HOTEL MARKET REPORT SOFIA 2015

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1 HOTEL MARKET REPORT SOFIA 2015 A REPORT BY

2 INCREASING TREND OF OVERNIGHTS! After a period of stagnation in Sofia s overnights between , since 2012 the number of arrivals and spent nights has been increasing again. In 2014 the overnights increased by 7.8% or 107,333 nights compared to the previous year. The increase in 2013 was 12.9%. The average length of stay per visitor is still very short. In the last few years it has always been between 1.71 and 1.78 nights per stay, which reflects the mainly business-motivated trips to Sofia. Compared to other international business cities, which have an average stay of between 2.1 and 2.4, the average length of stay in Sofia is very short. But the overall increase in overnights did not really bring a positive change to the hotel market. Because of the additional beds (new hotels and the improving sharing community) coming onto the market, the competition between hotels has stayed the same and occupancy and ADR (Average Daily Rate) were still decreasing. They remain the lowest in all of Europe, based on Trivago Index, December Overnights/Arrivals in Sofia Millions Arrivals Overnights Average hotel rates in Euro Vienna (130) Prague (102) Istanbul (94) Budapest (76) Athens (72) Riga (72) Bucharest (67) Warsaw (60) Sofia (57) Source: Trivago Hotel Index (December 2014) DID WE REACH THE BOTTOM? It was mainly the 4 star segment that has increased the number of rooms and beds. With an increase of 16% or around 1,000 beds, this segment absorbed the increasing demand and made it impossible for the 5 star segment to increase their performance. Besides Novotel, the new hotels are not really internationally branded. Hotel Sense opened next to Radisson in a great location. Another challenging project is the Suite Hotel in Studentski grad. Its location, concept and approach to the potential clients are innovative and completely different from what is already present on the hotel market in Sofia. If you like to be hosted by a hotelier who DOES NOT believe in stiff rules, a conservative manner and formal behavior, then you have to try them out this is one of their promises on their home page. Their internet appearance and message is so different and funny, that already good again. We are curious to see if they can attract international clients with their contemporary concept. Overnights by hotel category % 2 stars 4% 1 star 25% 5 stars 19% 3 stars 46% 4 stars In the 5 star segment, the occupancy rate remained at 56%, while for the first time in 3 years, the ADR showed a positive trend. Based on the Trivago Index the ADR dropped in 2014 by 6% again, which reflects the increasing price competition in the 3+4 star segment. Nevertheless, due to the big difference between the hotels in location, management, products and infrastructure, some are performing better while others are fighting to keep their presence in the marketplace. Luxury Collection Sheraton Sofia

3 Development of hotel beds by category, change in % Occupancy and ADR of 5 star hotels in Sofia 1) % Beds 2013 Beds 2014 Change in number of beds 13/ % 8.04% 0% -0.87% 5 stars 4 stars 3 stars 2 stars 1 star 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% % ADR ( ) OCC (%) % % % % 61% 60% 59% 58% 57% 56% 55% 54% 53% 52% Source: STR Global 1) When comparing the average prices of STR Global (six 5 star hotels) and the Trivago Index (mix of the offered rates in booking engines), the same trend of price seasons can be witnessed. But it is also evident, that the 5 star hotels yield much more than the average, which means that they adapt their prices much more to the market demand. Based on our observations, the market is facing the following main obstacles: zthe only functional market is the business market and for some hotels maybe the gaming market, but all hotels have a huge problem with filling their rooms on the weekend and during the summer vacation. Even reducing the prices is not increasing the demand. There are not enough tourism and hotel products that can attract people to stay over the weekend. zthe MICE market is domestic and the hotels fight for each group. The prices are very low. We expect that the Sofia Hotel Market will reach the bottom if not too many more hotels are going to open soon. ADR of Sofia s 5 star hotels 1) on monthly basis Monthly change in % ADR, OCC 2014 vs star hotels Jan Feb Mar Apr Mai Jun Jul Aug Sep Oct Nov Dec 30% 20% 10% 0% -10% -20% -30% 24.11% 2014 OCC 2014 ADR 10.45% 9.29 % 12.20% 8.27 % 4.62% 4.19% 7.78% 2.72% 0.22% 1.22% 1.05% 1.74% -1.17% 6.44% 3.53% -3.62% -1.02% -1.33% -3.85% -5.15% -4.91% % % Jan Feb Mar Apr Mai Jun Jul Aug Sep Oct Nov Dec Source: STR Global 1) Source: STR Global 1) Monthly development ADR in Sofia by TRIVAGO Jan Feb Mar Apr Mai Jun Jul Aug Sep Oct Nov Dec Source: Trivago 1) STR Global members are the hotels Sheraton, Hilton, Radisson Blu, Holiday Inn, Kempinski and Grand Hotel Sofia.

4 SPECTACULAR CHANGES IN HOTEL OWNERSHIPS KEMPINSKI BRAND LEAVES SOFIA Recently 3 popular hotels have changed ownership. According to the media, the Hilton was bought by the Radisson main-owner Spas Rusev. Based on our research, the main shareholder is Galaxy Investment Group from Plovdiv. Our request for confirmation left unanswered. From our own experience, we are aware that the hotel Kempinski has been on the market for sale for many years. The sales price the family Zografsky received (based on Medias 45 Mio Euro) is less than a third of the price Mr. Zografsky told us he wanted to sell the hotel for, when speaking to Kohl & Partner 8 years ago. In March 2015, the Kempinski managers left the hotel and Kempinski informed us that: Kempinski Hotels and Victoria Group AD confirm that they are in discussions to end the management agreement for the Kempinski Hotel Zografski in Sofia, Bulgaria, however business continues as usual until a handover date is agreed. Maybe less spectacular, but also very interesting, is the change of ownership of the hotel Rodina, which was bought by the owners of the famous Duni resort at the seaside. We wonder what concept they will bring to the market and how the successful resort managers will do their work in a city hotel. Overall, there have been very spectacular deals in the last year and especially the development of the old Kempinski will be interesting to follow. Compared to other Eastern European cities, it is remarkable that all new hotel owners are Bulgarians. Foreign investors / Funds seem to be scared to invest, very often because of complicated and non-transparent legal issues and also the prices, which were or are too high compared to the achieved turnovers. We have foreseen (see Kohl & Parnter Hotel Market Report 2012) that Kempinski will not renew the contract, because the owners maintenance of the building didn t fit with Kempinski standards anymore. On the other hand, the brand Kempinski is very strong in the mind of Bulgarians. Currently Kempinski stays present in Bulgaria only with the hotel in Bansko. But it is clearly not the strategy of a 5 star brand to have a hotel in the countryside while not being present in the capital. It will be interesting to see which brand will follow Kempinski. We assume that no American or European brand is looking for a partnership with the Victoria Group AD. The more Eastern European focused brand Rixos could maybe be a solution. Kempinski Hotel Zografski 442 rooms (240 in operation) THE BIGGEST HOTEL BECOMES AIRBNB.COM The successful website airbnb.com is actually the biggest hotel in Sofia. With 409 accomodations offered in the city (additional 120 around Sofia) accommodations offered, it has over 1700 beds (as of ). This is between 7-8% of the market in Sofia. Our research on the airbnb market reveals the following: z40% more available offers than 1 year ago. zmost of the airbnb offers are entire apartments the real estate industry has found a new market. zthe average price of the apartments is Euro 43. Compared to the hotel market the difference in price is very small. The lowest price offered for accommodation is Euro 8 and the most expensive is 399 Euros per night. zbecause of this small price difference compared with the hotel prices, the occupancy rates of the airbnb apartments, compared to other cities, are very low. Our research shows occupancy rates of 27% for the entire apartments, only 18% for private rooms and 5% for the only 17 offered shared rooms. zwith our estimated number of 70,000 80,000 nights a year, the market share of airbnb is 4-5% of all overnights already, and is therefore an important player. It is surprising that, compared to other cities, airbnb is not discussed within the local hotel industry, even though it is already taking an important part of the increasing demand.

5 POSITIVE TRENDS? The economic situation doesn t make us very positive. People with education in hospitality often leave the country. This exodus of qualified people is very negative for the industry and the country. However, positive signs do come from the airport, where we continue to see more airlines flying to Sofia, which will automatically increase the overnights. We are not aware of a lot of new projects. The Kempinski could still be renovated to more than 400 rooms and double its capacity. Hotel projects in Macedonia square and the Garden Inn are still far away from realization. More accomplishable is the new project of the owner of Grand Hotel Sofia, Park Inn and Suite Hotel Sofia at the Millennium Centre. They provided the following information on our request: Millennium center featuring upscale hotel with capacity 300+ rooms. The building is under construction therefore it is too early to share any official information referring its hotel development. To us it is incomprehensible that a company is commencing a construction of a building without having an idea about the hotel development, but we assume the owners also overlooked the market development and envisage the risk of 300 additional rooms in the upscale segment. The hotel market in Sofia currently doesn t need new hotel projects. Unfortunately the tourism industry did not improve in working together and the city has missed so far the chances to play a role on the international MICE market (Meetings Incentives Conventions Events). Hopefully the new Ministry of Tourism can support the city/hotels in creating the overdue convention Organisation. Presenting Sofia as a destination: There would be a more positive impact on the market if key players worked more efficiently together (hotels, airlines, municipality, tourism organizations etc.). Only if this was going to happen, we would definitely see a positive market development. If not,... Luxury Collection Sheraton Sofia 184 rooms Hotel Hilton 245 rooms Novotel (Accor) 178 rooms

6 QUICK CHECK HOTEL MARKET SOFIA Key Performance Indicators Sofia 2014 % Changes to last year Overnights % ADR 5 Stars % ADR Trivago % Occupancy 5 stars % 0.0 % REVPAR 5 stars % SERVICES OF KOHL & PARTNER ASSET MANAGEMENT & ADVISORY CONCEPTS, STRATEGIES FEASIBILITY STUDIES OPERATOR SEARCH For more information: André Gribi Managing Partner andre.gribi@kohl-int.com ADDRESS Kohl & Partner Sofia Hotel & Tourism Consultancy International 58 Bulgaria Blvd 1680 Sofia Bulgaria Tel (Ralitsa Vrabevska)