People in the Know: The World Is Not Enough

-You and your colleagues claim that the development of the hotel market is based on the principle of a pyramid. At first, the 5-star sector fills up, and then the 4-star sector follows and so on. Considering the level of income of most Russians wouldn’t it be more reasonable to build that pyramid from below, upwards?

I think the reality of the marketplace is such that, unfortunately, this is what happens here. We have seen a very strong focus on 4- and luxurious 5-star hotels in downtown Moscow. Many international companies and international based hotel groups have already recognized Russia’s potential. At the same time they admit that your country needs affordable hotels. The world’s leading operators, like Accor and Rezidor, are set to develop more affordable lodging facilities.

-Do you think that hotels at international airports are important for attracting more tourists, foreigners especially?

Airport hotels are a specialized segment of the market. Where airport hotels do very well is where there are a lot of international transit flights. An example is London where planes fly from Singapore, to New York and other remote destinations. 10 hours of flying, then you get some sleep and fly another six hours… Paris, Frankfurt, all those cities are terminals of global significance. As airports grow they offer more opportunities for developing other services, logistics and hotel operations, for example. Airports themselves create their own business demand for those additional services. Moscow, too, is a large city with steadily expanding airports, so I think that Moscow still has room for growth in terms of hotel development.

-How would you assess Moscow’s ranking compared to the capital cities in Eastern Europe, countries with a transitional economy?

The Moscow market is five, six, seven, eight, ten times bigger than in any of those cities. Practically every developing market goes through a phase of rapid development very often leading to oversupply. Then the new phase begins where development slows down while demand catches up.

I think the Moscow of today is at the point where the pace of development is accelerating, with a number of new hotels being launched on the market. This is a fruitful period, but at the same time the lowest point of the cycle. Demand exceeds supply considerably, and that is why hotels can charge such high prices.

Business people have to delay their visits even cancel their trips to Moscow because they have nowhere to stay, or they cannot put up with such high prices. Within the next 12 to 18 months Moscow will see the arrival of a variety of new hotels. Within the next seven years the market will become so strong that the situation will gradually be normalized.

Speaking of lower returns and longer payback, that may happen when the market is glutted. For example, hotel occupancy rates in Warsaw have fallen below 50% in the last few years.

-Where are you staying in Moscow? What are your impressions? Is it possible to say that Moscow hotels meet international standards?

This time I’ve opted for a hotel close to the venue of the conference (on the hotel business, held by Jones Lang LaSalle. – Vedomosti). I am staying at the newly built Swisshotel Krasnye Kholmy. I have been really impressed with the high quality of the furnishings and service. In a country where the market is growing so fast, talented people are needed everywhere. It is necessary to hire good staff and train them well. There are still some problems with staff training in Russia, although they are doing their best, really trying hard. Perhaps, they simply lack experience of working in that sector.

-One of the Russian delegates noted at the conference that the best hotel workers are divorced women over 35. Do you agree?

Certainly, from looking what happens internationally not in the hotel sector alone, but in retail as well, it is possible to make certain conclusions. Young people are motivated to build a career; they change jobs, seek more prestigious and better-paid positions, without considering it necessary to stay on in the same position for more than six months. Today they work at the reception desk and tomorrow they are managers...

They see their career goals clearly and move upwards steadily. The service industry, however, values a certain amount of reliability and the ability to perform the routine tasks of waiters or hotel maids, for example. Hotels need those who are mature, ready simply to do their job well for a stable income, in the same position without feeling any emotional discomfort. Such qualities as reliability, concern and care for the client are especially valuable.

-Why have some of the international chains such as Accor and Rezidor arrived in Russia while others, for example, Concorde and Best Western haven’t?

I think that is explained by the strategy and the place Russia occupies in the regional development plans of those hotel chains. Accor is a global player running a large number of outlets in Central and Eastern Europe. The same is true for Rezidor. Other major operators are only beginning to consider entering the rapidly developing Russian market. As regards Best Western, the largest hotel chain in the world, I would say it is more marketing-oriented. I think its representatives will easily adjust to the Russian market as they are less meticulous about following standards. Such chains as Accor, for example, insist that each room should be equipped accordingly; they traditionally offer a certain type of hotel product and a standard set of services. Hotels operating as part of large international chains have access to marketing, distribution, reservation systems etc. Best Western’s guests know that they stay at hotels where they get more than just a brand. I can stay in Germany, Pittsburgh or Shanghai; all the hotels will be different. That chain’s approach towards standards is flexible; its outlets reflect the culture of the country where they are located, local cuisine, etc.

-At what stage of development is the international hotel market today?

I would stay it is at the stage of rapid growth. Our survey forecasts the total hotel investment this year to reach $33 billion, new projects excluded. Almost all country and continental markets, those of the U.S., Western Europe, Central and Eastern Europe, are at the growth stage. Hotel investments are growing. I think there are no grounds to expect changes for the worse within the next two years. Growing economies have free capital. However, in the long run the development of a certain market depends also on the regional plans of hotel operators.

-The conference held by your company stated that in about a decade from now 150 million tourists from China will travel across the globe annually.

The Chinese make up approximately 15% of the entire world population. In some regions, such as Asia and Australia, Chinese tourists account for a considerable share of travelers.

-Do you think the problem of small hotels exists in the world, and in Russia in particular?

Small hotels are a sort of a challenge to traditional hotels. It is all about how their owners find their clients. Quite often, many things depend on the marketing policy of the hotel. In these terms, the Internet is one of the cheapest sources. Access to international distribution and reservation systems plays an important role for owners of small hotels. Some of them find a solution by joining consortiums, such as Best Western, thus getting access to their distribution systems and marketing campaigns. Others operate on a narrower field, positioning themselves on a local market, and look for their clients on their own. Another problem small hotels are faced with is the constant need for additional investment that will help them remain competitive as their clients’ requirements grow. However, sometimes small hotels succeed in getting incomes higher than those of hotels – members of large international chains. As regards Russia, here the problem is aggravated by the fact that many properties were built at least 20 years ago. Today, customers’ preferences in terms of the size of the rooms, their facilities, etc, have changed. 20 years ago construction standards were different. The only solution is to modernize the properties so as to meet the growing requirements of their clients. That is, of course, a time-consuming and hard task, but it is necessary.

-Could you describe the main means of financing the hotel business throughout the world?

I think the main trend we have seen over the past two years is the considerable growth of the investment base. Only 10 years ago in Europe most hotels belonged to the large hotel companies with shares traded on stock exchanges or private family owners who had been in the business for generations. Today the range of investors has expanded considerably, especially in the luxury segment where many educated people take an interest in boosting returns, improving facilities and other aspects other than the traditional aspects on the real estate market.

-Speaking of respectable hoteliers, is it possible to say that haute couture designers are shaping a new trend by taking part in hotel projects?

Of course, Louis Vuitton, Giorgio Armani. Their hotel brands can be regarded as a sort of logical expansion of their fashionable brands. The next step is hotel design. I think that will become a special niche where properties will be positioned as a top of the range segment, designer hotels. Besides, the avant-garde design is a great solution to diversifying hotel standards, bringing their brands to a new level.

-Are there REITs working solely with hotels?

Yes, of course. In the U.S. there are 15-17 investment trusts. In these terms, the U.S. is the most developed market. There are hotel investment trusts in Australia. A hotel trust is likely to be launched in Japan next year. In France there are funds investing in the hotel sector but I am not sure whether they focus solely on hotels. I think as time goes by the number of such institutions will grow because the hotel sector is now on the rise.

-How would you access the prospects of condo hotels?

Condo hotels succeed in regions where people go for a week or two, in the U.S., in southern Europe, etc. The most successful condo hotels are resort-type hotels. People usually buy such properties not only as an investment but also as a vacation home. The owner spends a couple of weeks two to three times a year in his apartment. At the same time, there are some real risks that investors face. Let’s assume the developer has built a property and left, leaving the apartment owner and 200 other buyers like himself to the mercy of fate, without any management company to run the hotel. That is why there are two factors that play a very important role here – a management company with a solid reputation and a clear-cut agreement with the investor. For example, an agreement may stipulate regular changes of furniture or carpeting, but this is not being done. The details are very important in any document.

-Some time ago, a Cyprus-based company was offering vacation homes guaranteeing an annual income of 6%. People here laughed at that kind of proposal, we are not used to such low rates.

As for vacation homes, U.S. or German investors believe a fixed income of 6% to be a very good figure, as is a 3% income on a bank deposit. But for condo hotels the income is not the key factor for the apartment owner. He buys it because he enjoys spending his vacation at the seaside and being the owner he pays very little for it.

-You noted in passing that the developer can withdraw after the property is built. Why would he? Isn’t he interested in making more profit?

What I meant by that is the following situation. Let’s assume a developer buys a hotel, re-plans the interior space, dividing it into separate apartments, and furnishes them. And then sells the units for a profit.. After that he moves on to another project, leaving the unit owners without a management company. That is why one must be careful when choosing a developer.

-Which countries exercise tighter control over the hotel business and where do so less?

On most markets government control over the hotel sector is minimal. In some countries governments introduce grades for hotels and the service industry. In China, on the contrary, the government has a strong influence on the hotel business, as well as in some African states. Tourism is a leading industry in developing countries with weak industrial production, or extraction of mineral resources, etc. Tax exemptions, grants, customs facilities are introduced to boost the development of tourism. Tourism also creates more jobs. Examples are the Caribbean and Maldives…

-Which landmark deals has the market seen this year?

I would at first say a few words about the key trends. Public companies are going private and the trend is quite strong these days. Because hotels traded poorly over the years 2001-2004, several companies even stopped trading. Speaking of big transactions we’ve seen this year, that would be the acquisition of 111 Wyndham Hotels by the Cendant Corporation from The Blackstone Group.

The trend is such that companies quoted on the stock exchange are selling off their real estate property in the hope that investors will value their assets higher than stock gamblers. The largest transaction is the sale of 73 hotels of the InterСontinental Hotels Group in the U.K. for $1.75 billion to LRG Acquisition Limited, a consortium including Lehman Brothers Real Estate Partners, GIC Real Estate and Realstar Asset Management. A unique deal is the sale of the historic building of the Danieli hotel in Venice.

-Could you share your forecasts for the next year? Where can we expect a hotel boom, and why?

The U.S. has witnessed a boom over the past two to three years. I don’t expect the situation will change on the U.S. market within the next 12 to 18 months. The U.S. market is very liquid, transparent. Over the past two years prices grew at a record pace. China will see rapid development next year. Macao plans to launch 8 hotels, 10,000 rooms each, next year. I think that will have significant influence on the Chinese market as a whole, as well as on the whole of Southeast Asia. Many hotels come up with new ideas, new developments will feature shopping malls and exhibitions. Those countries are creating new conditions for the development of the tourism industry.

-Who are the investors?

All sorts of groups. First and foremost, representatives of Southeast Asia, citizens of Taiwan, Singapore. U.S. and German investors, too, are entering the region.

-Does the government keep an eye on the most interesting projects?

Yes, as a rule, the state holds a share in the most important projects. But most projects are not controlled by the government but on the municipal level, as local authorities are usually in charge of allotting building plots.

-It is hard not to draw an analogy with Moscow. The agencies in charge of the hotel and tourism industry claim they are giving investors the green light, promising not to interfere in their operations, and to create conditions for their development…

I think such an approach is correct. If the city authorities do indeed manage to build an effective market, we will see a breakthrough. A new product will come into being that will comply with the laws of the market. This is necessary to survive the ever-intensifying competition as cities vie with each other to attract new operators, host conferences, as well as in terms of the availability of hotels and other facilities.

The municipal authorities will continue to play an important role in the development of the tourism industry. For example, airports should not only be able to operate effectively, but also be accessible. Transport accessibility will play a significant role for companies deciding to launch operations in the city. The city needs a developed infrastructure, and hotels are a part of that.

When planning the development of an enormous office center measuring 5 million square meters that will, undoubtedly, bring many new companies into the Russian capital, it has to be kept in mind that sites for hotel construction, too, need to be reserved. It is necessary to develop a comprehensive strategy that would help preserve the required balance. That would make it possible not only to gain a better understanding of certain processes, but also to forecast them.

-How would you assess the state of the Russian hotel market on the whole?

The Russian hotel market is developing at a rapid pace, its participants nurture many plans; they come up with serious initiatives. Large international operators show a keen interest in Russia. We can clearly see the first signs of foreign capital becoming interested, as strategic investors move in.

Arthur de Haast is Global Chief Executive Officer of Jones Lang LaSalle Hotels, responsible for an international team of more than 150 professionals worldwide.

Arthur has extensive experience within the global hotel market having been involved in, or having led, a wide range of both advisory and transactional assignments. These have included the sale of certain CIGA assets in Italy on behalf of Starwood Hotels, to a value in excess of $600m, the ground-breaking sale and leaseback of the property interest in the Paris Marriott Champs Elys?es on behalf of Strategic Hotel Capital, and pan-European or global valuation assignments for InterContinental Hotels Group, Hilton International and Queens Moat House Hotels. He also led the Jones Lang LaSalle Hotels team that advised on Six Continents’ (now InterContinental Hotels Group) successful bid for the 79-hotel Posthouse portfolio in the UK, and advised InterContinental Hotels Group on their recent disposal of InterContinental Paris for $384 million.

He has also been involved in expanding the group’s services to encompass innovative financial structures such as the Airport Hotels Partnership, a $350m limited partnership created to enable BAA Lynton, the property division of the British Airports Authority Plc. (owner of most of the United Kingdom’s major airports, including Heathrow) to dispose of the majority of their hotel property assets.

After graduation, Arthur joined Hilton International as a corporate trainee and spent three years working in hotels. He then joined Horwath & Horwath, an accounting firm, where he worked for four years carrying out a wide range of consultancy assignments prior to joining Jones Lang LaSalle in August 1987. Arthur became a director in 1992, a European director in 1995, Managing Director of Jones Lang LaSalle Hotels, Europe in 1999 and an International Director of Jones Lang LaSalle in 2000. He was promoted from Managing Director Europe to Global CEO in January 2003.

Jones Lang LaSalle Hotels, the world’s leading hotel investment services group, provides clients with value-added investment opportunities and advice. In 2004, its success story includes the sale of 23,103 hotel rooms to the value of $5.2 billion in 85 cities and advisory expertise on 132,498 rooms to the value of $27.9 billion across 301 cities. Jones Lang LaSalle Hotels’ services include transactions, mergers and acquisitions, financial advice and capital raising, valuation and appraisal, asset management, strategic planning, operator assessment and selection and industry research. Jones Lang LaSalle (NYSE: JLL) is the world’s leading real estate services and investment management firm, operating across more than 100 key markets on five continents. www.joneslanglasallehotels.com