2008 CEE HOTEL MARKET AT A GLANCE. Performance indicators. Hot Topics. Market Overview

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1 CB RICHARD ELLIS HOTELS MarketView Hotels - Central & Eastern Europe YEAR END 2008 Market Overview 2008 CEE HOTEL MARKET AT A GLANCE Performance indicators ADR Hot Topics Occupancy RevPAR Development Pipeline affected by the lack of available funding Hotel operators' development strategies will focus on Management Agreements Yields will come under further pressure Expect distressed sales from Q RevPAR expected drop to across the region in 2009 Despite the continuing impact of the global economic crisis some good development and investment opportunities exist in the region. Economic growth in Central and Eastern Europe (CEE) has experienced a slowdown, particularly compared with the recent period of rapid expansion. Even with the slowdown, most forecasts still suggest substantially higher real GDP growth rates in CEE countries than Western European countries in the long-term. Visitors from Western Europe and the U.S. form important source markets for hotels in the region. As these economies continue to suffer, the negative impact upon visitor numbers becomes apparent. The availability of low cost budget air travel to the region has been a major demand driver in both the leisure and corporate markets in recent years. However, in the latter part of 2008 a number of international airports in CEE reported a decrease in passenger numbers. This is the combined result of the global economic situation and changes in destinations covered by air carriers, especially low-cost carriers. Meetings, Incentives, Conference and Events (MICE) generated demand will grow in importance for many CEE cities. Vienna, Budapest and Prague ranked 1st, 6th and 12th respectively in the 2007 International Congress & Convention Association (ICCA) global city rankings. However, investment in infrastructure and conference facilities is required for Budapest and Prague to maintain their rankings. This is also true for cities looking to improve their rankings such as Warsaw, Bucharest and Sofia. The hotel development pipeline in most CEE countries remains robust, with Prague leading the way in terms of number of added bedrooms for Tight lending conditions resulted in some major projects being postponed as developers look to focus on current projects while the availability of finance is scarce. In addition, hotel performance indicators in the region have been poor in comparison with recent years. International brands remain interested in the region, although they are selective in both location decisions and types of operating agreements they propose. In general, hotel performance for 2008 across CEE was not as good as Occupancy fell 6.7% while ADR increased by 7.4%, resulting in a minor increase in RevPAR of 0.2%. Bucharest and Prague were amongst the weakest performing cities with RevPAR in both locations falling in excess of 11%. Average Daily Rate And Occupancies For CEE Average Daily Rate EUR Occupancy % 75% 70% Average Daily Rate % 60% 55% 50% 45% Occupancy % CEE Hotel market represents: Bratislava, Bucharest, Budapest, Prague, Vienna and Warsaw ADR and occupancy data sourced from STR Global and weighted against CBRE Hotels CEE supply data.

2 Occupancy % CEE Hotel Market Situation 75% Vienna 70% Warsaw Prague 65% Bucharest 60% Budapest Bratislava 55% Average Daily Rate EUR Based on Market Size of predominantly three- to five-star hotels, ADR and Occupancy ADR and occupancy data sourced from STR Global. Market Size data from CBRE Hotels CEE. Market Positioning By City Source: CBRE Hotels CEE RevPAR Tendencies Across The CEE Region RevPAR analysis based on STR Global figures Page 2 Warsaw was the region s star performer in 2008, whilst Vienna was the only other city to report increasing RevPAR. This was a direct result of an ADR increase driven by the UEFA European Championships In 2008 there were few transactions of internationally branded hotels and investment volumes dropped significantly, a feature common to the real estate investment markets across the world in general. A common theme across hotel transactions last year was the focus on a guaranteed or highly secure income stream to the purchaser. Market Positioning Key Cities Bratislava - Emerging In Q passenger numbers at Bratislava Airport decreased 13% year-on-year (y-o-y). This was a contributing factor to the city s hotels experiencing a 7.9% drop in RevPAR. Bratislava s hotel pipeline has been hit by a slowing economy with some development projects struggling to attract financing, resulting in postponements and cancellations. The reduction in pipeline supply may prove to be beneficial for the local hotel market in the long run as it reduces the potential for oversupply. The Kempinski hotel Riverpark and the Sheraton Bratislava are two of the high profile hotel developments underway in the city and projected to open in H Both developments are part of larger development schemes located outwith the existing traditional city centre. Bucharest - Emerging Foreign overnight stays started to decrease in Q and by year end had decreased 6.3% y-o-y. This was reflected in Bucharest s RevPAR in 2008, which at -14.2% y-o-y represented the largest decrease amongst CEE capital cities. The Ramada Plaza with 300 bedrooms and the Bucharest Radisson SAS with 424 bedrooms are two of four large hotels which opened in the course of More than 2,360 bedrooms were added to supply in 2008, an increase of more than 30%. New supply has highlighted the need for existing hotels to carry out refurbishment and invest in CapEx programmes to remain competitive. Bank financing for real estate development is currently severely restricted. Lenders are now focusing on smaller projects or those that require only marginal exposure.

3 Bucharest still shows potential for large mid-scale hotel projects, as there are currently only two internationally branded three-star hotels. Krakow - Established 2008 was a quiet year for hotel openings in Krakow. In 2009 the Park Inn will open adjacent to the city s future conference centre, in the Debniki area. On average the main international hotels experienced a drop in occupancy of around 6.5% y-o-y. Despite a relatively stable room supply, RevPAR decreased in Passenger numbers to Krakow Airport dropped 4.7% y-o-y in part due to SkyEurope s cancellation of all flights to Krakow. As a city, Krakow remains of interest to a number of international hotel operators from budget to upper-scale categories. Warsaw - Established Warsaw experienced RevPAR growth of 7.8% y-o-y in This was bettered in Europe only by EURO 2008 host cities Geneva and Zurich. The RevPAR growth throughout the year was driven by a 9.4% y-o-y ADR increase. The prospect of Warsaw hosting EURO 2012 both encourages and requires further investment in infrastructure. This will benefit the local hotel market, but will strongly depend on government spending in a challenging economic climate. The new national stadium under construction on the banks of the river Vistula in Praga Poludnie, could have a positive impact on MICE demand. It is planned to include a conference facility. In 2009, the proposed opening of the 266 bedroom Hilton Garden Inn Warsaw-Mokotow will add competition to the mid-scale market. Budapest - Mature ADR increased slightly in 2008 although a large drop in occupancy levels during H2 resulted in decreased RevPAR. We expect few major additions to hotel supply in The proposed 60 bedroom extension of the New York Palace Hotel is planned for August 2009 while the 66 bedroom Baglioni Hotel in Buda is planned for November In 2010, we expect the opening of the 102 bedroom Buddha Bar Hotel and 214 bedroom Yasmin. Page 3 Number of New Bedrooms Hotel Development Pipeline: Bratislava Budapest Bucharest Prague Warsaw Vienna Source: CBRE Research and Hotels CEE Graph includes projects currently on hold In 2008, the Marriott completed a substantial refurbishment with estimated cost in excess of 30 million. The Intercontinental is undergoing a significant room refurbishment programme. This is expected to increase pressure on other upper-scale hotels to improve the quality offered. While operator requirements for Budapest still exist, location and quality of assets are crucial given the high level of competition across all sectors. Prague - Mature 2008 started positively for Prague with RevPAR growth in January and February. However, by Q2, hotel performance was beginning to feel the impact of the economic slowdown in Western Europe and the strength of the Czech Koruna. From August to the end of the year both ADR and occupancy levels decreased, with RevPAR in 2008 decreasing 11.6%. The opening of the Clarion Congress, Barceló Premium and Kempinski Hybernska were the key additions to the Prague market in 2008, with the Clarion improving the city s capacity for conferences is expected to be a similarly tough trading year for Prague s hotels. The city s status as the seat of the EU Presidency will benefit some hotels over the course of H However, increasing supply, which includes Sheraton, Rocco Forte, King s Court and Park Inn, will create further competition.

4 There are additional hotels in the pipeline for 2010 and beyond such as Le Meridien and Sofitel, which will increase the diversity of the Prague hotel market. However, the difficulty in financing development in the current market may delay some projects, while a further increase in supply will put pressure on smaller brands and independent hotel owners. Vienna Mature Vienna posted RevPAR growth in 2008 as ADR grew by 6.6% over the year, driven primarily by being joint host of the European Football Championships. In June 2008 Vienna recorded a 63.4% increase in ADR. The presence of EURO 2008 was also seen as a contributing factor to a decrease in occupancy over the year as some MICE business chose alternative destinations. Vienna was voted in the ICCA 2007 city survey as the top destination for international meetings. With a conference capacity in excess of 15,000 people, the city is expected to remain one of the top MICE destinations in the world will be dominated by four-star openings. In 2010, a number of large five-star openings are planned including Shangri-La, Sofitel and Four Seasons. Around The Region Poland Lodz, Poland s third largest city, continues to attract investment. The 278 bedroom Andel s Lodz will open in 2009 and will include the second largest hotel ballroom in Poland. As a host city of EURO 2012, Wroclaw has a significant development pipeline which includes a number of budget hotel operators, including Louvre Hotels. Katowice s International Airport has grown significantly, with passenger numbers growing 21.6% y-o-y. Low-cost carriers have increased routes to the city and, with only two international branded hotels, opportunities exist for further development. Balkans Tourism demand in Belgrade is weak compared with other capital cities in the region, although this is improving. Existing supply is focussed on twoand three-star hotels. Of the current hotels, only the Hyatt, Holiday Inn and Best Western are internationally branded. Page 4 RevPAR Comparison Source: STR Global Starwood s domination of the Zagreb market is expected to change in the short to medium term as other international hotel chains enter the market. Montenegro is the subject of a number of potential large development schemes, which include hotel and conference elements. While supported by the government, the economic downturn is likely to delay a number of these. Operator Trends Expansion plans of many hotel operators in the CEE region have been affected by the global economic situation. While the region is still a target market for operators, some proposed openings have been postponed or cancelled. As such the location and quality of an asset and the nature of the management contract/lease are of paramount importance. In 2007 and early 2008, some operators eagerness to penetrate the region led them to include their own capital in development projects. This level of commitment fell in H2 2008, and we expect few operators to expand in this way in 2009 unless the opportunity presented is exceptional. Some low-scale brand operators continue to show an appetite for freehold land in many locations, including secondary Polish cities and Romania. Others are focused on expanding via franchise agreements.

5 MarketView Hotels - Central & Eastern Europe YEAR END 2008 In contrast, mid- and upper-scale brands are less inclined to adopt ownership as an expansion strategy unless the asset is outstanding. Operators in these categories are also increasingly reluctant to sign lease agreements, except where they include significant variable parameters in their contracts. Many lease agreements were signed in the last couple of years during a period of buoyancy. Currently there are instances across the region where operators rental obligations are at risk based on current hotel performance. As a result, the focus of hotel operators is on expansion through Management Agreements (MAs). The growing trend in Western Europe for operators to offer guaranteed elements to MAs has appeared recently in CEE and is a trend we expect to grow in the short to medium term. Yields Yields moved out across 2008 and we expect further outward movement in 2009 as the market is characterised by a lack of purchasers with equity or access to finance. Sellers expectations remain adrift of the pricing levels of potential purchasers. The disparity was evident throughout 2008 as many of the hotels that were brought to the open market across the region failed to transact. We have yet to witness the appearance of distressed sales, although we anticipate this will increase later in Despite a lack of market evidence, we believe that yields for all types of hotel investments across the region have moved out between basis points. This includes hotels operated through MAs, lease contracts and vacant possession hotels. As the economic crisis has a further impact on the performance of hotels in the region, we consider that hotel assets with good covenant leases could be more attractive to potential investors than either vacant possession hotels or those on MAs. Market Definitions ADR Average Daily Rate. Statistical unit used to measure a hotel s pricing scale. The figure is derived by dividing the actual daily rooms revenue by the total number of occupied rooms. Occupancy Rate The percentage of all available hotel rooms occupied over a given time. RevPAR Revenue Per Available Room. RevPAR is typically calculated by multiplying a hotel s ADR by its occupancy rate. Page 5 Hotel and Commercial Yields Dec 08 Bratislava 8.00% 6.75% 6.75% 8.50% Bucharest 9.25% 8.00% 8.50% 8.50% Budapest 7.75% 6.75% 6.75% 8.00% Prague Vienna Hotel* Retail** Office Industrial 7.50% 6.50% 6.75% 5.75% 6.50% 5.50% 7.75% 7.00% Warsaw 7.50% 6.75% 6.25% 7.75% Source: CBRE Research and Hotels CEE * Hotel yields shown are prime yields based on a projected stabilised trading performance and may vary according to location and type of asset ** Shopping Centres Evolution of Hotel Yields in CEE 14% 13% 12% 11% 10% 9% 8% 7% 6% 5% Source: CBRE Hotels CEE Bratislava Budapest Bucharest Prague Warsaw Vienna

6 MarketView Hotels - Central & Eastern Europe About CB Richard Ellis Hotels The CB Richard Ellis Hotels Group is dedicated to being the hospitality industry s premier provider of sales advisory, finance, market research and valuation services to meet the capital needs of investors and individual owners of hotel properties. With over 100 CB Richard Ellis Hotels specialists globally, we have a dedicated Central & Eastern European team. CBRE Hotels CEE Market Coverage Our CEE Hotel business lines include: Hotel Advisory Services, Hotel Capital Markets, Development, and. YEAR END 2008 Hotel Advisory Services The Hotel Advisory Services team provides investors across EMEA with an in-depth understanding of the hotel industry, specific assets and market in order to maximize investment returns. The team comprises three specialist groups: the Investor Advisory team are a consulting oriented service with a strong independent, analytical component, the International Operator Selection consultants provide expert advice to site owners on the most effective hotel brand to operate their hotel and finally, the Owner Representative experts work with operators to focus processes on the owners strategic goals and investment objectives. Hotel Capital Markets The Hotel Capital Markets team deliver a premium integrated disposal and acquisition process to a wide range of global clients on both single assets and portfolios. The team has an unmatched track record in the hotel investment market and has particular skills in successfully completing complicated and financially engineered deals throughout the EMEA region. Development Our development team provides a comprehensive service to site owners and hotel developers, including a unique understanding of the ways to unlock site value. From site assessment and hotel specification to the implementation of agreed disposal strategies, including lease and management contract negotiations, CBRE Hotels arguably has the most experienced Development team in the industry. assignments are undertaken throughout the EMEA region and are led by RICS qualified chartered surveyors with specialist knowledge of hotel markets. Our client base covers a broad range of operators, lenders, developers and investors with advice given for a variety of purposes including sale or purchase, financing, expert submissions, company reporting and strategic review. Page 6

7 Track Record Sample Disclaimer 2009 CB Richard Ellis Information herein has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to independently confirm its accuracy and completeness. Any projections, opinions, assumptions or estimates used are for example only and do not represent the current or future performance of the market. This information is designed exclusively for use by CB Richard Ellis clients, and cannot be reproduced without prior written permission of CB Richard Ellis. Copyright 2009 CB Richard Ellis. Page 7 Intercontinental Budapest, Hungary 398 bedrooms Hotel Development Bratislava, Slovakia Development Advisory 150 bedrooms Warimpex Portfolio CEE Region Portfolio 26 properties Four-star Development Zagreb, Croatia Development Advisory & Operator Selection 147 bedrooms Luxury hotel & Spa Salzburg, Austria Investment Advisory 880,000 sq m Hilton Hotel Prague, Czech Republic 788 bedrooms Sheraton Warsaw, Poland 350 bedrooms For more information regarding the MarketView, please contact: CBRE Hotels CEE Adrian Flueck Junior Analyst adrian.flueck@cbrehotels.com Jean-François Laporte Associate Director jean-francois.laporte@cbrehotels.com Martin Thom Associate Director martin.thom@cbrehotels.com Andreas Ridder Chairman CEE andreas.ridder@cbre.com Colin Waddell Managing Director CEE colin.waddell@cbre.com Jos Tromp Director Head of CEE Research & Consulting jos.tromp@cbre.com CBRE Hotels Palladium, Namesti Republiky Prague 1 Czech Republic Tel: (420) Fax: (420)