Vienna hotels have sustained the recent economic slowdown relatively well. There has been continued investment in Vienna's tourist infrastructure. Despite the entry of new hotel supply to the market our outlook is positive.

Economy

The key points affecting the Austrian economy according to the Economist Intelligence Unit's (EIU) latest Austria Country Forecast Summary (21 June 2004) are as follows.

• Since 1999, Austria has been governed by a centre-right coalition government comprising the Austrian People's Party (ÖVP) and the far-right Freedom Party (FPÖ). It is anticipated that the next general election, due in 2006, will result in a new coalition including the ÖVP and the Socialist-Green party;

• The ÖVP has implemented a series of structural reforms and capital expenditure consolidation programmes to create a leaner state; areas of focus include reforming the national pension scheme, increasing labour participation and the retirement age, and privatising the national healthcare, rail and public administration systems. Despite these reforms, the budget deficit which stood at 1.3% in 2003 is expected to widen to 2.0% in 2005, before reducing gradually to 0.1% from 2008;

• The Austrian economy has been affected by the recent global economic slowdown, with real GDP declining from 3.3% in 2000 to 1.0% in 2001 and 0.9% in 2002-03. Growth is expected to commence from 2004 - reaching 1.7%, and 2.4% in 2005 - in response to government capital expenditure and increased private consumption. Moderate growth is expected from 2006 onwards, driven by robust domestic demand and a more favourable external environment. GDP growth is expected to stabilise at 2.2% from 2007 onwards;

• Due to acceleration in domestic demand, inflation is forecast to rise above the 1.4% recorded in 2003, but to remain below 2.0%. The current account deficit is forecast to widen gradually from 0.9% in 2003 before stabilising at 2.0% from 2007. Short-term interest rates are expected to remain relatively low at 2.1% in 2004-05 and below 4.0% from 2006 to 2008.

Vienna is an attractive leisure destination and it is considered to be one of the opera and culture capitals of Europe. Vienna is ranked as one of the strongest congress destinations in Europe and benefits from an established commercial demand base. We estimate that across Vienna's four- and five-star hotel market, business demand accounts for approximately 60% and leisure demand for 40% of total demand.

The following chart shows the trend in overnight stays at hotels in Vienna from 1990 to 2003.
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Chart 1 - Overnight Stays at Vienna Hotels, 1990-03 (000s)

Source: Vienna Tourist Board

In 2000, marketwide occupancy for the quality four- and five-star hotel markets increased by approximately two percentage points, showing a peak at approximately 72%. This was due to increased international travel in the millennium, strong domestic hotel demand and events held in Vienna, such as the European Figure Skating Championship and the Cézanne exhibition. However, there was a decline in international congress and meeting demand due to cancellations following the continued political unrest. This limited the extent of growth in upscale hotels' performance in 2000.

From 2001-02 there has been a continued decline in occupancies across the upscale Vienna hotel market, and particularly in the five-star segment; this is mainly due to the slowdown in the European and Global economies, which affected key source markets for upscale Vienna hotels. Commercial demand originating from within Austria, Germany, the USA and Japan has been particularly affected by companies cutting back on expenses. International travel was further affected by the 11 September 2001 attacks and the unrest in the Middle East.

Despite the continued economic slowdown in 2003, the war in Iraq and the outbreak of SARS (which had an adverse impact on Asian visitation), hotel occupancy for four- and five-star hotels in Vienna reached approximately 70%; an increase of two percentage points compared with 2002. This increase in marketwide occupancy was partly a result of the temporary closure of the 600-room Hilton am Stadtpark early in 2003 for a 17-month renovation. Overall there was a decrease in the net supply of upscale hotel rooms available in 2003, despite the opening of two new hotels late in that year (Le Meridien and Palais Coburg), which added a total of 327 rooms to Vienna's five-star market. In addition, upscale hotels' performance in 2003 was boosted by record levels of congress and meeting demand for Vienna in that year. Several large international congresses were held in the city, the largest of which being the congress of the European Society of Cardiology. There was also some recovery in US visitation in that year.

Vienna has two large venues in the city, while a third venue, the RX Messe Wien Congress Centre, opened in January 2004, thus increasing the city's convention capacity by some 25% to 13,500 delegates. Over the next few years Vienna is likely to benefit from large events that are planned, such as hosting the Mozart year in 2006 and co-hosting the European Soccer Championship in 2008. The Prater Amusement Park and Schönbrunn Palace are currently undergoing renovation. Due to its geographic position, Vienna is likely to benefit from the EU enlargement in terms of additional business travel. Vienna's active tourism board has set a goal to attract 10 million overnights to Vienna by 2010 (just under 8 million overnights were recorded in 2003). There are plans to support this goal by improving Vienna's infrastructure and accessibility, including reconstructing the central rail station and expanding the airport. Vienna's international airport serves as a 'transit hub' between several international destinations and, with the exception of 2001, has recorded year-on-year growth in passenger movements from 1990-03. The airport's major redevelopment programme includes expanding the airport's terminal to accommodate an additional 10 million passengers by 2007 (which would double its current capacity) and adding a new runway by 2013.

Hotel Supply

Due to strict planning regulations and generally a lack of suitable hotel development sites, the supply of four- and five-star hotels in Vienna has remained relatively stable over the past five years.

Recent Changes to Hotel Supply
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However, in 2003-04 there have been the following changes to hotel supply.

• The 95-room four-star Falkensteiner Hotel, located in the 7th district of Vienna, opened in May 2003;
• The 294-room, five-star Le Meridien hotel, located on Opernring, close to the Vienna State Opera House, opened in November 2003. This contemporary hotel features the Le Meridien's showcase 'Art & Tech' guest rooms;
• The 33-suite five-star Palais Coburg, located near to the Vienna State Opera House, opened in November 2003. This hotel offers extensive gourmet dining facilities and meeting and banquet space. We understand that the development cost was approximately €120 million;
• The 579-room Hilton Am Stadtpark reopened in May 2004 following an 18-month refurbishment, costing some €60 million. Prior to the renovation the hotel had 600 guest rooms;
• The 108-room five-star Sacher Hotel, located in the historic city centre, closed in June 2004 in order to undergo an extensive renovation programme that includes a 44-guest-room extension. The privately owned hotel reopened on 14 September 2004 with a reduced room count of 65 rooms until September 2005, when it opens as a fully renovated 152-room hotel.

We are also aware of the following hotel projects that are under construction in Vienna city-centre.

• A 75-room four-star Cerruti hotel, located on Herrengasse in the historic city centre, is under construction and is due to open in January 2005. The hotel will be operated by Rezidor SAS and will become the first Cerruti-branded boutique hotel;
• A 245-room three-star Austria Trend Hotel, located at the RX Wien Messe Congress Centre, is under construction and is due to open in June 2005.

In addition, we are aware of several hotel projects and sites that are considered to be suitable for hotel development. It is rumoured that international hotel operators such as Four Seasons, Mandarin Oriental, Ritz-Carlton and Kempinski are actively seeking opportunities to develop or manage existing privately owned hotels in Vienna. Although we are not aware of any confirmed development plans at this point in time, we consider that the following hotel projects are likely to materialise during 2006-07.

• The 44-room five-star Hotel im Palais Schwarzenberg is due to close in January 2006 for an 18-month extensive renovation;
• A 170-room five-star hotel is proposed to be converted from four connecting buildings located on the Schubert Ring. This project has been rumoured for several years, but progress has been slow due to the high building acquisition and conversion costs. We envisage a five-star hotel opening at this site in 2007;
• A 150-room five-star hotel is proposed to be converted from an existing building located on Börseplatz in Vienna's financial district. We anticipate that, should an operator be sourced, the hotel will open in 2007.

Outlook

Despite the recent additions to hotel supply in Vienna, including the reopening of the Hilton am Stadtpark in May 2004, we understand that in the first six months of 2004 there has been an increase in total hotel overnights of 10.6% and a dramatic 30.2% increase in the five-star segment, compared with the same period in 2003. This indicates that recovery is well underway, with visitation returning from key source markets such as Germany, the USA and Japan.

The following chart illustrates the change in demand for hotel accommodation in Vienna, measured in terms hotel overnights from 1991 to June 2004.
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Chart 3 - Trend in Hotel Demand for Vienna Hotels, 
1991 to YTD June 2004

Source: Vienna Tourist Board

Due to the prospect of new hotel openings in 2006-07, we consider that marketwide occupancy will see some decline in the mid-term, before regaining a stabilised level of occupancy in 2009.

In terms of the average rate of upscale hotels, we consider that, due to the addition of new quality five-star hotel products (Le Meridien, Palais Coburg, and proposed five-star hotel projects) and the upgrading of several existing hotels renovated hotels (Hilton, Sacher and potentially Hotel im Palais Schwarzenberg), there will be upward movement in average rates over the mid-term. However, competitive market conditions are likely to suppress average rate increases in the short-term until the impact of new hotel supply has been absorbed by the market.

Vienna is an established leisure destination and benefits from strong convention, meeting and incentive, and commercial demand. In order to remain competitive as a leisure and business destination, Vienna has focused attention on preserving the city's heritage while upgrading its tourist attractions, developing new congress and meeting venues, and improving its communication infrastructure. Furthermore, Vienna is likely to benefit from the increased trade between new EU member states in Central Europe and from annual events such as hosting the Mozart year and EU presidency in 2006 and co-hosting the European Soccer Championship in 2008.

Bernard Forster is a Director at HVS International�s London Office. He joined HVS International in 1997, previously working in the IT sector as well as several years in various hotel operational management roles in Switzerland and London. Bernard holds an MSc in Property Investment from City University London, as well as a BSc in Hotel Management from Oxford Brookes University. He has advised on hotels throughout Europe, the Middle East and Africa.