Russia Rules
European investors are beginning to follow international brands looking to tap the occupancy and rate riches of Russia.
-- Hotels, 2/29/2008 11:00:00 PM
Frequent business travelers to Moscow joke that they don't book a room when they have business in the Russian capital; they schedule business when they can get a room. Moscow is riding a wave of supply/demand imbalance that is raising both rates and investor interest. Jones Lang LaSalle Hotels ranks Moscow as having the most expensive average room rates in Europe, and its fourth quarter 2007 US$352 average room rate marks a 20% gain over the previous year. More importantly, the city's average US$254 average per room yield represents a 25% increase, more than either London or Paris could manage.
 With the Hotel Astoria in St. Petersburg (background), the Rocco Forte Collection now has its sights set on Moscow. |
These are numbers that spell potential. “Even though Russia has certain country risks, certain economic risks and certain bureaucratic risks, it also has such substantial demand. For investors who want to develop hotels, it is a no-brainer, really,” says Marina Usenko, senior vice president, Jones Lang LaSalle Hotels, Moscow. Increasing visitor numbers, a growing economy and rates like these are fueling a great deal of investor interest, not only for hotels in Moscow, but in key cities throughout Russia.
Until recently, hotels were not the most attractive asset class. “If developers could build offices with a five-year payback or residential with very aggressive pricing, why build a hotel? It is very expensive and takes longer to ramp up. Hotels have been viewed as a means of creating additional synergies rather than generating greater returns,” Usenko says.
That is changing as rates continue to rise, further pressured by a 17.6% increase in business across Moscow's three airports. Economic and political stability make a good case for sustainability. Melanie Pennell, CEO, Associated Ventures International, Los Angeles, points out that Russia's economy is becoming monetized. Its current-account surplus has been sizable—roughly 9.6% of GDP in 2006. Oil money has repaid all of Russia's international debt. That is a story that pushed foreign investment three times higher in the first half of 2007 versus the same period in 2006.
“Ever in search of increasing market share and revenues, investors have recognized that Russia has all the ingredients necessary to sustain its economic growth across the board,” Pennell says. “It has an enormous supply of raw materials, a large population and the lowest labor costs in Europe. It is emerging as one of the largest global markets and a favorable investment target.”
More Joint Ventures
Given the complexities of doing business in Russia, from contract terms to regulatory requirements, much of the new wave of investment will be in the form of partnerships.
Mixed-use projects remain in the domain of local investors. “For foreign investors, they are fraught with political and permitting complications,” Pennell says. The exception: foreign investors that can form strategic alliances with strong Russian partners. That strategy enabled Pennell's company to ally with a partner on a 4-star conference hotel under development in Moscow, a 5-star mixed-use project and a series of economy and mid-tier properties throughout Russia and the Commonwealth of Independent States (CIS).
 Rezidor is growing its Park Inn presence in cities like Ekaterinburg. |
For Russian companies, it may be a seller's market. Consider reports from Russia that suggest Renova-Stroigroup, the construction arm of Renov Group (Russia's largest asset management company), has plans to build 50 3-star hotels in Russia over the next 10 years. According to HVS International, “All the company needs to start is a co-investor prepared to help with the necessary investment of a minimum of a reported US$1 billion.” That is quite a price tag, but it could be worth it for investors who want part of Russia's 142 million-plus population and an economy with real GDP growth that is averaging 6.2%. Renova-Stroigroup is said to be keen on hiring a leading Western chain. That could be a prime opportunity. Each hotel will have 200 rooms and at least seven of the properties will be built in the Russian capital Moscow, HVS says.
European investors looking for higher upside are finding it harder to ignore the Russian market. Aalst, Belgium-based Immo Industry Group, one of Europe's leading industrial real estate developers, and Moscow's Rostik Group, Russia's leading owner and operator of restaurant, travel and real estate businesses, formed a joint venture company to develop high-quality real estate projects across Russia and the Commonwealth of Independent States (CIS).
The participation of St. Helier, Jersey's Belgravia Financial Services Group sends a strong signal about the sustainability of Russia's potential. Belgravia will provide the capital and funding for all of the new ImmoRosinIndustry (IRI) projects, as well as “business support, advice and capital on the initial US$2 billion stage.” Belgravia is diversifying its Russian platform with an exclusive strategic partnership with Hilton Hotels Corp. to roll out Hampton Inn and Garden Inn brands on each of the industrial park sites developed by IRI. Targeting major cities and urban areas with access to 1 million-plus populations, the first phase of this deal will create more than 3,000 hotel rooms.
| Why Go To Russia? |
Source: Jones Lang LaSalle Hotels |
“We believe Russia represents some of the greatest potential for hotel growth in the world today,” says Patrick Fitzgibbon, Hilton's senior vice president, Europe, Africa, UK and Ireland. “We are entering at a pivotal time in its economic development. There is an almost absolute absence of internationally branded properties through the regional cities. While some brands have a foothold in Moscow and St. Petersburg, they have been slow to make an impact elsewhere.”
Hilton is backing up that belief with a two-pronged expansion plan. Last summer, it entered into a “preferred development alliance” with London & Regional Properties Ltd. (L&R). The terms of the agreement call for development of at least 25 new hotels in an initial period of five years, encompassing selected Hilton Family brands like Conrad, Hilton, Doubletree by Hilton, Hilton Garden Inn and Hampton by Hilton hotels, all of which Hilton Hotels Corp. will manage.
“The Hilton name is a powerfully strong brand and Russia offers tremendous potential as there are 11 major cities (some would say there are least 19 major markets) with a population of more than 1 million people,” says Ian Livingstone, joint group managing director of international transactions for L&R. “With the multi-brand approach that Hilton Hotels Corp. now has, the company is able to offer solutions in all travel sectors.” Moscow, St. Petersburg and key regional cities are all on the radar.
Fitzgibbon sees no cannibalization. He says the strategies will be different for Hilton's partners. L&R will focus primarily on developing a chain of quality upscale and midscale hotels while Belgravia will concentrate on the economy sector. The goal will be to reach critical mass within five years and to have 70 Hilton-branded hotels across Russia over the next decade.
Darren Blanchard, Rezidor Hotel Group's director of business development, Moscow, is also setting ambitious goals. Near term, that will mean growing a 4,200-room portfolio to more than 6,400 rooms. But, will the investors be there? Yes, says Blanchard. “People are seeing the gains in Russia. The Russian economy has proven to be far more resilient than anyone expected. That is the main factor behind the performance levels hotels are achieving,” he says.
“Russian oligarchs” and high-net-worth individuals are being joined by a wider range of banks and institutions. On the active list are: AIG Global, Morgan Stanely, HSBC and Deutsche Bank in the major markets; HSBC, Bank of Austria, AIG and PN/UKA among others in the republics.
Beyond Moscow
For most brands, development will be opportunistic. “Operators don't go looking for specific sites (outside of Moscow and St. Petersburg). It is a matter of finding a partner with the right site. Developers usually come to the operator, then they decide which brand is the best fit,” Blanchard adds. Most of the approaches to Rezidor have come from Russian investors as well as Scandinavian companies who know the brand and its beginnings within SAS. “We're seeing some direct investment from banks,” Blanchard says. ”Some new Russian insurance companies are looking at hotels. There are still a lot of private individuals. With all that, return expectations are getting higher as well.”
 In 2009 Rezidor will open the Radisson Tymen in Syberia. |
Luxury groups such as the UK's Rocco Forte Collection will concentrate on Moscow and St. Petersburg. “The time it takes to get hotels to cruising speed in Moscow is very short at the moment with hardly any ramp-up,” says David Munns, Rocco Forte Collection's group finance director. “There's a lot of appetite for hoteliers to get into cities outside of Moscow, but it is difficult to secure sites because of the opacity of property ownership and planning.”
Developers who are willing to move beyond the Golden Ring are looking at the Black Sea area for 3-star tourism projects and key cities—especially those readily accessible by rail: Nizhny Novgorod, Kaliningrad, Volgograd, Rostov-on-Don, Samara, Omsk, Ekaterinburg, Kazan, Sochi, Novosibirsk, Krasnoyarsk, Ufa, Perm, Chelyabinsk, Kamchatka and Tyumen.
Mass Market Opportunities
Usenko predicts that more of those developers will be coming with mixed-use proposals that include select-service or 3-star hotels. Chains may need a 5-star flagship in Moscow, but “3-star demand should be there because of the number of people who can afford it. Many 3-star hotels already command 4-star rates,” she says. A recent Jones Lang LaSalle Hotels report on Russia termed both the economy and mid-tier segments as “severely under-represented.”
Pennell agrees. “The preponderance of 5-star product has caused a chilling effect on the budget-minded tourist sector and, to a lesser extent, mid-level business travelers seeking quality at affordable price points. The domestic Russian traveler with an average income of US$450 per month is effectively priced out of the market,” she says.
Like Usenko, Pennell sees that creating more opportunities for Western chains launching product to address significant pent-up demand for “quality” 4- and 3-star hotels. The exceptions would be in markets such as Moscow, where prohibitively high land costs mean 3-star product “doesn't make sense from an investment standpoint,” Pennell says. Another trend to watch: projects with a residential component—particularly some form of condominiums within luxury hotels in highly developed tourism/urban markets.
 Hilton Moscow Leningradskaya |
That does not mean 5-stars will not continue to debut. “They appeal to investors as they are insular products. Upper-tier guests continually are less impacted by economic downturns and fluctuations,” says Pennell, who predicts affluent developers will continue to look to brands not already represented to gain a prestigious presence in gateways and tourist hubs. And there is no paucity of affluent individuals. The number of resident billionaires in Moscow is exceeded only the number in New York.
Staying Power
How long can the imbalance last? Moscow has some 7,000 upscale rooms slated to open by 2013, but it is unrealistic to think all will make the deadline. Construction delays are one factor; others are likely to be put on hold.
Changes in tax and investment laws are making investment more inviting, but some projects will still be hamstrung by problems with obtaining building permits and other bureaucratic procedures. “Since the credit squeeze, some people are thinking twice,” Munns says.
Whatever the challenges, they are not enough to stanch the current investment flow. “Just look at the scale of the business opportunities,” says Robin Wicks, IHG's chief operating officer, continental Europe. “It is not surprising we are seeing more and more institutions and investors who have never been in the hotel sector in Russia before. Hotels are becoming acceptable to investors with big checkbooks.”
|
No related content found.
