In-Depth: Autumn Maturity of Hoteliers

According to HVS International, the average price of a hotel room in Moscow stood at 240.9 euros per day this year, which exceeds the average room rate in Europe, of 233.6 euros. Moreover, the ?160 million (US$205 million) deal for re-financing of The Ritz-Carlton Hotel in Moscow was the largest transaction on the Moscow market of commercial properties. And even though the best is yet to come for the Russian hospitality industry, the times of crisis are gone already.

This last September witnessed a radical change of heart in Moscow city hall over the state of affairs in the hotel sector. Over the past three years influential Moscow officials many times stressed the city’s need for 3-star hotels and spoke of favorable conditions the city hall was creating for their development.

Now it transpires that the situation on the market of hotel properties in Moscow has changed to an extent that hotel construction will proceed with great speed and in great volumes. During a regular Saturday inspection of the capital on September 9 Moscow Mayor Yuri Luzhkov paid a visit to a new Holiday Inn hotel on Sushchyovsky Val and publicly announced the city hall’s plan to eliminate the shortage of hotel rooms.

“We have a plan to build and launch 75 hotels before 2010,” the mayor explained. “Once it is fulfilled the number of hotel rooms will treble.”

For the time being it remains unclear how the city government plans to implement their yet another revolutionary idea. Perhaps, it will remain just as unrealistic as the priority development of 3-star hotels.

It is clear that so far the development of first-class and luxury hotels continues to bring good returns and occupancy rates remain quite high (72.4%, according to HotelBenchmark Survey), whereas hotel projects graded 3 stars and lower are simply less profitable. Which developer will agree to lower income?

There are a number of factors providing convincing proof that Moscow’s hospitality market is growing steadily. That became clear at the Russian Hotel Investment Forum 2006 hosted by Jones Lang LaSalle Hotels recently. In the first six months of 2006 alone hotel room prices grew 23%, while last year that figure stood at 32 to 35%, according to various estimates.

Another positive change on the hotel market is that nowadays the sector is able to grow independently. Hotel developers are able to raise required cash, first and foremost, at home. Remarkably, the forum held by JLL saw several such transactions made right on its sidelines. Investors and developers whose projects needed extra financing and who were ready to accept aid from the former and share the profits fairly found each other.

Developers, on their part, were able to share the burden of responsibility with powerful investors, and perhaps, find more mature partners in their person. Admittedly, General Director of the Hotel Baltschug Kempinski Moscow Gianni van Daalen says that local investors think that financing of projects for a term longer than 3 to 4 years is a “no-go”.

I believe that such a view is somewhat outdated. That is how the things were several years ago, but today developers in Moscow and other parts of Russia do not shun problems and venture on all sorts of noble deeds for the sake of their ambitious projects. For example, they agree to provide residents of centrally located apartment houses with new homes. Fervor and desire to achieve the goal are the main driving forces of contemporary pioneers of hotel development.

Several influential international market operators believe that the main obstacle that hinders the inflow of investment into the hotel sector is poor popularization of Russia abroad. “Today Moscow still can do without tourism,” Marina Usenko, senior vice-president at Jones Lang LaSalle Hotels, told Russian Hotel Investment Forum 2006.

Indeed, for people to travel to a country they need at least get to hear about it. And while back in the Soviet era days Russia, whose image was somewhat distorted by capitalist propaganda, still attracted the most courageous and curious tourists, in these days of political and economic stability popularization of this travel destination does not get due attention, even though the hotel sector is growing rapidly and the quality of service, albeit slowly, improves to meet European standards.

Participation of Russian delegations in international hospitality fairs could serve as a good remedy against Russia’s failure to attract foreign tourists. For the time being our hospitality experts are rare guests at such events as, for example, Arabian Travel Market, attended by 18,000 delegates this year. A lonely girl clad in Russian national attire at a stand representing Moscow and the Moscow Region publicizing the museum complex Kolomenskoye caused dual feelings. It could seem that visitors felt they were in a wrong place, or that the parties spoke different languages, although everyone could speak English.

But then, even hotel fairs differ from one another. Moscow-based and regional hotel market operators had looked forward to a new specialized hospitality fair HF&E, held with active support of the company GAO Moskva. The flashy acronym HF&E, which stands for Hotel Forum & Exhibition, in Russian sounds as “The Moscow international hotel forum and fair.” While the forum did take place, the fair did not.

Almost the entire exhibition space was occupied with numerous manufacturers of hotel accessories and services and stands of specialized media outlets. Out of hoteliers only two were present, one of them – the company Siti-Otel (City-Hotel) – has a joint project with Moscow city hall. As regards the sections working at the forum, only those of them succeeded whose organizers had shown their creative initiative and revealed profound knowledge of the market.

For example the delegates showed great interest in the conference titled “Tendencies of hotel industry development in the regions of Russia”, hosted by the multimedia edition Industriya Gostepriimstva (Hospitality Industry) and a master-class “Design project of a modern hotel”, one of the speakers at which was Moscow chief architect Alexander Kuzmin. Some other sections of the forum, too, saw heated debates, although those discussions were not always constructive. The acute problem of hotel certification clearly vexed Margarita Nemolyayeva, president of the association Hotel Expert.

Of course, head of the group of authors who developed the system of hotel classification, approved by the Russian federal government’s decree No. 1,004-r, of July 15, 2005, candidate of economics science, associate professor Margarita Nemolyayeva had the right to dissenting opinion. However, her criticism of a representative of Heliopark Group, whereby she mixed up the concepts of standardization, certification and classification of hotels, made a somewhat distressing impression. Those versed in the issue had all the chances to be confused and those who merely sought to familiarize themselves with the present-day situation in the field, failed to understand anything. Meanwhile, several important criteria of classification were never mentioned. For example, the Russian system of hotel classification, no matter how many times it is approved by the federal government, still fails to win confidence of foreign tourists. According to Jones Lang LaSalle, Moscow has only 9,500 rooms that meet world standards. HVS International puts that number at 8,000, or 23% of 35,000 hotel rooms available in Moscow.

I believe that this figure is extremely low for a city claiming the title of a hospitable travel destination. Since Moscow is situated in Europe, after all, the local hotels could benefit much more from certification in line with international quality standards, for example, the EUHS, introduced by the European Economic Chamber of Trade, Commerce and Industry (EEIG). A hotel that earns this certification is able not only to use the EU logo and indicate the star category it has been awarded in its ads but also to host international delegations at the highest level.

Hotel operators say that Russia has a high potential for development of new hotel formats such as motels, condo hotels and aparthotels. The events of early October have shown that time is clearly ripe for the development of specialized gambling resorts. A recently unleashed crackdown on Moscow casinos will undoubtedly prompt their owners and investors to look for a solution to the crisis.

On October 4, State Duma chairman Boris Gryzlov announced the plan to move all gambling enterprises to not more than four zones, where their operations will be legal. Such measures are stipulated in the amendments to the law on gambling industry, submitted by President Vladimir Putin to the State Duma. “The bill calls for allocating not more than four restricted territories where gambling business will be allowed,” the speaker said. “Those may be two areas in the European part of Russia, one in Siberia and one in Far East. Today, proposals concern uninhabited territories.”

Thus, it is quite possible that in the near future Russian and foreign gamblers alike will be spending their holidays in Malakhovka (in Moscow countryside) or Naryan-Mar (in Far North). Perhaps, those unconventional formats deserve attention of such potential leaders of the hotel industry as Sochi. For the time being the city fails to attract foreign tourists. Russians account for 85% of all holiday-makers in Sochi.

This piece was contributed to Vedomosti by Yelena Shuvalova, independent hotel industry consultant. The point of view of the author does not necessarily reflect the position of the editors.