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Since 1998 HVS International has conducted several studies in the Warsaw market including many feasibility studies, valuations and market studies. The research for this article is based on HVS experience since 1998 and our significant recent experiences in the Warsaw market. It should be pointed out that our research and analysis relates primarily to international and branded quality hotels in central Warsaw.
Economy
The key points according to the Economist Intelligence Unit`s (EIU) latest (10 May 2004) Poland Country View are as follows.
- After several years of stagnation the Polish economy began to recover in 2002, when real GDP rose by 1.4%. GDP growth rose to 3.7% in 2003, and is forecast to rise to 5.0% in 2004, before moderating slightly to 4.8% in 2005. Growth is expected to average just over 4.0% per year from 2006 to 2008, although unemployment will fall only slowly from a current level of approximately 18%;
- Export performance is expected to continue to be good, but higher imports, linked to a recovery in fixed investment, will lead to a gradual increase in the current-account deficit. According to the EIU, the deficit will be financed through foreign direct investment and a moderate level of foreign borrowing;
- Inflation was 1.7% at the end of 2003, falling below the 2-4% target of the outgoing Monetary Policy Council (MPC). Inflation is set to rise gradually but will remain within the MPC’s target range of 1.5-3.5% over the forecast period. The new MPC has adopted a surprisingly aggressive approach, but, unless fiscal policy is relaxed further, it is likely to make only limited increases in official interest rates in the forecast period.
Recent Performance – Central Warsaw Hotels
Between 1993 and 1996 Warsaw enjoyed a healthy demand/supply balance. During these years supply increases were quickly followed by increases in demand, indicating high levels of unaccommodated demand and strong levels of demand growth, including some induced demand, generated by the new hotels entering the market. Between 1998 and 2001 there was a real reduction in accommodated demand and no additions to supply. The main reason for this decline in hotel demand during these years was the economic slowdown of the Polish, Russian and German economies. In 2002 there was a significant increase in new supply of approximately 12.5% (the Hyatt Hotel and the Radisson SAS hotel), and for the first time since 1997 there was a moderate increase in hotel demand, due mostly to induced demand. However, marketwide occupancy continued to decline, to approximately 51%. In 2003 there was another significant increase in hotel supply, of approximately 16.5% (Westin Hotel, InterContinental, Courtyard by Marriott at the airport) and hotel demand increased by 12%.
There are several reasons for this surprising increase in hotel demand. The adverse trading conditions experienced in Warsaw, mainly as a result of the new supply, have resulted in a price sensitive market; leading hotels in Warsaw have had to cut their rates, resulting in a significant decline (of approximately 15-20% compared to 2003) in average room rates achieved by four-star and five-star hotels in Warsaw. The decline in average room rates (in euro) has been compounded by the devaluation of the zloty against the strong euro. A big part of the increase in accommodated demand in 2003 is due to the cannibalisation by the upscale hotels of demand previously accommodated at the lower-positioned hotels in Warsaw.
Table 1 illustrates the evolution of annual supply and demand for international and branded quality hotels in central Warsaw.
Table 1: Annual Supply of and Demand for International and Branded Quality Hotel Rooms – Warsaw 1990-03
In 2003 Warsaw recorded double-digit decreases in RevPAR for the third consecutive year. Demand in Warsaw is strongest during weekdays. However, the market is constrained by continued weak demand at weekends and during non-business periods. Warsaw has always been an almost exclusively commercial market, with relatively little leisure demand to fill hotels at weekends and holiday periods; hence historical marketwide occupancy has been constrained to the high 60s. During 2003, demand was stimulated by a small amount of unaccommodated demand during weekday business periods and some induced demand generated by the new hotels entering the market. However, despite the increase in hotel demand, marketwide occupancy continued to decrease – by 2% in 2003 compared to 2002 – due mainly to new supply. New Supply
Hotel supply in Warsaw has increased significantly in the last few years. In addition, there are several projects proposed which will further increase supply in the next few years. Hotels that opened during the course of 2003 and 2004 include the following.
- The 44-room boutique Hotel Rialto located on Wilcza Street opened in June 2003;
- The 361-room Westin Hotel located on Al. Jana Pawla II opened in July 2003;
- The 333-room, three-star Ibis Hotel Muranowska opened in August 2003;
- The 220-room, three-star Courtyard by Marriott opened at the airport in October 2003;
- The 406-room InterContinental Hotel opened in November 2003;
- The Envergure complex located at ul. Towarowa opened in March 2004. The complex includes a 144-room Kyriad hotel, a 126-room Premiere Classe hotel and a 194-room Campanile hotel;
- The 61-room boutique Hotel Le Regina located on Koscielna in close proximity to the Old Town opened in June 2004. The hotel is owned and managed by the Orco Property Group.
Hotels that are currently under construction or planned in the next few years include the following.
- The 206-room, four-star Polonia Hotel located on Al. Jerozolimskie is due to open at the beginning of 2005. The hotel has been closed for several years for an extensive refurbishment. The hotel is owned and will be operated by Syrenna Hotels;
- A 229-room hotel planned at the Blue City shopping centre on Bateryje Street. It is rumoured that this hotel will be a mid-market Barcelo Hotel;
- A 320-room Hilton Hotel located on Grzybowska is expected to open in mid 2007. However, construction work on this development has currently stopped.
Outlook
In 2004 further significant new hotel supply will enter the Warsaw market. We anticipate further stimulation of demand as average room rates remain very low or are cut even further, but we expect that marketwide occupancy will still experience a decline in 2004, to approximately 45%. We also anticipate that average room rates will continued to decline as significantly in 2004 as they have done over the last few years. High levels of new supply entering the market in 2004, 2005 and 2007 are likely to keep marketwide occupancy low. Although fewer rooms are due to enter the market compared to previous years, RevPAR is likely to be depressed until the new supply is absorbed, and improved demand growth allows marketwide occupancy to rise. This would indicate that the Warsaw market will not turn until 2007/08. Nevertheless, in the longer term, the outlook is one of greater optimism; the continued recovery and growth of the Polish economy, the country`s accession to the European Union in May 2004 and the continued rise in the number of low-cost airlines flying to Warsaw will result in further growth in international visitation and consequently the recovery of the Warsaw hotel market.
Theodore is the Co-Founder and Managing Editor of TravelDailyNews Media Network; his responsibilities include business development and planning for TravelDailyNews long-term opportunities.
