Developers Wanted

Top-tier hotel operators recently stirred to greater activity in Russia. For example, during the next four years Accor will nearly double the number of hotels in Russia under its management to 17, whereas the accommodation stock will rise to almost 3,900 rooms. General Director of Accor for Russia and CIS, Alexis Delaroff, underscored that he believed the Russian market is strategically important. Hilton Worldwide recently announced its plans to open new hotels in Moscow, Kazan and Yaroslavl (earlier on Hilton Garden Omsk Hotel was announced). Intercontinental Hotels Group plans to put into operation three hotels in 2011. One hotel will be opened next summer on Tverskaya Street in Moscow in the building of former Minsk Hotel. Furthermore two Crowne Plaza hotels will open their doors in St. Petersburg: one is located at the Pulkovo Airport and the second one – on Ligovsky Avenue.
Russian hotel operators are also accelerating. In particular Azimut opened new hotels in Novosibirsk, Stavropol, Moscow and the Moscow region and took up the management of a hotel in the Sochi ski resort Roza Khutor.
Almost all hotel chains represented in Russia announced their interest in regional projects. As noted by David Jenkins, spearheading the hotel business department at Cushman & Wakefield, today’s activity is the result of the first thaw – operators and developers are restarting their projects frozen during the crisis. He reminded that prior to the crisis developers, investors and especially operators were highly interested in the regions. “They wanted to develop their brands across Russia and each operator has his own strategy in this respect. For example, Rezidor, Accor (particularly interested in the development of its Ibis brand) and Marriott laid ambitious plans,” remembers Jenkins. After problems with financing arose, developers and operators concentrated only on Moscow projects. Nevertheless the projects did not go defunct but were only put on hold for a while. Today we see hotel chains moving into the regions again, assures David Jenkins.
Hotel operators now try to fill their niche in the regions. “The regions were severely affected by the global financial crisis, but again under a sensible and professional approach to pricing, you may hope for decent results here,” notes Alexis Delaroff.
For now many big cities actually lack quality hotels, even though the anticipated demand is rather high. “For most investors and hoteliers the market ended in Saint Petersburg. Now as the markets of the two capitals are relatively well-developed, the hotel players have developed keen interest in the regions,” reasons Alexander Gendelsman, Director of Azimut.
However the two big operators may now feel crammed even in a city with one million plus population as there can be not enough guests for all. “Another problem with regions is that the market is rather narrow there and as soon as the second international hotel opens in a regional center, the first one’s performance is negatively affected. The third hotel will further worsen the performance, let alone the fourth and fifth ones,” notes Mr. Delaroff.

Defiant to pigeonholing
Hotel chains are rather quick off the mark and ready to operate almost in any city for one simple reason: they do not invest their own money in a project. “Operators do not invest in hotel construction and offer only their management services. For developers the investment project risks are related, above all, to its longevity, since the payback period is 5 years at best while the average recoupment time is 12–15 years,” says General Director of Clover Group Alexander Popov commenting on the risks.
Very few hotel chains can afford expansion by taking up the management of already existing hotels. “Large chains can take under their wing only a very high-end hotel standing apart from modern-day standards. For example, many would be willing to brand the Metropol Hotel in Moscow though formally it may not conform to the standards of hotel chains. Talking about the medium price range, most existing hotels do not comply with the requirements of Western hoteliers,” notes Marina Usenko, spearheading the Russian division of Jones Lang LaSalle Hotels. She notes that most of the mass market is the notorious “Soviet standard” out of tune with modern-day requirements. In addition, relatively new hotel buildings constructed during the 1990s stand out among others; but these are normally small hotels which can hardly be fitted into any modern-day classification. As a result, the main bulk of hotels can be pigeonholed in the niche of idiographic projects. “Because most Soviet hotels defy any reformatting and new hotels are rarely built, the market remains rather motley and heterogeneous with pronounced poles: contemporary chains, on the one hand, and archaic idiographic hotels,” concludes Ms. Usenko.
“Each international operator abides by its own standards and criteria and it’s extremely difficult to find any existing building which would meet them. As for Accor and our brands, we prefer to deal with new hotels built in line with our standards on the basis of a hotel construction monitoring agreement,” intimates Mr. Delaroff.
Meanwhile the domestic operators are much more flexible and often agree to rebrand idiographic hotels. Marina Usenko is confident that this policy won’t last long. “Sooner or later, as their size increases, they’ll grow more hard-driving. Any brand is defined by consistent accommodation standards provided by chain hotels. For instance, Azimut is now in the process of developing strict standards. An opposite example is Hilton – they’ve schematized and codified everything to such an extent that it’s next to impossible to squeeze their brand into an existing building,” she says.
“Not a single Russian building older than 10 years conforms to regular international standards and much ought to be changed,” affirms Alexander Gendelsman. Reformatting of old hotels is a forced measure, he says. “In every city where we run our business one hotel has been built on the average in a recent decade. True, these buildings are meant for a regular hotel business but I can’t say this would be enough because we are mainly engaged in reformatting of the old hotel buildings,” comments the hotelier lifting his hands in dismay. In the opinion of Ms. Usenko, it is generally expensive and bothersome to rebrand the existing buildings – it’s much easier to take them down and construct a new project.
The attempts at repurposing office space into hotels (projects under construction) are a new crisis-related trend. The share of hotels in mixed-use projects is generally enlarged at the expense of office areas. As noted by Alexander Gendelsman, his company was proposed such projects, which in most cases are unfeasible for two main reasons: a column grid and window size. For office projects a common column grid is 6 by 6, whereas hotels normally require 7 by 7. Offices are often adorned with huge panoramic windows and it’s very difficult to split a open-floor space into several rooms under this arrangement.

Hotels versus offices
The hotel market proved more stable during the crisis than other sectors and caught the eyes of developers, notes Mr. Gendelsman. “Hotels take longer time to pay off compared to offices (5–7 years for a prime location five-star hotel and 6–10 years for a three-star hotel in not a very good location). On the other hand, we are stable and this time will certainly be enough to return the investment,” he suggests.
Alexis Delaroff agrees that developers are now focusing on the hotel market. “But I don’t think they do it because a return on investments is more predictable in this segment. In my opinion, the reason is that the office real estate market is totally dead and operations on the residential real estate market is impeded by the shortage of bank financing (not everybody can afford such high interest rates). The remaining source of revenues is hotels. Hotels are attractive owing to flexibility of pricing (rates can be changed daily) and much faster response to market fluctuations. For instance we are tied by long-term office lease agreements, whereas in the hotel business you can change prices several times a day as in the area of transportation service,” he clarifies. Yet Ms. Usenko believes that even today hotels are less attractive than offices. “There is a firm belief that if you let an office for five years you can be assured with a cash flow. The situation is different with hotels even those which are managed by professional hoteliers. You always have to sell this commodity 365 days in a year and a cold shiver runs down the investor’s spine every time he thinks of this prospect as operators never guarantee revenues,” explains Usenko.
As noted by David Jenkins, though hotels rouse higher interest during the crisis, real projects are much fewer in number than declarations of intention. “Now as offices are struggling, everybody has turned their eyes to hotels. However the hotel market is not that simple. Investors and developers inquire how a hotel project must be constructed and how an operator should be selected. But then they often admit that they do not understand such projects. Sometimes they announce a hotel project, but years later they still fail on opening it,” says the expert. In his words, it is especially difficult for a developer to raise financing for regional projects. “Regarding our experience, the potential of each region needs to be separately assessed. Out of all the planned projects the only one we’ve brought to fruition is the 178-room Radisson Kaliningrad hotel in Kaliningrad managed by Rezidor Hotel Group. The advisability of implementing such projects in other regions is still questionable, but we do not cease working in this direction and watching over the market dynamics,” says Mr. Popov, sharing his experience. In his opinion, the regional hotel market is still impacted by the crisis. “We planned hotel construction in Nizhny Novgorod, Kazan and Novosibirsk, but now we have to factor in today’s conditions and put off our work in this area. Therefore it’s too early to say that developers are now keener on hotel construction,” concludes the head of Clover Group.
For now, as noted by experts, in spite of growing interest in hotels, the gap between declarations and real deeds is still wide. “The announcements of operators about future openings are generally unsupported. Operators may talk about their plans to expand to some particular cities, but unless they find a cooperative developer, this will be just talk. We’ve heard many declarations of intention to form strategic alliances between developers and operators for development in CIS states. And where are these projects now?” – asks Marina Usenko.
Everything comes down to money, or rather their absence, she notes. “Hotel projects are traded for more lucrative projects. It’s good if at least half of the declared projects were realized,” says Ms. Usenko.

Operators are ready to invest
Despite the said problems, many hotels chains look into the future with optimism. “Hotels have always had the longest recoupment time compared to other commercial real estate segments. Until recently very few investors were ready even to think of this business. However, we’ve seen a change of priorities of late and the hotel market has become a real alternative for developers. In the next couple of years we’ll see a multitude of projects,” says Mr. Delaroff. In his opinion, because the projects launched before the crisis are now hitting the market, competition is getting tougher.
“Now everybody sells rather aggressively, struggling for guests, especially in such saturated markets as St. Petersburg and Yekaterinburg,” agrees Mr. Gendelson.
In the opinion of David Jenkins, competition on the hotel market will be gathering momentum in the years to come. “You’ll see real competition between Accor, Rezidor and Hilton, which have planned about 50 projects in the regions and this is a real expansion. Next year we’ll see many openings and then there will be a lull for a couple of years,” he forecasts.
Marine Usenko points to the fact that growing competition between hoteliers is a positive outcome for the developer as it is easier now for developers to find a well-known brand for their projects. Hotel operators are even willing to become co-investors today and grant the owners recoupment guarantees, she notes.
The mounting activity of hotel operators is now catching the eye, although developers and investors do not demonstrate such resolve as the hotel chains. The few openings we are witnessing nowadays have to do with the completion of projects launched a long time ago. It can be expected in this situation that the hotel chains will be grappling for quality objects, rather than clients, as they need good facilities worthy of their brand.