Money-Growing: Hotel Makeovers

As of today, 69 hotels in Moscow are under government ownership and some 100 are privately-owned, according to the Hotel Consulting and Development Group. The decree orders government-owned hotels to cancel all lease agreements whereby hotel rooms are used for purposes other than to provide accommodation, starting from February 1 of this year.

The hotels that are only part-owned by the state and are registered as open stock companies or limited liability companies have to evict commercial tenants within a period of 6 months. The decree instructs the Moscow Property Department and the Committee for Foreign Economic Activities to oversee the process. Other hotels, “regardless of the form of ownership”, are to vacate rooms being leased as offices in the first quarter of 2005.

The decree has arrived at just the right time, because with several hotels undergoing renovation – some of them have been closed down temporarily – the supply of hotel rooms in Moscow has plummeted. “According to official data, Moscow has approximately 36,000 hotel rooms. Considering that some hotels have been closed and others are to be closed down in near future - including those to be closed for renovation – it transpires that the city will soon loose over 5,500 hotel rooms,” says Vladimir Yefimov, president of UMACO.

“Proceeding from the maximum valuation of the market [hotel rooms occupied by offices], it turns out that if the decree is implemented, the supply will increase by 10,000 additional rooms.” In Yefimov’s opinion, that will help ease the shortage of rooms and create a certain “margin of safety” for Moscow’s hotel industry before new hotels are commissioned.

Most hotels with rooms available for tourist accommodation and office leases belong to the 2- and 3-star category. Hotels started letting their premises to businesses in the mid-90s after receiving the go-ahead from City Hall. But hotels faced their first problems even earlier at the beginning of the 1990s after the Soviet-era centralized booking system was abolished.

It was then that the inflow of tourists from other cities and abroad dropped, and the demand for hotel rooms decreased. At the same time, private enterprise began to develop in Moscow with newly established firms requiring office space.

Businessmen and hotel managers found each other: hotels willingly leased out their rooms for use as offices.

Initially, hotels took advantage of the situation merely to survive, but later it became clear that leasing rooms to businesses was a means of making good money with little hassle. In the 1990s, however, the authorities issued a decree banning the leasing out of residential space for office use. “The ban had a positive impact on the office space market as it became more organized,” recalls Marina Usenko, head of consulting and valuation department at Jones Lang LaSalle.

Thus, in the 1990s Moscow hotels helped to partially ease the shortage of office space. However, nowadays the authors of the new decree accuse hotel owners of “having changed the profile of enterprises, considerably altering the socio-economic situation in the city and the state of affairs in the hotel sector.”

The hotel managers were merely making use of a 1996 Moscow decree that enabled them to let not more than 10% of their rooms for office use. Admittedly, the number of rooms available for such purposes could be increased by re-registering part of the premises as ‘hotel-complex’ space. But some hotels also leased out rooms to legal entities without resorting to such strategic maneuvering.

As a result, the city’s hotels found themselves so engrossed in that area of business that today almost one-third of all the hotel rooms, according to the Hotel Consulting and Development Group, are being used as offices. The Sevastopol Hotel, for example, has leased out 70% of its rooms, says Marina Smirnova, deputy director of the Hotel Consulting and Development Group. Other hotels like Yunost, Minsk, and Tsentralnaya have also leased out most of their rooms.

Nobody knows the total number of hotels rooms leased out in Moscow for office or retail use. No precise figures are available as hotels never release separate financial statements for hotel rooms and offices. Ilya Shershnev, development director of Swiss Realty Group, believes that “there are many such hotels near VDNKh (the All-Russian Exhibition Center in northern Moscow), and for them the decree is a serious problem, because some of their rooms have been redesigned as office space.”

Hotel tenants are a motley gathering. Companies renting hotel rooms for office use include transport firms, travel agencies, law firms, dentists, pharmaceutical companies, and trading companies. There are also some very intricate schemes with, for example, some hotels leasing out several floors to other hotels. “Orlyonok [Hotel] leased out an entire floor [to people of Southeast Asian origin],” says Smirnova. “They opened a hotel of their own there, offering accommodation to their compatriots.”

Before the decree was issued hotels attracted commercial tenants for a number of reasons. Most hotels are conveniently located – not far from metro stations and main roads. Hotels have all the necessary infrastructure: communication facilities and a security service. And, most importantly, companies could rent a small office – 15-20sqm – something that is rarely available at conventional office centers.

At the same time, tenants had to pay not only for the space itself but also for additional services. Another serious drawback was that hotels did not always agree to enter into long-term lease agreements. “Much is based here on oral agreements that you cannot attach to the case file,” says Marina Smirnova. She also notes that for the most part such agreements were signed for 11 months – without registering them with the Moscow Property Committee – whereupon the contract was either extended or annulled. Although some firms used to rent rooms for years.”

The government is to carry out the first checks at the hotels in the near future. In the first quarter of 2005 Moscow’s Committee for Foreign Economic Activities and the State City Inspectorate that oversees the use of non-residential facilities in the capital will check how municipal hotels are complying with the decree. Violations will also be reported by Moscow’s main directorate for civil defense and emergency situations during fire safety checks at city hotels.

The new decree means that most commercial tenants will be evicted from the city’s hotels. As an alternative, they may consider renting premises at Soviet-era scientific-research institutes, schools and colleges. “After all, offices are leased out everywhere in this country, as long as there are vacant areas and acquaintances. You can find a place for a girl and a phone practically anywhere,” says Smirnova.