Budapest is Hungary's capital and the nation's economic and administrative hub. The city was formed in 1873 through the unification of the formerly separate townships of Buda, Obua and Pest.  Today the city covers an area of 525 km2 and has a population of some two million people.

Economic and tourism review

Hungary was one of the first countries in central/eastern Europe to embark on social, political and economic transition from communism. The transition is still on going but much progress has already been made. Despite the effects of the Russian financial crisis and some slowdown in the Euro-zone (Hungary's main export market) between late-1998 and 2000, gross domestic product (GDP) grew strongly in real terms, peaking at 5.2 percent in 2000. However, the subsequent global economic downturn in 2001 has impacted economic growth, which slowed to 3.8 percent - the lowest level since 1996. The EIU do not forecast growth to increase until 2003. Efforts to curb inflation have been successful, with inflation down to 9.2 percent in 2001 from 18.6 percent in 1997, and forecast to fall further in 2002 to 5.6 percent. This said, levels remain high, relative to other European countries. Foreign investment accounts for some US$2 billion per year, with the majority originating from multinational companies, attracted by low wage costs and fiscal/investment incentives.

Hungary is targeting membership of the European Union (EU) between 2004 and 2005 with membership of the EMU anticipated to follow two or three years after entry to the EU.  However, in addition to EU-wide risks to the timetable for admission, Hungary has a large (and rising) fiscal deficit, which will need to be halved before admission can occur. The EIU currently estimates that membership is unlikely to be achieved before 2005.

According to the World Tourism Organisation, international visitor arrivals reached their peak in 1993 with some 22.8 million arrivals.  Since then visitor arrivals have fallen year on year, recovering slightly in 2000 to 15.6 million arrivals.  We estimate that between 1995 and 1999, visitor numbers declined at a compound annual rate of nine percent.  This is largely attributable to a decline in visitation from former Comecon countries; the war in Kosovo, and increasing competition from other regional destinations (notably the Czech Republic and Austria). During the same period, international tourism receipts grew considerably from US$1,181 million in 1993 to US$3,424 million in 2000 -- much of the growth was reported between 1994 and 1996 when international tourism receipts grew by 56 percent in US$ terms. According to the Hungarian National Tourist Office (HNTO), Europe is the dominant source market, representing up to 95 percent of arrivals to Hungary.  Austria, Germany, Slovakia and Romania are the leading in-bound markets. Budapest remains the principal tourist destination in Hungary, accounting for up to 84 percent of foreign overnight stays, followed by the Veszprem and Somogy districts around Lake Balaton.

Hotel review

The Budapest hotel market is characterised by a wide variety of hotels, many of which were previously in State ownership. The Hungary Tourist Board estimates that in 2001 there were 124 graded hotels from 1-5 star providing 13,859 rooms in the Budapest market.  A further 67 units (1,627 rooms) are graded as Inns and Tourist Hostels.  Deloitte & Touche research indicates that only 43 of the 124 hotels are branded representing some 9,412 rooms. Accor, through its ownership of Pannonia, is the largest branded operator in the city with 11 hotels and 2,278 rooms.  Local hotel chain Danubius is the second largest operator in the city with nine hotels, although nearly 50 percent of these are classified as spas, and as such are sited in tertiary locations. International hotel chains with representation in the city include Hilton (two properties); Hyatt; Kempinski; Marriott (two properties); Meridien; Radisson SAS and Six Continents.

The grading classification in Hungary is not commensurate with international standards, however Deloitte & Touche estimate that the branded supply in Budapest could be split as follows:
 

Between 1990 and 2001 we estimate that the quality hotel supply (top, upper and mid-tiers) grew by four percent annual compound growth.  The most recent addition to supply is the Novotel Palace hotel, which opened in August 2002 with 227 rooms.  As a result, and in order to underpin their competitive positioning, a number of hotels have undergone refurbishment programmes in the last two to three years.  These include the Inter-Continental, which completely refurbished its bedrooms, food and beverage facilities and public areas in 2000, as well as added a conference centre.  The Hilton which refurbished its rooms and conference facilities and added 74 executive rooms and six meeting rooms, and the Hyatt Regency, which completed a US$10 million refurbishment of its 353 rooms and conference and banqueting facilities.

Trading performance

Whereas many cities in eastern and central Europe and Russia (including Prague, Warsaw and Moscow) have seen dramatic declines in average room rates in the 1990s, the Budapest market has remained relatively robust with average room rates only four euros below those levels achieved in 1998.  Much of this can be attributed to the fact that average room rates in Budapest never reached the levels seen in some of the other cities, and consequently the decline to more stable market rates was less severe. Indeed, performance is all the more remarkable given the addition of 613 new hotel rooms to supply during 2000 in the shape of the Art'Otel, Hilton West End and Le Meridien -- all targeted at the top-tier of the market.
 
 

During the three years 1998-2000 occupancy levels remained stable at 65 percent.

However, levels dipped to 60 percent in 2001 as the impact of new supply diluted demand.

Average room rates encouragingly grew four percent during this time.

The year-to-August 2002 performance numbers reveal the market suffering from the impact of a slowing economy and curtailed international visitation  passenger numbers for the first four months of 2002 were down seven percent over 2001 levels.  Occupancy is down 4.0 percent whilst average room rates have fallen 4.8 percent resulting in a revPAR decrease of 8.7 percent.

The overall impressive city trading results mar the fact that there is a significant gap between the average room rates achieved by top-tier hotels and those achieved by the upper and mid-tier. Whereas the top-tier market benefits from international corporate demand, the upper and mid-tier hotels are more reliant on tourist and leisure-related visitation as well as the domestic market, and hence are subject to more price sensitivity. Deloitte & Touche estimate that top-tier hotels achieve average room rates nearly double those of the upper and mid-tier segments.

The lowest occupancy levels are usually reported in January, but all three winter months can be characterised as low season, with group and leisure breaks in particular providing little business. Weekly occupancy levels are fairly even with corporate guests throughout the week and leisure-break guests staying during the weekend. Current occupancy levels suggest there are rarely any periods when all hotels are full, with the exception of the F1 Grand Prix (typically held in August) and occasional large conventions and conferences.  However, Budapest does not exhibit the distinct pattern of peak trade/convention periods prevalent in many other cities. 

New supply

Whilst there appeared to be a significant amount of new supply in the pipeline a year ago, the appetite for hotel development appears to have weakened (as in many other cities) in light of the events of September 11 combined with falling tourism demand and global economic uncertainty. Recent research by Deloitte & Touche reveals that the following new hotel openings look likely to come to fruition: 

• 160-room Astron hotel due to open in October 2003 near the western railway station;
• the Millennium City Hotel which is being developed on the site designated for World Expo 1996; 
• Corinithia plan to re-open the former Royal Hotel, following massive renovation and the addition of extensive conference and leisure facilities in October 2002; 
• Four Seasons Gresham Palace which is now on schedule to open in the first half of 2003; 
• Italian group Boscolo have also reportedly started work on converting the New York Palace hotel into a 5-star hotel with up to 100 rooms. 

Outlook

Weak regional and international economic conditions appear likely to continue to impact the economic performance of Hungary during 2002 and most probably into 2003.  The new government faces a considerable challenge in the implementation of effective policies in order to hold the country on course for EU integration, and unemployment is not forecast to decline in the short-term.  As a central European economy, Hungary shares many of the challenges of an economy in transition, including wage inflation, unemployment and aggressive competition for investment from other countries. 

Given the city's position as the centre of government, a key commercial centre, and an appealing touristic destination, Budapest should benefit from the anticipated general growth in the economy however, observers remain positive about the potential for growth, particularly in the tourism industry, despite the economic and geo-political uncertainty that increased following the events of September 11. We anticipate that trading conditions for the city's hotels will remain difficult over the next two to three years, particularly at the top-tier where the market will need to absorb the proposed new supply, however generally we believe that prospects for the market appear positive in the medium-term.