Arab investors behind three of the biggest luxury hotel deals of the year appear ready to forgo quick money in exchange for a chance at big profits in the long term.
Their latest business, the Párizsi Udvar, will see the two businessmen managing a property for Majdi Helmi Rida Ayesh, a Dubai resident with extensive connections to Hungary. Judging on the past performance of Mellow Mood, we can expect a stunning renovation, with competitively priced rooms.
The deals share a lot in common: All three are fancy landmarked properties that do not promise huge return on investments in the short-term. And all were purchased by Arab investors, who apparently have enough up-front financing that they do not have to worry about short-term gains.
Perhaps the biggest deal this year had an undisclosed price: In June, billionaire Khalaf Ahmad Al Habtoor – a citizen of the United Arab Emirates, one of the richest men in the world and the owner of the luxury Le Méridien Hotel Budapest since 2012 – bought the river-side five-star, Hotel Intercontinental. Also this year, the Jordanian partners Zuhair Awad and Sameer Hamdan, who own the high-end Buddha-Bar Hotel and a wide range of other accommodation properties, were involved in the purchase of the historic, centrally located Párizsi Udvar, for an estimated HUF 2.1 billion, with plans to turn the landmark building and courtyard into a hotel. In a third major deal this year, Sheikh Jassim Bin Hamad Bin Jassim Bin Jabr Al Thani, a member of the Qatari ruling family, paid an estimated HUF 6 bln for the Ballet Institute, a landmarked building that has been unused for years now, with plans to turn it into a hotel.
Both the Párizsi Udvar and the Ballet Institute will require renovation, which is an expensive prospect because their landmark status means any restoration must be historically faithful. According to Ákos Balla, director of valuation and advisory services at Colliers International Hungary, these purchases will not see quick returns for the new owners, though they could be smart medium-term investments. Balla noted that the major Austrian and German institutional investors, who were very important in driving real estate investment before the crisis but now remain hesitant, would not make such a deal.
“Market-based institutional investors do not even consider expressing interest in Budapest opportunities,” Balla told the Budapest Business Journal. Those who finance investments by leverage must reckon with an interest rate of at least 5-6 %, as well as the operational costs of the fund manager, which can amount to 1-2%. “Under a 7-8% yield, institutional investors do not even bother to consider purchasing,” Balla said.
In the experience of real estate experts, the bigger Arabic investors coming to Budapest are motivated by different considerations. “They employ family asset managers, so they do not have to report on return rates to any boards,” Balla of Colliers explained. Unlike institutional investors, these cash-rich buyers can afford to plan for ten years, calculating on long-term profits.
“Trophies like the Párizsi Udvar or Gresham Palace (purchased by an Oman state fund in 2011) are worth ten times as much in Western Europe as in Budapest,” according to Balla. “In the mid-run, therefore, there is a serious chance that, if the Budapest real estate market once catches up with Western European prices, these pieces of real estate will be able to yield 300-400% profits.”
MELLOW MOOD DOES IT CHEAPER
But more than just property investments, these hotels are businesses, and they are capable of producing a profit for their owners. In 1997, Jordanian partners Hamdan and Awad founded Mellow Mood Group and began growing in the hospitality business here. They developed a model of giving competitive service at competitive prices. Early properties were low-cost, like the very well-run Mellow Mood Hostel, which drew rave reviews from Time Out Budapest: “Top banana in terms of both convenience and comfort.”
On the other end of the luxury scale, Mellow Mood Group also opened the Buddha-Bar Hotel in 2012 in Budapest’s landmark Klotild Palace, a five-star with a strong sense of style that won it several design awards.
Mellow Mood’s team seems to understand style, and many of their properties are “boutique” or “fashion” hotels – small but upscale establishments, where the décor, atmosphere and attitude are very important.
“In one field, Mellow Mood is certainly unbeatable: this is the operation of so-called boutique hotels,” said Attila Hegedűs, president of the Alliance of Touristic Managers.
Along with requiring good management, small, boutique hotels – that are not backed by big brand names – depend on a good evaluation in the internet-based direct booking systems. “Mellow Mood has developed a special expertise in online booking systems. This is essential because today top-category customers choose hotels less by brand names; what they look at is the rating of hotels at Booking.com,” Hegedűs said.
Indeed, Mellow Mood Group boasts on its website: “Our company is the owner of many domain names, providing multiple channels through which potential guests may reach our properties. We also pay attention to the optimization of our homepages on various search engines.”