Cashing In On Kazakhstan

By Staff -- HOTELS Magazine, 11/1/2007

KAZAKHSTAN "Kazakhstan is booming at the moment," says John Litzenberger, Marriott International's vice president, international hotel development, Zurich. The country's rich natural gas and oil reserves are the nearterm draws. Added attractions include real GDP growth the Economist Intelligence Unit estimates at 9.2% for 2007, potential created by relocation of the capital from Almaty to Astana, diversifi cation of the economy and the future promise of a tourist market. Spurred by improving infrastructure and a probusiness government, this neighbor of Russia and China is attracting growing numbers of business travel "heads" looking for beds. And that, in turn, has hotel developers and operators alike surfi ng for opportunities on Kazakhstan's economic wave.

Upward Mobility

To date, Kazakhstan's major cities-Almaty, Astana, Aktau and Atyrau-have been primarily 4-star and 4-star-plus territory for hotel development. Business may be booming, but development hasn't been until very recently. Figures reported by the Singapore-based Ascott Group (which recently signed management contracts for two prime serviced residences in Astana and Aktau) show less than 2,000 internationalstandard rooms in what is one of Central Asia's fastest growing economies.

That's good news for those in the vanguard. Internationally branded properties such as Marriott's Renaissance hotels in Aktau and Atyrau, the InterContinental and the Hyatt Regency in Almaty and the Radisson SAS in Astana have translated the current supply/demand imbalance into occupancy that typically averages above 70% and rates that have increased "aggressively" since 2005, according to Marina Usenko, senior vice president, Jones Lang LaSalle Hotels, Moscow. Rack rates from US$230 to US$280 were the upmarket rule outside of Almaty; levels over US$350 were common in the country's largest city early in October. Litzenberger sees rates and occupancy increasing until equilibrium between supply and demand is reached. "That may take several more years," he adds.

What that means for the future depends on the point of view. Properties such as Almaty's Holiday Inn have their market, but most developers have their sights set on trophy assets. "Investors are cash rich, and there is a lot of capital in the market. As in other areas of the world, it is not always demand that is pushing development toward the top of the market. It's a matter of ego as well," Usenko says. "Kazakhstan doesn't have many experienced developers yet (unlike Moscow). What most of them don't realize is how expensive it is to build a true 5-star hotel."

Mixed-use should be the driver for a new generation of high-end brands. Ultra-luxury hotels haven't been "the most attractive investment" as stand alone projects. Ramp-up takes one to two years longer than pure offi ce plays. But, Usenko says, their potential for creating synergies and adding prestige to mixed-use development is opening a new stream of opportunity.

Marriott, which Usenko terms "very popular" thanks to a deal with one of the region's biggest developers, is a brand family to watch. Capital Partners Ltd., the six-year-old real estate pioneer in Kazakhstan, is building on the success of its Renaissances with affi liate Capital Tower Development LLC's plans to open a JW Marriott in Almaty in 2008 followed by a JW Marriott Residences in 2009. The properties will be "integral parts" of the 3.3 million sq. ft. (309,800 sq. m) Esentai Park mixed-use development. A Ritz-Carlton also is slated for Almaty.

If the rumor mill is running true, these 5-stars won't be alone for long. Kempinski Residences Jeruyik, Astana, is due to open in 2008. Four Seasons Hotels & Resorts is said to have been approached by no less than seven developers. Overtures reportedly have been made to Global Hyatt Corp. regarding a Park Hyatt as well. "Kazakhstan is on the radar of a number of luxury chains. But some still have reservations about the market size and sustainability," Usenko says.

Marriott is not among them. Litzenberger says Kazakhstan represents "a phenomenal opportunity." International investors developing the region's natural resources and hoping to tap new initiatives in aerospace, technology, education, telecommunications and transportation "need a place to stay and, in some cases, a place to negotiate a deal. They often need the communications infrastructure of a luxury or a deluxe brand," he says.

Local market conditions are making it easier to oblige. Litzenberger says the country's "progressive policies" are positioning it as the regional commercial hub. Satisfactory airports in Almaty and Astana have several daily fl ights from both European and Asian gateways. Almaty also is working to position itself as the region's fi nancial center, another factor fueling development and improving performance, says Nicholas Villemin, director of sales, Hyatt Regency, Almaty.

Kazakhstan is becoming the corporate base for multinational companies since there are no direct fl ights from Europe to the heart of the oil-producing region. Bankers and auditors who support business travelers involved in the oil and natural gas industries are adding to the demand side, as well as pushing the average length of stay to three nights, Villemin says. "Kazakhstan in general is developing rapidly. The infrastructure-roads, shopping centers, commercial property-is being built or updated. Demand for hotel rooms is growing. All of the major chains are opening here."

Although some cities have enterprise zones, most developers are not building because of tax breaks. "The large Kazakh cities are extremely attractive to local owners and investors, as evidenced by the large number of construction sites. As far as I know, there are not particular incentives other than high profi t expectations," Villemin adds.

The Hyatt Regency Almaty has benefitted from corporate financial business.

Multi-Market Appeal

Darren Blanchard, Rezidor Hotel Group's director of business development, CIS markets, Moscow, says 5-star projects will be more the exception than the rule. The half-dozen projects in Rezidor's pipeline are mostly Radissons and Park Inns. "You have to have the right balance of food and beverage, good conference facilities and clean modern rooms," Blanchard says. "For a 5-star to work, the development would have to be unique."

International travelers remain the bread-and-butter business for Kazakhstan's hotels, but Blanchard says that is changing. "We're starting to see a shift toward domestic business and new regional travel patterns within the CIS states," he says. This is sending new ripples through the development track. "When development is being done by a large bank or a government body, the positioning is as much about the investor's profi le as demand. But, there are new investors coming into the hotel market who are starting to realize that it will be mid-market fl ags that drive returns."

Nearly any investor hoping to open a hotel outside one of the major cities will be thinking mid-tier, adds Usenko. "Three-star demand should be there because of the number of people who can afford to pay the rate. In fact, in Kazakhstan, it's likely that mid-tier hotels will be getting 4-star prices," she says.

More options are on the horizon as the market matures. Conference/event attendance is big business for established 4-stars. Usenko says government meetings and international events have put hotel conference facilities in the spotlight. Tourism may be a future market, but it's defi nitely a longer term play. "Ninety-fi ve percent of our business is corporate. The local infrastructure is not yet ready for Kazakhstan to be considered a tourism destination. Visas are still required for foreigners," Villemin says.

If there is a cloud, it centers around recruiting and retaining staff, especially with oil companies luring trained staff. Rezidor is leveraging its expanding base in Russia, Ukraine and Azerbaijan to create teams for Kazakhstan hotels who speak the language and understand the nuances of doing business in the region. Still, Blanchard says, "We have a lot of training to do."

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