, and failed to return albeit visible demand growth
to pre-crisis levels ever since
• 2011 > a year of stagnation in ADR, slight
• Demand changes lead to market fragility, improvement in RevPar
especially in rates
• 2012 suggests that 5-star sector is getting
• Rate development has been diverse as per somewhat stronger in realised rates
category> while 5-star rates have been
- A possible result of tougher rate policies in the
showing promise in 2011 and 2012, the category
ADR of the 4-star sector is still slightly
decreasing due to the fierce competition
for market share
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8. FUTURE SUPPLY
Operator Profiling
•International operators still wishing to land, expand or return to Budapest
•Large international companies management agreements
- seldom with some guarantees
•Small companies’ tool to grow lease
- yet the question is if the project and the market justifies a lease income that is expected by the
developer
•Long-time players protecting their markets as opposed to massive expansion
•There is a niche market characterised by small, private hotels run individually trying to exploit the
opportunities of the online markets – less at the mercy of cheap groups
•Very little interest from international players to enter the provinces
Developer Profiling
•Market is still characterised by individual deals and opportunistic transactions as opposed to major funds
buying up portfolios or multiple assets (unless there are packaged deals with other cities)
•There are still parties out looking for quick buys and hot deals, however most current owners are still
holding their investment
•Own and operate: Spanish hotel companies have bought substantial RE in Budapest
•Provinces: Hungarians only – see comment above
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9. FUTURE SUPPLY
Is there room for more players?
• Limited pipeline of hotels – as the market recovers those who offer better quality than
competitors could maximise profits and values
o In 2012 – about 4-5 hotels opened in Budapest (of which Mellow Mood alone 3 hotels)
o Little if any activities in the provinces – ETO Park (after delays) Four Points (Mercedes
impact?)
o EU Fund programme
• Though the market is fragile and profits are thin, there is some cash flow in the hotel scene
o Operators have employed and still maintain strong control over costs
o Whatever has been possible to outsource it has been
o Apart from the low periods when CF balancing is an issue, hotels can produce stable
cash flow – yet it is always a questionmark if it is sufficient to cover bank financing
eventually return expectations
• Once growth will be sustainable the hotel market is anticipated to see some activities, yet
all will be subject to see how 2013’s main season towards mid summer performs
o We believe that for the right priced developments, good products in a good location
upon sustained demand growth and upturn in rates there will be a road to succeed
Page 9

10. AND COMES THE BANK – THE BLACK SOUP SIR…..
• Insufficient Hotel EBITDAS did not sustain loan repayments, solution from banks:
- Take the asset and become Owner
o Appoint new management – is there a willing lessee or open book policy
o Keep the previous owner/manager – appoint an asset manager
- Goal: Transparent operation
• Restructuring the loan – very few examples exist
- Bank becoming a co-owner for a certain period – maximum control
- Payment period releases – pay as much as you can
• Worst, but existing solution – close the hotel
• All above are evidences
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11. TRANSACTION MARKETS
Hotel is for sale and who is buying?
•It is rather an opportunistic than a hot market
o Largest deals – Four Seasons and Le Meridien – both trophy asset deals
o The above were long term on the market for sale
•On the basis of rumoured transaction prices: difficult to justify a sound and applicable
multiple
•Little transaction volume (and not only in this Budapest is similar to Prague – rebound in
demand, soft rates, small hotel openings and seldom transactions)
•Long term thinking from buyers – since there is no visible return beyond 12-15 years, the
latter figure especially for large and upper end developments
o The driver could be sustained cash flow vs. offices where vacancies and potentially
non paying tenants could be a headache
•Yield scissor between office and hotels could be closing – hotels can and do deliver cash-
flow
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12. MANAGING NUMBERS OR…..
BC:
• Strong GOP levels in Budapest – even full service hotels did above 45%, limited
service properties could have reached around 60%
• Predictable GOP in the provinces – high 30s (especially in hotels with large water
facilities)
AC:
• Everyone tries to manage the numbers – though some are managed by the
numbers…..
• Hoteliers have become cost cutters and optimisers – staff, suppliers, managements
– slogan: Cluster if you can (except individual hotels…
• Outsource, outsource (except the Provinces where this word does not exist)
• Budapest – GOP levels falling to the region of 35-40% at the better properties
• Provinces – 20-25% is a great number
Everyone’s fear or reality:
• Drop in revenues, increase in cost and shrinking margin could not help the high CHF
rate
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13. FUEL FOR GROWTH… IS THERE A MOTOR ANYWAY?
Is there a bright side?
•A conference centre would do us good – there is a place on the map waiting for
Budapest
•Diverse offerings in the Hungarian provinces – yet domestic demand will remain the
fuel for growth
•Promotion, promotion – We have a beautiful destination
•Life after MALÉV – will someone raise the flag?
•Airport – new airlines want to come – What about landing fees?
•Hotels do need to cooperate – Nothing is easier than undercut no redline watch in
place
•The market shows recovery, there is rebound BUT the times of bonfires is still
ahead…..
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14. THE MEANING OF WWW…..
BUDAPEST COUNTRYSIDE
• A dynamically growing online sector despite the • In 2010, 35% (2,5-2,7 million) of the total guest
crisis – corporate and FIT bookings primarily nights in 3-5 star hotels were booked online
• A growth of 248% on the online market (nearly 770 • A yearly average growth of 20%, outstanding
thousand guest nights in 2010) growth in the 4 – 5 star and wellness segments
• The significance of OTAs (620 thousand guest • As opposed to the nearly stagnating total number
nights in 2010) of guest nights, a 42.2% growth in online guest
• Big TOs also on this market nights
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15. KILLING ME SOFTLY
Adverstised as a community tool – yet it can be a lethal
injection for an unfamiliar and naive user (hotel)
Coupon pages do agressive marketing
Customers will develop loyalty not to the hotels but to the pages
Coupon pages build on sales and volumes

16. OUTLOOK
• An increased emphasis on online marketing and sales
• Cost efficient operation
• Service level and guest attention shall be kept high
• Still hotels can generate cash flow – seldom to see guests leaving
without payment
• Patience from owner, operator and financiers
• Some of our neighbours (Slovakia, Romania, Serbia, Ukraine even
Poland) still do not have adequate hotel facilities – especially in
the wellness segment
• As for Budapest, there is volume and one has to believe that
quantity kicks into quality after a certain point
• Budapest: a double digit demand growth is ambitious but likely to
soften
• Provinces: marginal demand evolutiuon if any
• Prices: at best stagnation
• AND UNTIL: PROMOTION, BRAND, AWARENESS and
so on…..
Page 16

17. Thank you for your attention!
Attila Hegedűs
attila.hegedus@bdo.hu
+36-20-9-264-227
More information:
www.bdonline.hu or www.bdo.hu