Overview of the 3- to 5-Star Hotel Market in St. Petersburg

Review
Other factors hampering the development of tourism, in addition to the dearth of quality hotels in the mid- and upper-range categories, are the low capacity of museums, a shortage of restaurants and the unsatisfactory level of service in them according to European standards, as well as the high crime level in the city. In response to resolving these issues, in 2005 the city approved the “Program for the Development of St. Petersburg as a Tourist Center for 2005-2010,” which was prepared based on research conducted by the international consulting firm Boston Consulting Group. The goal of the program is to expedite the development of the tourist industry in St. Petersburg and to increase income in this sector of the economy. In five years time, the city should enter the top five of the largest tourist centers in Europe, with an overall flow of visitors of five million per year, thus the program was named 5-5-5. Therefore, in the summer of 2006, the St. Petersburg government approved a decree to entice developers to build hotels, according to which the payments made by an investor for the right to develop a land plot could be decreased in the event the developer completes a hotel project. Market experts reckon that the measures taken together with business development activity should increase the development of the hotel real estate segment.
The following deals that took place in 2006 on the hotel market are worth noting from among others:

• Britain-based London & Regional Properties acquired an incomplete 280-room hotel on Vasilevsky Island from St. Petersburg-based LenSpecSMU. Once construction has been completed, the Finland-based Holiday Club chain, as part of L&RP, will manage the hotel;
• In May 2006, the Norway-based Wenaas Group holding acquired the Pulkovskaya hotel from the Germany-based Kempinski group. The amount of the transaction was around $30 million. Wenaas Group is the investor in the construction of another two hotels in St. Petersburg on Bataisky Lane and one on Vosstanie Square.
• Wenaas Group in November 2006 also acquired a 100% stake in the 1,200-room Pribaltiiskaya hotel complex. The Rezidor Hotel Group will manage both this complex and the Pulkovskaya hotel. The hotel is expected to be renamed this winter to Park Inn Pribaltiiskaya;
• Inteko acquired the St. Petersburg Isaakievsky Hotel which holds the rights to the reconstruction of building 5 along Konnogvardeisky Boulevard. A 93-room five-star hotel is planned for construction at this location by the end of 2008.

Supply
The attractiveness of the hotel segment for professional players has grown over the past few years, and this is reflected in the increase of the number of announced facilities to be completed. According to Becar Consulting, at this time in St. Petersburg, 24 new hotel projects are under construction, with several of them being as follows:

• The reconstruction and expansion of Corinthia Nevsky Palace: a five-star hotel on Nevsky Prospect is slated to open by the end of 2007, and it will be managed by the Corinthia chain. One of the main features of the project will be a conference and business center, and there are also plans to build a stand-alone retail and business center, Nevsky Plaza, with a shopping arcade and office premises;
• A 250-room four-star hotel on 8th Linii Vasilevsky Island, which will be managed by the Finland-based Sokos chain operator. The developer is Estonia-based Manutent Ou, and the hotel is slated for delivery in the second half of 2007;
• A 280-room four-star hotel is under construction as part of the elite Rostral Columns residential complex on Vasilevsky Island. Opening is set for 2007, and Holiday Club will manage the hotel, which is part of Britain-based London & Regional Properties investment company;
• A 233-room hotel under the Ibis brand name of the international hotel operator Accor will open in 2007 on Ligovsky Prospect. GVA Sawyer is the developer of the project;
• IVI-93 is completing construction on a 20-room hotel which is part of the residential complex on Rizhsky Prospect. This is the first hotel of a chain whose name is still being chosen. A 114-room four-star hotel will be delivered in 2007 on 14th Linii Vasilevsky Island. Also at this time, a four- to five-star hotel, with around 300 rooms and a SPA complex, is in the design stages and will be built on Bering St.;

Hotel market participants note that the deadlines for delivering hotels to the market are often postponed, which is characteristic for other segments of the commercial real estate market.
According to data provided by GVA Sawyer, the share of quality three- to five-star hotels in the overall number of hotel rooms in St. Petersburg (18,606, including officially registered mini-hotels and low-end hotels) is just over 50%. According to data provided by Becar Consulting, this share is a bit less (please see graph 1). At this time the majority of hotel rooms are concentrated in the center of St. Petersburg. Five-star hotels are located in the historical center of the city, close to points of interest and at the intersections of tourist routes, while four-star hotels are also aiming to open in the areas adjacent to Nevsky Prospect. The demand for location of mid-range hotels is less; nevertheless, the central areas of the city are still the most attractive. According to market analysts’ estimates, the regions of Admiralteisky, Moskovsky and Vasilevsky Island are the leading areas for the distribution of high-quality hotels.
Furthermore, according to the estimates of analysts, of all the quality hotel rooms of the mid- and upper-range categories being built in St. Petersburg, around half of the hotel rooms are three-star, thus, it can be expected that in several years, the shortage in this category will decrease substantially.
Seven quality hotels with 427 rooms (data provided by GVA Sawyer for October 2006) were delivered in 2006, thus the increase in the number of three- to five-star hotels for 2006 was around 4.5%. Several hotels which opened in 2006 are listed below:

• The 60-room three-star Asteria appeared as a result of redesigning the five-story Art and Production Union building on Fontanka Embankment. Tour operators and an international booking system will provide guests for the hotel;
• The 115-room four-star countryside Aquarium SPA hotel with its own park and beach (operating as of September 2006) is located on the shores of the Bay of Finland;
• The 58-room business-class Our Hotel opened on Vasilevsky Island in June 2006;
• The 47-room, five-story three-star Alexander Plats hotel opened on Voronezhskaya St. This is the fourth and largest hotel among the Evrazia group of hotels;
• The 43-room three-star Lira hotel opened on Dnepropetrovskaya St. and has been in operation since May 2006.

During the past several years, the mini-hotel market has been actively developing in connection with the relatively low level of investment required to open them. Praktis Consulting & Brokerage reports that the share of officially registered mini-hotels in the overall number of hotels is 247, which is around 12% of the total. The company also notes that many mini-hotels operate without official registration; therefore, it is only possible to estimate approximately their share, which could exceed the official figure by one-and-a-half or two times.

Demand
Despite St. Petersburg’s status as a tourist attraction generating serious concern on the part of the city’s administration, hotels do not suffer from a lack of guests. This is because of the dearth of modern hotels in the mid- and upper-range corresponding to international standards.
It is necessary to note the heavy influence of the seasonal factor on the flow of tourists as being among the problems of St. Petersburg’s tourist industry. Indeed, in the winter the number of visitors declines significantly, whereas in the summer, the traditional White Nights season, the hotels are filled to capacity. In order to change this situation, the Committee for Public Relations and Tourism in St. Petersburg, in conjunction with the Russian Tourist Industry Union, began to implement the White Nights program at the beginning of 2005. The program is aimed at livening up the winter lull and envisages a number of marketing measures to promote St. Petersburg on the world stage. From November to March, tourists are offered a full program of cultural events as part of savings on lodging. The number of guests to St. Petersburg is growing each year, both in the winter and the summer, but it is still too soon to tell whether this is a result of the measures taken by the government or other factors.
According to data provided by Praktis Consulting & Brokerage, the maximum annual average occupancy (70%-75%) is in the three-star mini-hotel category, which is connected with attractive prices in this segment. On average, the occupancy rate at the majority of quality hotels in St. Petersburg is 60%-65%; whereas, during the off season (from November to March), the occupancy rate could drop to 30% and lower, and during the peak months (from May to September), the occupancy rate reaches 100% in all categories of hotels. As reported by Kempinski Moika 22 hotel, five-star hotels cannot accommodate all those wishing to book a room during the peak season. It is worth noting that several high-end hotels in the four- and five-star categories, and also the more modern three-star hotels, are not that dependent on the seasonal factor as a result of business guests and corporate groups, and occupancy in these hotels in the winter could even reach 90%.
According to data provided by GVA Sawyer, of the 45 existing three- to five-star hotels, only 13 of them, or 29% of the overall amount, are managed by international hotel operators. Accordingly, Russian players still predominate among management companies on the St. Petersburg hotel market, whereas in the three-star category, international hotel operators so far are practically not represented.
Nevertheless, international hotel operators are evermore actively entering the St. Petersburg market. Today, 10 international hotel operators are present in the northern capital (data provided by GVA Sawyer):

• Rocco Forte Hotels (two hotels);
• Kempinski Hotels&Resorts (one hotel);
• Corinthia Hotels (one hotel);
• Rezidor SAS (two отеля);
• Summit Hotels & Resorts (one hotel);
• Orient Express Hotels (1 hotel);
• Accor International (one hotel under the Novotel brand name);
• Marriott International lodging (one hotel);
• Best Western Hotels & Resorts (one hotel, franchised to City-Hotel);
• Boutique Hotels&Resorts Int. (one apartment hotel);

However, many world-leading high-end hotel chains, such as Ritz-Carlton, Four Seasons, Hyatt and Hilton, are not present to date in St. Petersburg. According to data provided by Colliers International, several of the afore-stated operators today are reviewing the possibility of entering the market in the next two to three years.
According to data provided by GVA Sawyer, six companies from professional Russian chain operators are present in the city:

• Marco Polo (one hotel),
• Orange Ring Hotel Management (one hotel in Russia, with opening slated for the winter of 2006-2007)
• Evrazia: hotels and resorts (one hotel, Sovietskaya-Azimuth).
• Europa Hotel (two hotels).
• Amaranta operator (one hotel).
• Turris group of hotels (three hotels).

Accordingly, less than half of the current hotels of the mid- and upper-range are under the management of professional operator companies. The other facilities are managed by specially created structures of the hotel owners.

Rates
The prices for staying in St. Petersburg hotels change according to the season, thus, in the summer, prices increase by 30%-40%. The average growth in costs for services of St. Petersburg hotels is 10%-15% per year, which renders the city too expensive for middle-class tourists. Market experts note that prices for three- and four-star hotels exceed by nearly three-fold the prices for staying at many European tourist center, and St. Petersburg even lags them in terms of the level of service.
The average cost of staying in standard St. Petersburg hotel rooms is shown in table 3. The cost of luxury rooms and apartments, as a rule, are two to three times higher than the cost of staying in standard rooms. According to data provided by Becar Consulting, the cost of staying in a double room with breakfast in a five-star hotel on average is around $1,200 per night.
According to analysts’ estimates, the average recoupment period for five-star hotels is 10 years; for four-star hotels, it is 8-10 years; and for three-star hotels, it is 7-8 years. The period of return on investment depends on the amount of investment and the scale of construction. The recoupment period for mini-hotels is typically 6-8 years, whereas for large and especially large projects, it is 10-15 years. It must be noted that all indicators of investment cost efficiency vary depending on the exact parameters of the projects.
According to data provided by Becar Consulting, investment in construction and reconstruction of five-star hotels on average is $5,000-$9,000/sqm; for four-star hotels, it is $1,500-$2,500/sqm; and for three-star hotels, it is $1,300-$1,900/sqm.

Trends

• There will be growth in investment activity on the hotel real estate market, and the number of Russian and foreign investors showing interest in acquiring hotel projects at various stages of development will grow;
• The attractiveness of the hotel sector will increase for developers, which, in turn, will increase competition and decrease the profitability rates in other segments of the commercial real estate market;
• The shortage of hotel rooms in all categories will remain, and there will be an especially high shortage in mid-range hotel rooms;
• The development of the mini-hotel market will continue; however, as new large hotel projects enter the market, many mini-hotels risk losing competitiveness and becoming unprofitable;
• The announced timeframes for completing projects will very often be postponed because of the complexities of obtaining approvals and permit documentation;
• International hotel operators will continue to enter the St. Petersburg hotel market.

Forecast
In the event that all of today’s current hotel projects are delivered on schedule, the overall number of hotel rooms in St. Petersburg should increase by 11,000 and the number of hotels serving the city will reach average European levels. However, given the planned influx of tourists, market experts believe full market saturation is very unlikely.
With the entry of a large number of quality hotels, the cost of hotel services in St. Petersburg is expected to decrease gradually, approaching the cost of staying in European hotels.
An increase in business activity and the measures taken by the city’s administration for developing tourism should eliminate the seasonal fluctuations in the occupancy rates of St. Petersburg’s hotels.