Lisbon hotels face room glut, keep building

With thousands of new rooms planned for a market in the grip of a price war and in a city where construction cranes dot the hills, worried hotel executives are saying, "Enough already".

"This is a difficult period," Luis Alves de Sousa, president of the Hotels Association of Portugal, told Reuters.

"We're urging people not to invest in hotels if they really don't know what they're going to do with hotels, how they're going to use them."

The boom is good news for the 12 million tourists who visit Portugal each year, and who can expect cheaper rooms and greater choice.

Since 1989, the number of hotels and hotel rooms in the Portuguese capital has more than doubled, with 13,000 rooms available last year, according to Lisbon's tourism office.

With the growing supply, prices have tumbled. The average rate per room sold dropped 4.2 per cent from 2003 to 2005, to €79.72.

"Since 2000, hotels in Lisbon have effectively lost value," said Jorge Anibal Catarino, head of the hotel advisory service at Cushman & Wakefield, a real estate brokerage.

Last year, Lisbon dropped almost 10 per cent on the hotel valuation index used by consultancy HVS International, the worst performance in Europe. By contrast, the European average was up five per cent.

The drop was partly a correction after soccer fans flooded Portugal for the 2004 European championships. But Lisbon was still next to last among 29 European cities for valuation, topping only Warsaw.

Even as prices drop, about 40 more hotels with at least 3,200 rooms are planned by 2010, according to the tourism office. They include unconfirmed projects.

Lisbon's hotels had about 1.1 million guests in the first half of 2005, according to the tourism office.

The Socialist government aims to complete a strategic plan this year to boost Portugal's tourism growth through 2015 beyond the current rate of about four per cent a year.

Tourism is a key factor for growth in a country with one of the widest budget deficits in the euro zone and one of the lowest growth rates at just 0.3 per cent in 2005.

José Antonio de Mello, president of the Selecta property investment fund, said the hotel boom was driven by investors looking for a higher return than that available from building offices or housing.

"They think that (investing in) tourism hotels is the way to get more profit. Except it isn't, because they don't know anything about tourism or hotels," said Mr de Mello, who runs a property portfolio of €150 million, including hotels.

Most building has been for upper-end five- and four-star hotels and investors do not know how to market them, he said.

"There is more and more supply and now you've got, as you know, five-star hotels selling (rooms) for €40, €50."

Planned building projects are dominated by non-listed Portuguese groups, followed by Spanish companies.

France's Accor, whose brands include Novotel and Ibis, is the only international chain on the tourism office's projects list, in partnership with Portugal's Grupo Amorim. Accor did not respond to inquiries about its plans.

Diogo Laranjo, director of the Heritage group of small upmarket hotels, said survival depended on strong marketing to carve out a niche in a crowded sector.

"Hoteliers are a little scared that these forecast projects will go ahead and the market will get saturated," said Mr Laranjo, whose group just opened a fifth hotel in Lisbon.

A big factor keeping international hotel groups away is slow-moving bureaucracy that can delay hotels for decades, industry executives said.

In Lisbon, 23 agencies have to approve projects, giving the advantage to local groups who know how to cut through red tape.

"It's madness," said Mr Alves de Sousa of the hotels association.

Eventually, hoteliers hope the growing number of rooms will help Lisbon attract conventions or big events like the European soccer tournament, as well as tourists on short getaways.

"This will put Lisbon on a different plane," said Cushman & Wakefield's Mr Catarino. "In the meantime, we have a lot of growing pains."