PEOPLE IN THE KNOW: Hotel Developers Wait for Collapse


Mark Wynne-Smith, European CEO of Jones Lang LaSalle Hotels, told Vedomosti of the prospects for the hotel development market in Moscow.

Mr. Wynne-Smith believes that if the rental rates for building plots used for hotel developments remain as high as rentals for residential and office construction sites, the hotel sector will have to wait for those segments to collapse. Only then will the hotel market see rapid growth, although everyone – from the City Hall to hotel operators and developers – speaks of the dire shortage of hotel rooms in the capital.

Jones Lang LaSalle Hotels opened its office in Moscow on January 1, 2005. It is led by Marina Usenko, the senior vice president of Jones Lang LaSalle Hotels. The decision to open a special unit in Moscow was taken by Jones Lang LaSalle’s head office in London, because the company executives believe that the hotel business has a bright future in Russia.

In the fall of last year the company opened its hotel division in Milan, Italy. The company has been involved in hotel development projects in Russian since 1997, offering advisory support for the development of project concepts, the valuation of hotels, and mediation in talks with hotel operators, etc. Recent years have witnessed an increase in the demand for consulting services in the hotel sector.

-The hotel market in Moscow is experiencing difficulties. Almost all the market experts are talking about it. What are the main problems?

The main characteristics of the current state of affairs on the Moscow hotel market is the imbalance between demand and supply. Supply exceeds demand considerably. In this context, occupancy rates are high and room rates are soaring. This means that, in principle, any hotel development will find a market. But there is a risk that many will take up new projects without looking very far ahead.

Another peculiarity of the Moscow hotel market is the uneven disposition of hotels. Business in Moscow is concentrated largely in the city center. The hotel business is always the last to arrive in a micro-district. That is why, I think, developers are so reluctant to build hotels on the outskirts. In Moscow, the highest demand is for hotels situated in the immediate proximity to the main business areas.

-Does the Moscow hotel market differ from that in other European cities?

In terms of absolute figures the shortage of hotel rooms is particularly felt in Moscow. While here we have some 30,000 to 35,000 rooms, in London there are 63,000, 71,000 in Paris and 21,000 in Prague. At the same time, the demand for hotels is permanently growing. We expect the situation to start changing in 3 or 4 years when stabilization of demand and supply is likely.

At the same time, the situation in Moscow is better than, say, in Warsaw where the hotel market is at a “peak of recession”. That came about because too many hotels were built several years ago. Revenues on Poland’s hotel market (where revenues are calculated on the basis of the average occupancy rate multiplied by the average room rate - Vedomosti) continue to drop. There are various means of tackling that problem, including radical ones. An analogous situation in Brussels prompted the city authorities to impose a moratorium on hotel development for several years.

-Do you think that hotel real estate in Moscow is developing faster than other commercial real estate sectors?

Demand for hotel rooms in Moscow is very high. The market has been developing and will continue to develop as more and more people arrive here and new companies open their offices. That is why the size of the market is impressive.

At the same time, in terms of returns the hotel business is clearly inferior to residential properties and multi-functional [shopping, entertainment and office] facilities. Developers fear long payback periods on investments in the hotel sector, they fear they will not be able to sell the property afterwards.

Revenues in the hotel sector are, of course, lower than, say, in office real estate, but the life cycle of a hotel is 3 to 4 times longer. The market value of hotels grows with time, and they can be resold at a profit.

An additional advantage for a hotel is having a famous hotel management company, but that also entails additional costs. Hotels run by famous international brands incur higher spending. World hotel chains invest funds in booking and a centralized marketing system. Of course, the owners bear all the costs.

Hotel operators are entitled to a royalty fee in the form of a share of sales and profit, under a hotel management agreement. The rest goes to the owner. The royalty fee includes the so-called basic commission, set in percentages (2-4%) of the total sales and the so-called premium bonus calculated on the basis of gross profit and which can vary from 8-12%.

- What categories of hotels does Moscow lack?

There is no ideal model of a hotel market. The hotel market as such resembles a pyramid with a few top class hotels on the top, business-class hotels in the middle, and economy hotels at the bottom that don’t get much publicity, other than on the Internet.

In Moscow’s case it is hard to foresee the ideal hotel market structure. Most likely it is the same as elsewhere in the world. At the moment obsolete and dilapidated Soviet era hotels are being replaced with expensive ones in the center of the city, which is most attractive for developers. That is normal in terms of economics, as developers pay enormous sums to secure leases for the land and cannot afford cheap projects targeting the masses.

But that state of affairs will not last forever. After the expensive hotel niche is saturated, developers will move into the middle class sector and so on until all the sectors of the market are saturated.

-If, 50 years ago, hotels such as Leningradskaya or Ukraina were considered daring architectural designs, then nowadays developers are focusing on new forms. What are their prospects?

Today, that would mean hotels such as Ararat Park Hyatt. Here we see the best international architectural designs, and a variety of technical novelties. But I would not call that hotel extravagant, rather, it is classic.

I believe there are two factors that prompt hotel guests to return. They are comfort (including the interior) and the quality of service. I remember a hotel in Istanbul where you could look through the blinds in the bathroom without being seen from the outside. The designers had shown a bit of ingenuity and come up with a unique product.

However, despite the vast opportunities designers are to a certain extent restricted in their choice of color forms and space. Every hotel must offer three compulsory components – a bathroom, a bedroom and service. Within the framework of those three components there is room for initiative.

For example, it is possible to install radiators with an original design in the rooms; to make sure that the staff is genuinely tactful and courteous; to equip the premises with the smartest technical devices…

-Is there a kind of fashion for hotels and what hotels are “in” today?

Moscow follows the development of hotel design. Hotel rooms do not exceed the optimal size for a certain standard, which reflects the guests’ ever-increasing desire for coziness. Lobbies do not have to be enormous as larger spaces bring no revenues but rather entail additional spending, say, for cleaning and equipment. The global tendency is to avoid overspending during the implementation of hotel projects. Large luxurious hotels can be compared to expensive boutiques where visitors go just to have a look without any intention of buying anything.

Gigantic bathrooms and ‘super intellectual’ equipment will of course please vacationers. But for business people such facilities are excessive; they are more interested in good lighting. Poor lighting is one of the most frequent complaints hotel managers receive. Enormous bathrooms and other ‘special effects’ are, in the long run, unprofitable because they just increase the payback period of a hotel.

Mark Wynne-Smith, CEO at Jones Lang LaSalle Hotels, joined the company as an investment consultant. He oversaw projects for the development of several 4-star hotels in central London. He also took an active part in developing corporate services in Europe and worked together with Paramount and Arcadian Group on several deals to the value of over $150 million.

In the year 2003 he presented to the market shares worth $315 million in Airport Hotels Partnership – the first ever stock company set up for the sale of a portfolio of hotel properties. The same scheme was later applied during the sale of hotels for further lease. Recently, he oversaw the successful sale of 73 hotels by the InterContinental Hotels Group in Great Britain for a total of 1 billion pounds. Mr. Wynne-Smith now heads the European team of Jones Lang LaSalle Hotels focused on expanding hotel advisory services in Central Europe and Scandinavia.

Jones Lang LaSalle Hotels, the world's leading hotel investment services group, provides clients with consulting and investment services. The group’s work includes: brokering hotel sales, financing deals and projects, valuations, asset management, strategic planning, choosing hotel operators, and market research. In 2004 the company sold a total of 23,103 rooms, to the value of $5.2 billion in 85 cities around the world, and provided consulting services for projects involving 132,498 hotel rooms to the value of $27.9 billion in 301 cities.