Budapest Hotel Market overview Benchmarking to other CEE capitals

Hungary Research 2018 Budapest Hotel Market overview Benchmarking to other CEE capitals Introduction Strong economic growth accompanied by a booming tourism industry among the CEE countries in this cycle has resulted in improving hotel performance. These positive developments are the main reasons behind growing interest from both investors and operators towards hotel markets in the region. The CEE hotel growth outperformed that of the Western European countries with a RevPAR expansion of 14%. Additionally, the total transaction volume in the CEE hotel market experienced rapid growth. It was EUR 954 million in 2017 up from the EUR 386 million transacted in 2016, which represents a significant, approximately 247% growth y-o-y. The Budapest hotel market reached the 10th highest occupancy rate, among the 35 European countries listed by a recent STR report, with 77.5%, however in terms of ADR and RevPAR it was still ranked only in the lower third of the listed European countries. It suggests that there is still room for operational improvements in the Budapest hotel market. Budapest s fast growth in recent years was achieved even with the accompanying strong expansion of the city s Airbnb market. We found that in terms of operational performance Budapest ranks in the middle of a peer group containing Prague, Bratislava, Bucharest and Warsaw. The Budapest hotel market is experiencing strong growth both in terms of investment and development activity that proves that this asset class is becoming more significant in the property market. Currently, Airbnb accommodations are mainly the competitors of the midrange hotels, located in the city centre, however, it is expected that Airbnb s effect in the luxury segment will be more significant when it launches its new premium services, the Airbnb Plus and Airbnb Beyond. Feature Headline > Introduction > Key drivers of Budapest tourism > Hotel performance > ADR > RevPAR > Occupancy rate > CEE benchmark > Demand > Number of guest nights > CEE benchmark > Supply > Recent handovers > Pipeline > CEE benchmark > Hotel transactions > Airbnb influence > Key takeaways

Key drivers of Budapest tourism Budapest is a safe and highly affordable destination with good accessibility, which makes it appealing for tourists. The total number of passengers exceeded 13 million, which is 15% growth compared to 2016. Recently, new direct flight connections were added to the Middle East, China and the USA, which further enhance its accessibility. The city has many monuments worth visiting and tourists can also enjoy the refurbished baths and the traditional Hungarian culinary experience. The party district with a number of ruin pubs attracts an increasing number of western European youths seeking this unique type of entertainment. Major annually recurring events, such as the Formula 1 Grand Prix at the Hungaroring in Mogyoród, the Sziget Festival in the summer, and other major sport events attract people from all over the world to visit the city. Business-related visitors are also on the rise, due to the opening of several new shared service centres, and also the number of companies active in the IT sector have been expanding rapidly. As a result, the city is attracting increasing numbers of business travellers and conferences. To serve this segment, a new congress centre with capacity of 5,000 people is expected to be handed over between 2020-22. Development of new attractions, for instance the Museum District and the renovation of Buda Castle are scheduled to be completed after 2020. Hotel performance ADR 150 140 130 120 110 100 90 70 50 40 30 20 Net ADR in Budapest (2007-2017) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 3 star 4 star 5 star After the crisis, 4-star hotels became to be the most popular among developers/operators in Budapest. The ADR of 4-star hotels on average reached EUR 70 and rates in the downtown area (district V) are approximately 10% higher reaching EUR 78. Both the average 4-star hotels and the 4-star hotels of the downtown area follow the same upward trend with 7% year-on-year average growth rate since 2014. Net ADR of 4* hotels in the city center of Budapest 75 70 65 55 50 45 2009 2010 2011 2012 2013 2014 2015 2016 2017 Budapest 4* average District V Considering hotels in the downtown including district V, VI and VII, generally they are able to reach more than 10% higher ADR than the average ADR rate in Budapest, and in the meanwhile they are able to make 20% higher RevPAR. We expect RevPAR growth mainly driven by the ADR with 10-15% growth in the upcoming 2 years. 2

RevPAR Net Revpar evolution in Budapest (2007 2020) 1 140 120 100 40 20 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 FC 3 star 4 star 5 star 2019 FC 2020 FC 90% % 70% % 50% 40% 30% In 2017, there was a 4% year-on-year RevPAR growth rate among the 3-star hotels, 3% among the 4-star hotels and 6% growth rate among the 5-star hotels. Since 2015, 5-star hotels experienced even stronger growth rate in RevPAR that supports the development boom that is under way in this upscale segment in Budapest. Considering the previous 5 years growth rate, we estimate further growth in RevPAR figures at all segments, even with a new supply of 2,500-room - including 3-star, 4-star, 5-star hotels - which is expected to be handed over in the next 3 years. Occupancy rate The average occupancy rate for all hotels in Budapest increased by 3.3 percentage-points last year compared to 2016. The hotels in the city center of Budapest performed remarkably well in the past two years: they often operate with occupancy rates between -85 %. 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 3 star 4 star 5 star Budapest Hotels Occupancy 2007-2017 In 2017, the occupancy rate at 5-star hotels grew by 1% y-o-y, 4-star grew 3% and 3-star hotels jumped 7%. 4-star hotels have the highest occupancy rate, especially those located in the city center (district V). 90% % 70% % 50% Occupancy rates of 4-star hotels in the city center of Budapest 2009 2010 2011 2012 2013 2014 2015 2016 2017 Budapest 4* average District V In district V, the average occupancy rate exceeded the % by the end of 2017, hence when the occupancy rate achieves such a high level for hotel operators it becomes more beneficial to put more emphasis on increasing room rates rather than further increasing the occupancy rates. Older hotels should take this opportunity to renovate their properties and refresh their concepts, otherwise they will not be able to compete with the new developments coming to the market. 3

CEE hotel performance as a benchmark The individual markets in CEE region have developed at different rates, but overall the hotel market in the region as a whole has registered an upward trend. Prague remains the largest and best-performing hotel market in the core CEE countries, achieving the highest occupancy, ADR and RevPAR in CEE. Budapest is one of CEE s most important economic hubs and as we have set out already, it recorded remarkable demand growth rates and performance improvements over recent years, though from a very low base. The Warsaw hotel market has been also on the rise since 2011, accelerating in 2016: trading fundamentals such as occupancy, ADR and RevPAR thus improved over this cycle but it is still behind Budapest. Bucharest registered the strongest growth in the region following Budapest. The city has recently earned a reputation as an attractive meetings and events destination, which was supported by the improving infrastructure developments that resulted in strong demand growth and an improvement of all KPIs. For benchmarking purposes, we present the key performance indicator of the CEE capitals. 100 40 20 0 Net ADR of CEE Hotels 2016-2017 Prague Budapest Warsaw Bratislava Source: hah.hu, 2018 2016 2017 The ranking of ADR of 3, 4 and 5-star hotel average daily room rate is the following among the aforementioned cities: Prague reached the first place with EUR 87.5, the second place was taken by Budapest with EUR 84.3, followed by Warsaw with EUR 75.4 and finally Bratislava with EUR 63.6. Net Revpar of CEE hotels 2016-2017 40 20 0 Source: hah.hu, 2018 The above graph examines the net RevPAR in Budapest, Prague, Bratislava and Warsaw. Budapest ranks second with EUR 65.3, after Prague (EUR 70.1) thus beating Warsaw (EUR 59.4) and Bratislava (EUR 44.2). Budapest hotels attained a 15.5% growth rate in 2017, which was the highest growth rate amongst these four cities. The occupancy rate ranking amongst the four cities in at the end of 2017 was Prague (.1%), Warsaw (78.8%), Budapest (77.5%), Bratislava (69.5%). All four destinations saw higher occupancy than 2016. 85% % 75% 70% 65% % Prague Budapest Warsaw Bratislava Source: hah.hu, 2018 2016 2017 Occupancy rate of CEE hotels (2016-2017) Prague Warsaw Budapest Bratislava 2016 2017 Most of the CEE capitals have matched or overhauled their pre-crisis occupancy rates. Among the KPIs Budapest generally occupies a middle position among the other key CEE capitals analysed in this report. 4

Demand in Budapest The 10 largest international sources in Budapest 7% 7 % 7% 8% 6% 5 % 13 % 18 % 14% 14 % UK USA Germany Italy Spain Israel Russia France China Sweden The chart presents the 10 largest international sources of guest nights in Budapest. The four main source markets are the UK, USA, Germany and Italy. These four countries provide presently almost % of the arriving guests. Number of guests and guest nights Budapest hotel market is characterised by strong demand (88% of all guest nights) from international guests. The market grew rapidly in recent years, exceeding the record amount of 8.9 million guest nights registered in the Hungarian capital last year, which is 6.9% higher than it was in 2016. Almost 90% of overnight stays in Budapest market were attributed to foreign guests in 2017. Considering the strong growth rate in the previous years, the demand forecast to keep growing steadily in the upcoming years and reach 11 million guest nights in 2020. We expect that the number of guests will exceed 5.4 million by the end of 2020. As a result of the expected growth in guests, the capacity of the airport will be also expanded with a new terminal until 2021. Demand in CEE The guest growth dynamics observed for Budapest are not dissimilar to those seen elsewhere in CEE, thus suggesting a strong base for Budapest s extrapolation out to 2020. In Prague the year of 2016 marked an all time high, with 16 million guest nights. 90% of overnight stays were originated by international visitors with Germany (12%), Russia (7%), the US (7%), and the UK (6%) being the most important source markets. In Warsaw the market registered 7 million guest nights in 2016. In 2017 a compound annual growth of 5.4% in arrivals and 6.2% was registered in overnight stays. In 2016, Warsaw reached remarkable numbers and saw a total increase of 30.1% in arrivals and 34.8% in overnight stays. Warsaw benefits from strong domestic and international demand, with 42% of overnights being generated by international visitors with the UK, the US, Germany and Spain being the top source markets. Over the last five years, Bucharest experienced a compound annual growth in arrivals of 7.7% and in overnight stays of 5.4%, reaching a record level of 1.9 million arrivals and 3 million guest nights in 2016. In Slovakia, overall the international arrivals account for 5 million guest nights per year. The most important source markets are the Czech Republic, Germany, Russia and the UK. since 2011, arrivals and overnight stays have increased exponentially by 59.5% and 62.4 percent respectively. Million 6.0 5.0 4.0 3.0 Budapest hotel market demand with forecasted years Million 10.0 8.0 6.0 2.0 4.0 1.0 2.0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Number of guests Number of guest nights 0.0 5

Supply in Budapest KPIs of Budapest in 2017 Category Nr of rooms Occupancy ADR (EUR) Nr of rooms in the pipeline (2018-20) 5-star 844 75.6% 139 811 4-star 8,057 76.1% 1,342 3-star 2,371 70.5% 39 378 Luxury hotel developments in Budapest typically offer lower rates of return due to the high initial investments compared to hotels in the budget segment. 3-4-star hotels are favoured by developers due to their substantially lower construction cost and shorter development period compared to 5-star hotels. With a good design concept and experienced operator, 3-4 star hotels can be operated extraordinarily efficiently, hence they were more popular among developers than the luxury segment. 11,272 3-5 star rooms expanding by 576 rooms or 5% in 2017-18. New supply of 2,531 rooms or 21.4% being added in 2019-20. Overall new supply will expand by 2,500 rooms or 12% which is slightly below our estimated growth rates for Warsaw and above Bratislava s. Handovers in 2017-2018 Q1 Hotel name Category Rooms Exe Danube 4* 101 President Hotel expansion 4* 48 Hotel di Verdi 4* 92 Three Corners Lifestyle Hotel 4* Hotel Anna 3*superior 44 Ibis Styles Budapest Airport 4* 145 Hotel Clark 4* 86 Total: 576 No 5-star hotels were handed over in Budapest since 2015, however until Q4 2020 five new 5-star hotel projects are expected to be handed over in Budapest alone and one 5-star development outside of the capital. It is worth noting that construction has only commenced on three of these projects. Besides new handovers, many older hotels have undergone full or partial refurbishments to meet guest and brand standards. These renovations are becoming necessary, as many hotel accrued significant CAPEX backlog, due to their poorperformance during the crisis years. Pipeline in Budapest 2018 Q2-2020 Q4 In 2020, the supply in the top luxury hotel segment will increase further in Budapest, as Marriott International announced that it will introduce the W Hotels brand by the end of 2020. The hotel will be housed in the Drechsler Palace the former ballet institute - and it will feature 162 rooms and suites. This will be the second CEE location of W Hotels after the opening of W Belgrade, which is scheduled for September 2019. Additionally, a completely new concept a mixedbranded hotel will appear at the beginning of 2019 in the budget/mid-scale segment on the Budapest hotel market. The hotel will offer 400 rooms out of which the refurbished Mercure Buda will offer 250 upperclass rooms and Ibis Hotel will offer middle-range 150 rooms for the guests. Nr of hotel rooms Hotel name Cat. Rooms Handover Meininger Hotel 4* 184 2018 Q2 Cortile Hotel 4* 36 2018 Q2 Ibis Stlye Budapest West 3* 115 2018 Q2 Dom Hotel 3* 142 2018 Q2 Dorottya 8 Hotel 3* 121 2018 Q3 Hyatt Hotel 5* 110 2018 Q3 Hotel Four Elements 4* 92 2019 Q1 Zenobia Palace Hotel 4* 150 2019 Q1 Hard Rock Hotel 4* 133 2019 Q2 Emerald Residence 4* 99 2019 Q2 Matild Palace Luxury Collection Hotel Hotel stock / development pipeline in CEE Budapest Prague Bratislava Warsaw 21 000 31 000 5 000 15 000 Pipeline 2 500 1 300 550 2 000 5* 156 2019 Q3 Quality Inn Hotel 4* 134 2019 Q3 Hilton Garden Inn 4* 214 2019 Q4 Renaissance Hotel Marriott 5* 1 2020 Q1 18 Private Palace Hotel 5* 200 2020 Q2 Intercity Hotel 4* 300 2020 Q3 W Marriott Hotel 5* 165 2020 Q4 Total New Supply: 2,531 6

Hotel transactions in Budapest Hotel transactions in Hungary remained elusive compared to other segments, however, there have been major transactions in the past 5 years in the luxury, midscale and budget segments. The key transactions in the 5* luxury hotel segment were the Four Seasons Hotel, the InterContinental Budapest (twice), the Le Meridien (now rebranded Ritz-Carlton) and most recently the Sofitel Budapest sold at Q4 2017. Additionally, Boscolo Hotel Group was also sold as part of a larger company buyout in 2017, hence their hotel in Budapest has also a new owner and will operate under a different brand. In terms of overall transaction size, the sale of the Hunguest Hotel chain represented the largest transaction in the past decade; it included more than 1,0 hotel rooms. The Hunguest Hotel chain is a Hungarian-owned and operated hotel brand, mostly operating in the 3-4-star segment with spa and resort hotels. The actual transaction price was not disclosed. Additionally, there were two large portfolio deals, both of which was acquired by Poland s Orbis Group. As a result they increased their hotel stock in Budapest with 1,500 new rooms. The purchased seven 3 and 4-star hotels are operated by Ibis and Mercure hotels. The former owners were Erste Immorent and Accor Hotels. The major hotel acquisitions in Budapest in the last two years were closed by Polish, Russian, USA and Hungarian investors.. CEE Hotel Prime yields* Prague 5.50-6.50% Warsaw 5.75-6.75% Budapest 6.50-7.00% Source: Colliers International research 2018 * With management contract The prime hotel market yields in Budapest are typically between 6.5-7.5%, hence it offers on average 50-150 basis point higher return compared to the office prime yields (6.0%) and retail shopping centre prime yields (6.0%). Similarly to the other asset classes, the prime hotel yields remains under downward pressure, due to the increasing interest of the investors and lack of quality products. Share of CEE Hotel Investment Volume in 2017 20% 19% 24% 36% Poland Czechia Romania Hungary Source: Colliers International research, 2018 Date Hotel Category Nr of rooms Transaction price (EUR) Price / Room (EUR) 2017 Sofitel Budapest 5* 357 75,000,000 210,000 2017 Regency Suites 4* 64 confidential confidential 2017 Mercure Budapest Korona 3* 420 27,500,000 65,0 2017 Ibis Styles Budapest Center 3* 130 4,300,000 33,000 2017 Ibis Budapest City 3* 84 2,0,000 33,000 2017 Ibis Budapest Centrum 3* 126 4,100,000 33,000 2017 Mercure Budapest Buda 3* 390 25,0,000 66,000 2016 Exe Danube Hotel 4* 104 14,000,000 135,000 2016 Hunguest Hotels 3* 1,0+ n/a n/a 2016 Lánchíd 19 4* 48 4,500,000 93,750 2016 Mercure City Center 3* 227 20,900,000 92,000 2016 Ibis Budapest Heroes Square 3* 139 6,0,000 47,500 2015 K+K Opera 4* 200 28,000,000 140,000 2014 InterContinental Budapest 5* 402 65,000,000 162,000 7

Airbnb influence Currently, the Budapest short-term Airbnb residential letting market is mostly concentrated to the downtown area District V, VI and VII and a few inner districts on the Buda side, but Airbnb room supply is still insignificant in the rest of the districts. There are different views regarding Airbnb s influence on the performance of the hotel market. Some experts state that Airbnb accommodations are mainly the competitors of the mid-range - 3-star hotels, which are located in the city centre. According to other experts Airbnb does not compete with the hotels, but only expanding the accommodation supply, especially during the peak periods. Therefore, hotels in general do not suffer from this new type of accommodation. In general, most of the rental flats compete with the price category of 3-4-star hotels, hence the question arises why guests would rather choose Airbnb over a hotel, while in the hotel, guests have access to a wide range of food and beverage, and other additional services for a similar price. Experts tend to say that rental flats compete more with the quality than the cheap price. Quality accommodations are also competing with the upper scale/luxury hotels, however Airbnb supply is much lower in this segment yet. As a result the impact is less intense than in the budget and midscale hotel segment. A more significant impact may be apparent, when Airbnb launches its new premium hotel like tier that is planned to go under the name of Airbnb Plus and Airbnb Beyond. These new service lines are designed to compete with more premium short term accommodations starts from spring 2018. Based on STR/Airbnb data the key difference between these accommodation types is that Airbnb patrons tend to stay longer on average than hotel guests, hence they attract a different type of customers. Additionally, Airbnb s share of business travellers was substantially lower than its share among leisure travellers. In London 9% of the arrivals choose the Airbnb services. Airbnb has 64,000 listings compared to the 156,000 hotel room availability, while in Budapest Airbnb has 8,000 listings compared to the 21,000 hotel rooms. The two cities have closely similar Airbnb/hotel supply ratio with 41% in London and 38% in Budapest. One of the most-debated issues of Airbnb accommodations in Budapest lies in their taxation. According to assessments 70% of the Airbnb flats pay taxes and 30% of the sector remains under the radar of the tax authorities. In order to improve this rate and to make fair market conditions, the Hungarian Hotel Association proposed the following points to impose new measures on the short-term residential letting market: Impose the same taxation like for the hotels; Limit the lettable days annually; Introduce minimal health and safety standards; Define the responsibility of the accommodation intermediary platforms. Overall, Airbnb s share of total accommodation supply is growing rapidly worldwide not just in Budapest. However, its share overall from the total hotel market is still not significant in 2016. In terms of market demand and revenue share, it was still generally below 4% and 3%, respectively in the top 13 global cities, according to an STR Airbnb and hotel performance report. Key takeaways The growth of the CEE hotel market during the previous years has outperformed that of Western Europe with a RevPAR growth of 14%. In Budapest after the crisis, 4-star hotels became the most popular segment for the developers. Since 2015 there have not been any 5-star hotel handovers in Budapest, but in the upcoming two years there will be five new 5-star hotel developments in Budapest. Colliers expects no further significant growth in the 4-star hotels segment occupancy rates, but rather forecast RevPAR increase mainly driven by the ADR with 10-15% growth in the upcoming 2 years. Considering the previous 5 years growth rate, Colliers expect further growth in the RevPAR figures even with the new supply of 2,500-rooms which is expected to be handed over in the next 3 years. Most of the CEE capitals are now performing at occupancy rates of pre-crisis level. Among the KPIs, Budapest generally comes in at second place, after Prague among the core CEE capitals. The Hungarian tourism is expected to benefit from the government s focus on the sector by cutting the VAT rate for restaurant services, creating a new national tourism strategy that shifts the focus to high-end quality tourism service offerings. In case the positive momentum remains in the tourism market, Colliers expects that in Budapest the number of guest nights will exceed the 11.0 million and the number of arrivals will pass over above the 5.4 million by the end of 2020. Budapest s Airbnb listing/hotel room supply ratio is already almost as high as it is in London. 8

69 countries on 6482 continents offices 62 countries on United States: 145 Canada: 28 Latin 6 continents America: 23 Asia United Pacific: States: 39140 EMEA: Canada: 131 42 Latin America: 20 Asia Pacific: 195 EMEA: 85 2.4 billion in annual revenue $2 1 billion in million annual square revenue meters under management 1.12 billion square feet 15,400 under management professionals and staff 13,500 professionals and staff Primary Authors: Gertrúd Hausenblasz Research Analyst Hungary Research +36 1 336 4200 gertrud.hausenblasz@colliers.com Tamás Steinfeld MBA, MRICS Associate Director Hungary Valuation & Advisory Services +36 1 336 4200 tamas.steinfeld@colliers.com Colliers International Hungary Csörsz u. 41, Budapest Hungary, H-1124 About Colliers International Colliers International Group Inc. (NASDAQ:CIGI) (TSX:CIGI) is an industry-leading real estate services company with a global brand operating in 69 countries and a workforce of more than 12,000 skilled professionals serving clients in the world s most important markets. Colliers is the fastest-growing publicly listed global real estate About services Colliers company, International with 2017 corporate revenues of $2.3 billion ($2.7 billion including affiliates). With an enterprising culture and significant employee ownership and control, Colliers professionals provide a full range of Colliers services International to real estate is a global occupiers, leader in commercial owners real and estate investors services, with worldwide. over 13,500 Services include strategic advice and professionals operating out of more than 482 offices in 62 countries. A subsidiary of FirstService execution for property sales, leasing and finance; global corporate solutions; property, facility and project Corporation, Colliers International delivers a full range of services to real estate users, owners and investors management; worldwide, workplace including global solutions; corporate solutions, appraisal, brokerage, valuation property and and tax asset consulting; management, customized research; and thought hotel leadership investment consulting. sales and consulting, valuation, consulting and appraisal services, mortgage banking and insightful research. The latest annual survey by the Lipsey Company ranked Colliers International as the second-most recognized commercial real estate firm in the world. colliers.com www.colliers.hu Copyright 2018 Colliers International The information contained herein has been obtained from sources deemed reliable. While every Copyright 2013 Colliers International. reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to acting to ensure onits any accuracy, of the we material cannot guarantee contained it. No in responsibility this report. is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.