Money-Growing: Star Fever

The general urban development plan for the period till 2010 stipulates for construction of 200 hotels in Moscow. Deputy mayor of Moscow in charge of international economic ties, Iosif Ordzhonikidze, has reported that the city hall plans to develop 240 hotels providing 200,000 rooms by 2010. Construction of inexpensive hotels being a top priority, affordable rooms are to make up nearly 67 percent of supply, for such hotels are most popular with tourists.

The Moscow foreign economic committee reports that as of January 2006 the city had 183 hotels, providing 69,200 rooms. Upscale four-star and five-star hotels account for 22 percent, the rest are inexpensive hotels, of which 24 percent are two-star properties. Most hotels operate in the central, northeastern and western parts of Moscow. Those administrative districts account for 65 percent of Moscow’s hotel stock. Outsiders are Northwest, Southeast and East administrative districts [okrugs] of the city, operating only 10 percent of Moscow hotels. The general plan for placement of hotel properties provides that by 2010 new hotels will be built everywhere across the city.

However, district administrations show little interest in the program, says Yevgeniya Malakayeva, president of the International Aerospace Consortium (MAK), a company authorized to oversee hotel development in the capital. Under a deal with the Moscow city hall, MAK is working on project documentation for development of three hotels measuring a total of 40,000sqm in the Central, East, and Southwest administrative districts of Moscow.

While the prefectures in the Central Administrative District and East Administrative District actively back the city hall’s initiatives, authorities in southwestern Moscow, on the contrary, are reluctant to sanction hotel projects, notwithstanding the disastrous situation in the hotel sector in that part of the city.

“The issue remains unsolved even despite the strong backing from first deputy mayor Vladimir Resin, deputy mayor Iosif Ordzhonikidze and chief architect Alexander Kuzmin. If other prefectures in the city assume the same stance toward the hotel development program, the mayor’s request issued to Vladimir Resin to allocate 48 sites within the city boundaries for hotel construction will remain but a good intention,” Malakayeva notes.

Things Get Moving

Over the past 24 months investment in the municipal hotel industry reached $1 billion. The foreign economic committee reports that in the years 2005 to 2006 the city plans to launch 28 new hotels. Only two of those are five-star hotels – Swissotel Moscow Krasnyye Kholmy, already finalized, and a new hotel under construction on the site of Intourist (at 3-5/1 Tverskaya Street); six are ranked as four-star hotels. The rest are, with the exception of a couple of two-star facilities, three-star hotels, which fully conforms to priorities outlined in the general plan.

Nearly 90 percent of all hotels built in 2005 to 2007 (government-run hotels excluded) are to be found in the Central Administrative District. The Northwest Okrug has launched development of two two-star hotels, on the premises of the Palashevsky Market shopping center on Tushinskaya Street (220 rooms) and at the Agramand mixed-use complex on Volokolamskoye Shosse. A 3-star hotel providing 1,300 rooms has already been launched in southwestern Moscow, within the Moskva shopping and leisure complex on Tikhoretsky Boulevard. A new hotel was built in the West Administrative District, at the union sports center Krylatskoye on Krylatskaya street (108 rooms). The development of Holiday Inn Sokolniki (1,040 rooms) is nearing completion near Sokolniki metro in eastern Moscow. Two large 3-star hotels – Holiday Inn Sushchyovsky and Marriott Courtyard opened in the capital this year.

Ritz Carlton Moscow, Pyotr Pervy (Peter the Great), Korona Intourist are in the final stages of development, as well as a hotel of the Russian Presidential Public Service Academy on Vernadsky Prospekt. Besides, several smaller properties are to be finalized in the near future. For example, the Mosrybkhoz company is building a 21-room hotel on Pyatnitskaya Street. For all those ambitious plans to materialize a favorable climate for developers needs to be created in that sector. But so far, little has changed.

Stimulus and Stimulants

Experts at the City Hotel company have noted that while competition between Moscow hotel developers remains weak, companies involved in housing and office real estate development are already showing interest in securing a foothold in the hospitality industry. “With the commercial property market nearing saturation the hotel development is the next logical step,” says Stanislav Kapinos, general director of Russian Hotels.

First examples are already available where developers earlier involved in office, retail and housing construction are taking interest in the hotel sector. Sistema Hals is building 4-star hotels on Bolshaya Sadovaya Street (Peking Hotel) and Leninsky Prospekt and a 3-star hotel within a mixed-use project at 40 Pokrovka Street, which is to provide offices and lodging facilities. Ingeokom won the contract to develop two hotels – a 420-room property at the intersection of Borovskoye Shosse and Chobotovskaya Street and a 200-room project on Skolkovskoye Shosse. The DSK I housing construction company plans to become a general contractor in a 3-star hotel project on the site of Tourist Hotel, slated for demolition, near the All-Russian Exhibition Center (VDNKh).

Stanislav Kapinos believes that location is a key to success of a hotel project. Hotels developed on the city outskirts or on industrial estates are unlikely to bring returns but central Moscow is running out of building spots suitable for hotel construction. The sites offered by the city hall at auctions do not always attract developers. The first two auctions held by the city tender committee in 2005 offered 17 sites for development but only four were sold. The Kompleks 98 company won the contract to develop a 2-star hotel providing 200 rooms near the Pechatniki metro station; Interkom Personal won the right to build a 3-star hotel in Novoperedelkino, providing 450 rooms.

But even where a site is allocated specifically for hotel construction there is no guarantee that it will be used for the purpose. Property experts admit that a developer may change the function of the plot and instead of building an economy-class hotel use it for construction of offices, shops or apartments, where payback is shorter. Not long ago, Kemi Finans investment company acquired a plot measuring 20 sotkas (one sotka is one hundredth of a hectare) in a prestigious locality in northern Moscow for $3.085 million, the city tender committee reported on its website. “I have serous doubts about the possibility of building a profitable and inexpensive 3-star hotel on such a plot, considering its size and price,” holds Yevgeniya Malakayeva.

Experts polled by Vedomosti agreed that the high cost of plots in the capital noticeably impedes development of affordable hotels. “The city hall imposes all sorts of encumbrances on each and every building plot suitable for hotel development, in addition to obligations arising necessarily for the developer, such as rerouting engineering lines,” says Stanislav Kapinos. “The state of communication lines in Moscow deserves special attention, especially in the city center where launching hotel projects makes sense. The projected payback period for such properties in Moscow is ten years and over, as calculations made already at early design stages reveal. Therefore, building a hotel today is an extremely risky venture.”

Another obstacle hotel developers have to tackle in Moscow is “the tradition of acquiring building plots or properties solely by resorting to the so-called ‘administrative resource’, [i.e. by enlisting support from the government bodies].” As a result, foreign investors are unable to enter the Russian market, while namely foreign companies can afford to wait longer for a return on their investments. That is the key reason why the Russian Hotels decided to develop hotels in the province, Kapinos adds. “Land is much cheaper in the regions, hence, more favorable conditions for investors,” Damir Kaftaranov, general director at City Hotel, says.

The overall cost of a hotel project (including the cost of signing an investment contract, design, access to communication lines, construction works) is practically the same for any hotel project, regardless of its ranking, Russian Hotels reports. The difference lies only in the cost of interior design, equipment, furnishing and final finish. But expensive hotels pay back much sooner.

The cost of construction grows in Moscow along with prices of construction materials and building works. The cost of laying communication lines and obtaining technical specifications grows too, Yevgeniya Malakayeva says. As a result, a 3-star hotel project providing rooms at the rate of 4,000 to 4,500 rubles per day pays back in 8 to 12 years; a 2-star hotel charging below 1,000 rubles per day - 12 to 15 years, provided the developer finances the project himself, without resorting to external borrowings. “With a payback period that long borrowing from Russian banks, considering their interest rates, is out of the question,” she says. “I doubt that some honest developer is ready to pour his own cash into the development of 2-star hotels that will not pay back until after 12 to 15 years,” she adds.

Irina Zharova-Right, managing partner at Nordblom Group, agrees. Fitting out 1sqm of a 5-star hotel requires $5,000 to $6,000, for a 3-star hotel the cost is $1,700 to $2,500, she says. But daily rates charged by 3-star hotels are several times lower than at 5-star hotels. While the cost of purchasing the city hall’s share in the project is the same for all projects, regardless of their ranking. “Therefore, little wonder that developers opt for hotels that bring sooner returns,” she says.

However, in Damir Kaftaranov’s opinion, a hotel project developed in accordance with international standards may pay back already in 5 to 7 years. At early design stages the developer should provide for all necessary amenities, such as restaurants, amusement facilities, etc. More often hotels are developed as part of mixed-use complexes, comprising business centers, shops and leisure zones, where payback is shorter. “At first we planned to build hotels offering no extra services, just bed and breakfast,” Kaftaranov admits. “But it transpired that tourists were ready to pay extra for a better quality of service. Today we are developing 3-star hotels featuring sports facilities, restaurants, conference halls and a variety of extra amenities.”

The situation is worse for two-star hotels. Today it is easier to refurbish existing hotels than build new facilities from scratch, Irina Zharova-Right says. Construction costs are incommensurably high, as compared to returns on the project. Projects with good prospects are multifunctional complexes offering a variety of public amenities and at least 100 rooms (otherwise, a 2-star hotel will never pay back). “To bring returns, a hotel must be situated not far from the Moscow outer ring road and provide at least 250 rooms,” she adds.

Constructive Solutions

The Moscow economic policy department suggests that certain benefits be introduced for investors involved in hotel construction. In particular, the city officials have called for reducing land rents. Yuri Petrov, first deputy chairman of the department, says that nowadays leaseholds along the Third Ring Road and key motorways are let at the rate of 0.25 percent of the cadastre value of land. The department suggests reducing the factor. Developers will be charged less only temporarily, during the period of construction and first three years of operations. Furthermore, the officials hope to get more developers involved in hotel construction by lifting encumbrances (with the exception of developers’ liability to build or repair engineering lines) at the expense of municipal budget.

Seeking to create additional incentives for hotel developers, the city hall offers them to build inexpensive hotels on the basis of the house design series developed by DSK I (Yubileiny). Vladimir Resin, chairman of the Moscow city construction industry department, believes that it is possible to build such hotels within 6 to 8 months. DSK I is capable of producing component structures in the amount sufficient for building 25 properties.

The Moscow Committee for Architecture has allocated ten plots for hotel construction across the city; by mid-2006 the Committee is to prepare all the papers for every site. The pilot project will be launched on Ostafievskaya Street in South Butovo. Another project to be launched soon is the construction of a hotel complex on the site of Tourist Hotel. The future property will provide four hotel buildings up to 28 stories high, offering a total of 2,000 rooms. The project will be developed by DSK I.

Waiting for New Arrivals

In the new future, Moscow’s stock of 3-star hotels will grow as a result of new development and refurbishment of hotels already in operation. Radisson SAS, a leading hotel operator, is currently looking for properties suitable for redevelopment into 3-star hotels.

The All-Russian Society for Physical Culture and Sport Dinamo has launched the development of a mixed-use office and hotel complex at 36 Begovaya. The project is financed by the company Dinamo – Petrovsky Park XXI Vek – MSh.

The City Hotel, too, is working on a hotel project in that area. The company has secured a 49-year leasehold for the plot and permission for development. The Begovaya complex is currently on the drawing board. Damir Kaftaranov says the complex, measuring a total of 39,000sqm, will comprise a 3-star hotel providing 200 rooms, offices, restaurants, conference halls, retail areas and a food court.

The Liberalto Investment company has started construction of a 2,000-room hotel at 44 Leningradskoye Shosse. One more 3-star hotel is to be built on the territory of the Kolomenskoye Estate.

The city government plans to continue redevelopment of former dormitories into inexpensive hotels. For example, hotels Akademicheskaya, Asia, Rybak and Moskvich are refurbished dormitories of the AZLK car-plant and other enterprises. A new reconstruction project will be launched soon on the site of a dormitory in 1st Avtozavodsky Proyezd. The 5-storied building will be refurbished to meet hotel standards; an annex will be built to house a restaurant.

By 2010 Ostankino, Zolotoi Kolos, Zarya, Vostok, Yaroslavskaya and Baikal hotels will be rebuilt to match the three-star standards. Those projects, commissioned by GAO Moskva, are designed by Mosproyekt III and Mosproyekt IV. The 925-room Ostankino Hotel is to be redeveloped into a mixed-use hotel complex providing 2,150 rooms, a retail center, exhibition space and a conference center.

The 307-room Zolotoi Kolos hotel will be expanded from the current 4,040sqm to 19,120sqm. The project will provide 2,525 rooms, including 2,000 3-star rooms, 400 4-star rooms and 125 apartments, as well as offices, shops and restaurants, and underground parking facilities. Altai Hotel (600 rooms) is to be replaced with a new hotel complex. Several buildings on Botanischeskaya and Gostinichnaya streets are slated for demolition to vacate space for new construction. The new hotel will provide 1,600 rooms.

“Within the next five years we are set to build 40 to 50 hotels across Russia,” says Damir Kaftaranov. “In theory we would like to build up to 50 properties in Moscow alone but problems here arise from the shortage of building plots. In Moscow we plan to build 10,000 hotel rooms, which is clearly not enough.” The company’s strategic goal is to establish a nationwide hotel chain. Hotel projects are planned in Moscow, St. Petersburg, northwestern Russia, in the towns of the Golden Ring of Russia and other regions.

The city hall also mulls a plan to develop 2-star hotels near large markets and transport hubs. An example is a hotel currently under construction within the Palashevsky Market retail complex on Tushinskaya.

Yevgeniya Malakayeva cites an example of a 2-star hotel project in South Butovo (3 Starokachalovskaya Street), near a local market. She expects the project to pay back soon, given its proximity to the city center. Iosif Ordzhonikidze says a plan to develop several 2-star hotels is currently being examined by the Moscow Committee for Architecture and the Moscow Department for Foreign Economic Relations.

Market operators are skeptical about the city hall’s new attempt to increase the city’s hotel stock by opening hotels on the premises of six out of 200 high-rises to be built as part of the New Ring of Moscow project. As Vedomosti reported earlier, the city hall is set to open new hotels in eastern Moscow (Budenny Prospekt and Shchyolkovskoye Shosse), one property in the southeast (Lyublino and Pererva industrial estates), on Varshavskoye Shosse in the southern part of the city, on Balaklavsky Prospekt (southwest) and Molodogvardeiskaya Street (western Moscow). If all those projects are finalized the hotel stock will grow by 10,000 rooms.

Moscow already has hotels operating in high-rises. Those are favorably located Ukraine and Leningradskaya hotels in Stalinist skyscrapers. “The farther the hotel is from the city center the cheaper are the rooms,” says Marina Smirnova, deputy head of valuation and consulting at Colliers International. “For hotels operating on the city outskirts to pay back the cost of construction must be as low as possible: serial design, up to 20 stories high, several buildings within a hotel complex…”

Government officials have come up with a proposal to open inexpensive hotels on the first floors of apartment houses raised on the city outskirts and in the suburbs. Speaking at a hospitality conference held in Moscow in May Yuri Luzhkov assured the audience that the city hall’s plan for overhaul and development of hotels is feasible “and we will build one hotel in every 6 to 8 weeks.”

But hotel developers do not share that opinion. Stanislav Kapinos says that it is impossible to force developers into construction of costly projects. They will show interest in the development of inexpensive accommodation facilities only after the market of 5-star hotels in Moscow reaches saturation. That is likely to happen as soon as the new luxury hotels Moskva, former Intourist (to be renamed to Paris), Ukraine and Rossiya open in the city, he is convinced. “I think that the year 2008 will witness a turn, expensive hotels will begin to compete with each other, as a result the sector of cheaper hotels will grow and the development of less expensive properties will begin,” Kapinos says.