December 20th, 2011

Why Hungary’s hotel deal of the year was actually the redevelopment disaster of the decade

We’re going to be taking a break for a few days in advance of the Christmas weekend, and will return next week for a bit of pre-New Year’s posting. But before we go, a few words about shiny and expensive toys, and naughty children.

You may have missed it at the time, but late last month came word that Budapest’s landmark Gresham Palace Hotel had been purchased by the sovereign wealth fund of the gulf state of Oman.

As with most such transactions, the deal was hailed as a win-win. “The sale of the property to SGRF, a highly respected long-term international investor, is a testament to their confidence in the Budapest hospitality market and serves as a very positive development for the hotel,” the head of Four Seasons Hotels and Resorts for region was quoted as saying in one of the breezy pieces we saw about the deal for hotel, which has featured near the top of rankings for such properties in recent years. (And actually was named the “best hotel in the world” by the US luxury-lifestyle magazine Robb Report back in 2005.)

In reality, however, the sale marks a rather inglorious end to a saga that stretches back to the 1990s, and the redevelopment of the onetime insurance company headquarters from a rundown mixed-used/residential building into the city’s hospitality jewel. Because according to published reports, the sale price was less than €40 million – which works out to less than half of what was spent to turn the building into a hotel.

Of course, the past few years have seen valuations of properties like the Gresham significantly cut in markets around the world. Still, a hotel development that cost €100 million plus being sold for less than 40% of that can hardly be called a success, even assuming the owners since the 2004 opening enjoyed some earnings along the way, which seems unlikely.

So what went wrong? One factor is that the deal seems to have been a fire sale of sorts, with the assets of one of the owners – fallen Irish magnate Derek Quinlan – apparently being liquidated in haste by Ireland’s National Asset Management Agency.

But a bigger contributing factor seems to have been the redevelopment costs of the property itself, which were so outsized – more than €500,000 per room – that it was probably always destined to change hands at a major loss.

As for who or what is to blame for this, a good bit can be marked down to the convolutions and delays inherent in any such project in Hungary involving a landmark property. (According to this article on HVG, Péter Medgyessy acted as a lobbyist for developer Gresco prior to his election as Hungarian prime minister in 2002.) And to be fair, it was a big, complicated and detailed job.

Some of the blame for the fiasco, however, must be pinned on what is widely rumored to have been a veritable orgy of expense padding and other dubious practices during the building and outfitting of the building. As one industry source put it to us, the Gresham not only set new local standards in terms of hotel design and service, but may have set new standards in siphoning off investors’ money. We won’t name any names, especially because from what we understand, some of those most responsible were actually caught with their hands in the cookie jar and sent away like naughty children.

[pic via zbalu]


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