Review of the Moscow Hotel Market

The Moscow hotel market has suffered most among all the large European cities. First evidence of this is huge drops in room prices. However, the reality is that the capital market was significantly overheated – until May 2008, with prices of accommodation services overinflated, like in no other European capital.

Moscow for a long time held the title of the most expensive European city for tourists, which to a great extent was due to the cost of hotel services in the city. With the sobering influence of the crisis, the hotel room prices in the capital have become a lot less scary, getting close to the European prices. Experts view this as a positive situation for the development of tourism in Moscow and in Russia as a whole. However, this development is being hindered for a number of reasons – the procedures for obtaining a Russian visa are still too complicated, lack of a developed infrastructure, and of course, almost no quality economy class hotels. Literally, the latter are hard to find in Moscow, and even those, given the prices they charge, can hardly be considered as economy class.

According to the plans of the Moscow government, 21 hotels are to be built this year in Moscow, and by 2025 the authorities expect to increase the capital`s hotel lodging capacity by 300 hotels (now, according to official data, there are 246 of them in Moscow). Until now, the actual pace of commissioning of hotels in the capital has been far behind the official plans, and experts do not expect any changes in this situation. Market participants are skeptical about the government`s plans – and feel no real assistance will come from the authorities for the implementation of hotel projects.

In March 2009, the Moscow authorities made some public efforts to attract investments into the hotel segment – the city government decided to establish the Gostinichnaya Kompaniya (Hotel Company), which would bring together all the hotel assets owned by the city. The city will own a 49% stake in this holding, with the remaining 51% of shares of Gostinichnaya Kompaniya going to a private investor, which the capital assets department hopes to attract after an audit of core assets. The chartered capital of Gostinichnaya Kompaniya will most likely include the shares the city owns in 17 hotel enterprises of Moscow, including 100% in GAO Moscow, 51% in Intour Renaissance, 50% in Slavyanskaya Hotel and Business Center LLC, 49% in DekMos (doing reconstruction work on the Moskva Hotel), 30% in SP Metropol, 100% in Hotel Russia JSC, etc.

The uncertain financial situation has led to commissioning postponement of many hotel facilities. Thus, in autumn it became known that the construction (reconstruction) of three landmark projects for the capital city had been extended. The opening of the former Ukraina Hotel, planned for this year, was postponed till the first half of 2010 and once again, the opening of the Moskva Hotel was postponed – this long-awaited hotel, the reconstruction of which started back in 2003, will open its doors no earlier than 2011. In addition, the Pekin Hotel and Office Complex in central Moscow will not be finished for another four years – the commissioning deadline in the investment contract was changed to December 31, 2013 – without any penalty to the investor. The investor of the project, working through the Beijing-Invest is Sistema-Hals.

Supply

The experts estimating the capital city`s hotel room capacity cannot agree, especially as regards mid-class hotels (3-star); the figures are as different as 9,600 rooms (GVA Sawyer) and 19,900 rooms (Ernst & Young). Taking into account the absence of standard classification of hotels, such variation in numbers is not surprising, but only a small proportion of hotels that are listed by the owners as belonging the 3-star category, actually correspond to international expectations for quality low-cost hotels.

For the top category hotels (4-star and 5-star), the calculations become a lot closer, their number, according to various sources, is about 8,000 rooms. In the current economic conditions, this sub-segment of the market may be considered almost saturated, in contrast to the quality economy segment.

In 2009, among the major openings, according to the experts of Jones Lang LaSalle Hotels, were the Holiday Inn Moscow Simonovsky (Intercontinental Hotel Group, 4-star, 217 rooms) and Ibis Moscow Paveletskaya (managed by Accor Group, 3-star, 147 rooms). In addition, the hotel room capacity was complemented by 100 rooms of the Aerostar Hotel, opened in 2008, – now this four-star hotel on Leningrad Prospect operates at full capacity, with 416 rooms.

Also opening in Moscow was the Aquarium Hotel on the territory of the Crocus Expo exhibition center (independent management, 3-star, 225 rooms), Maxima Panorama Hotel, 4 Masterkova Street (Maxima Hotels, 3-star, 123 rooms), boutique hotel Kadashevskaya (reconstruction, 4-star, 35 rooms).

Among the hotels expected to open by the end of this year are the Aquamarine Hotel – part of the eponymous mixed-use project, being developed by AFI Development. This hotel is located on Ozerkovskaya Quay (Management by Africa-Israel Hotels, 4-star, 159 rooms), as well as the Renaissance Moscow Monarch Center near the Dinamo Stadium (brand – Marriott International, management by Interstate Management Services, Inc., 4-star, 266 rooms).

Among the major openings, scheduled for 2010 we can name the five-star hotel of deluxe class Radisson Royal Hotel, which is going to be opened in the hotel Ukraine (management – Rezidor Hotel Group, 507 rooms and 38 suites), Courtyard by Marriott Moscow Paveletskaya (4-star, 170 rooms), InterContinental Moscow Tverskaya (5-star, 205 rooms), Lotte Hotel Moscow on Novinsky Boulevard (5-star, 304 rooms), etc.

As noted by AFI Development (in November the company is opening the Aquamarine Hotel), investments into the development of hotels do not pay off quickly, but investments into the hotel industry of Moscow are certainly reasonable, since the lack of hotels today is enormous, especially business class hotels in the middle-price category. In addition, in a crisis situation, when all the real estate sectors have sagged considerably, the hotel sector remains the most stable and profitable segment.

With regard to announcements about new hotel projects, there have been none since the crisis started – developers had simply left their projects on paper and postponed them until better times.

Demand

According to the Federal State Statistics Service, in the first half of 2009, the number of international travelers to Russia fell by 11%, in comparison with the same period in 2008, the main decline was due to tourism – the number of recreational trips decreased by 15%, while the business flow decreased by 6%.

The load of the Moscow hotels, summarizing the results of the first ten months of 2009, has decreased quite significantly. According to Ernst & Young, the least affected by the reduction of occupancy were hotels of the 4-star category – the decline was 5%, from 71% in January-October 2008 to 66% this year. In the 5-star segment, the load decreased by 16% – from 64% to 49%, in the 3-star segment – from 63% to 55%, i.e. by 8%.

According to Jones Lang LaSalle Hotels, September was a good month for Moscow hotels – the average load of hotels, of international quality, was only 4.3% less than in September 2008, and stood at 72%, i.e. the expectations of business activity revival in the beginning of autumn have come true. As the company notes, the September figures show that people are returning to their routine activities – business seminars, conferences and congresses are being held again. Although of course, the number of participants has decreased markedly due to the reduction in the number of people coming from each company. In addition, the average duration of stay at the hotel has decreased, as well as the expenditures on additional services, spending in the hotel restaurants (decreased by 20–30%), etc.

With regard to international operators and their interest in the Russian market, this still exists – but given the lack of new construction, this interest will be satisfied in the extremely selective way. This is because the emergence of new hotel projects depends not only on the willingness of operators to manage them, but also on the willingness and ability of the developers to build them. Operators working on the Russian market remain optimistic and say they are ready to expand their activities. For example, the experts at Rezidor believe that the opportunities existing in Russian market outweigh the risks, and that companies operating in Russia are accustomed to crisis situations, which allows them to be more flexible in difficult situations.

“Attempting to use traditional for business schemes of other countries is a waste of time. The winning way of doing business is to think globally, but follow the local rules of the game,” note the company`s experts. Accor Group says that Russia is the most densely populated country in Europe, and at the same time, there is an obvious lack of quality international brand hotels in Moscow and St. Petersburg. This is also the case in other major regional centers, so the company`s development plans for the country have not changed, although, of course, the pace of opening new hotels will be slower than expected.

Rates, investments

According to the observations of DTZ experts, the hotels of the upper and medium segments continue to attract groups of tourists. As a result, in the third quarter these have managed to avoid significant reduction in occupancy rates, however there was a significant decrease in the average daily rate (ADR), and consequently, the revenue per a room (RevPAR). The largest drop in revenue, according to the company, was registered in the luxury and upper limits of the top segment, which is not surprising, as guests continue being careful when choosing accommodation, still minding their budgets.

According to Jones Lang LaSalle Hotels, the average yield per a room (in modern quality hotels of all categories) in September 2009 was about $150, which is 43.2% less than in September last year.During nine months of 2009, the average yield was $114.2, which is 49.5% less than the RevPAR showing in January-September 2008.

According to Ernst & Young, the average daily rate (ADR) was $162, or 5,239 rubles for the 3-star hotels (a drop of 39% in USD terms and 19% in ruble terms). In the 4-star category, the ADR was $197, or 6,394 rubles. (41% and 20% less than in 2008, respectively), and in the 5-star category – $313 or 10,155 rub. (a decrease of 33% and 11%).

As for the investments into hotel construction, according to CB Richard Ellis, the average construction price of 3-star hotel is about 100–130,000 euros per room, for 4-star category hotel – about 150–250,000 euros, a hotel of the 5-star category is impossible to build for less than 300,000 euros per room. "In Moscow, the Ritz-Carlton has cost to its owners about $1 million per room, however Barvikha Hotel & Spa excelled everyone with over $3 million per room," say the company experts.

The payback period for investments into hotel development, according to market experts, is at least 7–10 years.

Trends

The prices of rooms in Moscow hotels are approaching the prices for accommodation services in the European capitals;

The renewal of business activity in the autumn of 2009 had a positive impact on the occupancy rates of Moscow hotels;

Hotels are optimizing their pricing policies, offering the basic product at the lowest possible price, or including extra services in the base hotel room price;

Visitors are much more careful when spending money today: former guests of luxury hotels now prefer quality hotels in the medium categories of international brands.

Projection

Results achieved in the third quarter of 2009 signal a new hope that stabilization is coming to the Moscow hotels sector. Experts do not feel that the situation in the sector will worsen, and they predict next year should be at least as good, and most likely better than the current one. However, the real estate market traditionally lags behind economic changes, so we should not expect a rapid resumption of hotel construction at the first signs of recovery from the crisis. In the coming year, hotel objects now under construction will continue to be opened – after that, it is very likely that no more new hotels come to market. What all this means for the future no one knows – will the prices for accommodation increase? Everything will depend on the tourist and business travelers.

Автор: Olga Lobacheva

Commercial Real Estate №23 (129), December,01-15 2009