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Moscow remains attractive despite challenges
July 2 2013

Developing and financing hotel projects in Moscow is a costly and lengthy process, but the Russian city is still a hot spot for investors.

Highlights
  • “It would be difficult to develop elsewhere in Russia if you’re not in Moscow,” said Darren Blanchard of The Rezidor Hotel Group.
  • The market needs more budget and midmarket hotels, said Tatiana Veller of HVS.
  • Investors in the market are generally local individuals looking to diversify their portfolios with one-off deals.

MOSCOW—Developing in Moscow is not without its challenges. Land is hard to come by in the city center and financing projects is a costly and lengthy process, but the Russian city is still a land of opportunities for developers.

After the Soviet Union collapsed in the 1990s, Moscow opened itself up to development, and global hotel brands heeded that call. Today, Hilton Worldwide, Marriott International, InterContinental Hotels Group, Interstate Hotels & Resorts, Carlson Rezidor Hotel Group, Accor, Hyatt Hotels Corporation and Starwood Hotels & Resorts Worldwide all have a presence in the Russian city.

“Moscow is important because it’s a key European capital,” said Darren Blanchard, senior director of business development for The Rezidor Hotel Group, which has five hotels in operation and three under development in Moscow. “And it’s the springboard to launch into the vast country. It would be difficult to develop elsewhere in Russia if you’re not in Moscow.”

Moscow has 21 hotels with 5,277 total rooms in its pipeline. Of those, eight hotels with 2,130 rooms are under construction, according to May 2013 pipeline data from STR Global, sister company of Hotel News Now.

May 2013 year to date, occupancy in Moscow decreased slightly by 0.4% to 62.3%; average daily rate declined 1.8% to €149.90 ($195.87); and revenue per available room dropped 2.2% to €93.34 ($121.97), according to STR Global.

Luxury products
The market is very active, especially at the higher end, said Tatiana Veller, managing director of HVS Russia. “Everyone wants to enter with a luxury product” and be associated with a well-known flag.

Because land is so hard to come by in central Moscow and development can prove costly, it’s “hard to build anything but a 5-star hotel in central Moscow.” Even mid-tier brands such as Holiday Inn are built to much higher specifications than a similarly flagged hotel in the United States, she explained. 

“The market needs more budget and midmarket hotels,” she added.

GM of Lotte Hotel Moscow, Morten Andersen, agreed, saying part of the problem is the number of hotels in Russia is not enough compared to other world cities.

“Moscow needs more tourists, and 5-star hotels are very expensive for this segment,” he said. “Therefore, the city requires more 3.5- to 4-star hotels like in other countries.”

“There is still a strong existing demand on 5-star accommodations, and the average rates are remaining high,” said Gerhard Mitrovits, area director Russia and the commonwealth of independent states for Kempinski Hotels and GM of the Hotel Baltschug Kempinski Moscow, a 5-star luxury offering that opened in 1992.

“The opening of the second Kempinski hotel (the Hotel Nikol’skaya Kempinski Moscow) in Moscow confirms the city’s demand for 5-star hotels,” he added.

Development woes
Government rules and regulations make development difficult, Veller said.

Getting a hotel off the ground in Moscow is “not very straight forward,” she continued. “If you don’t know the right people in government who can take care of various parts of hotels, then it may become totally tedious.”

Global brands coming into the city generally end up coming in as new builds, Veller said, because older hotels are harder to convert. Often, they don’t meet the basic requirements hotel brands need to make the necessary upgrades.

With limited land, the price is “very high—so high that it causes big issues” Blanchard said.

Additionally, investors in the market are generally local individuals looking to diversify their portfolios with one-off deals, so the local financing isn’t as sophisticated as it should be, sources said.

To attract local investors, brands have to enter the market with a strong value proposition, Veller said. Russian investors want global brands to invest equity into the hotel and not just manage the property.

“It has to make a lot of financial sense, probably a lot more than in other places,” she said.

Hilton Worldwide, which has four hotels in Russia, views Moscow as a key target for expansion, said Mike Collini, VP of development for Turkey, Russia and Eastern Europe.

The company plans to have seven hotels in operation in Moscow during the next few years. Hotels opening in 2013 and 2014 include DoubleTree by Hilton Moscow Leningradsky Riverside; DoubleTree by Hilton Moscow Vnukovo Airport; and Hilton Garden Inn Moscow New Riga.

The market is attractive to Hilton because “there is potential for our full portfolio of brands both in Moscow and across the rest of Russia,” Collini said.

The “biggest opportunity in the secondary and tertiary cities lies in the economy and midmarket sectors,” he added.

Tourists wanted
While developing and financing are trouble spots in Moscow, foreign travelers wanting to visit the city are also faced with a tough visa regime and a lack of airlift infrastructure. However, while the city continues to develop and work through its obstacles, it remains a strong business destination.

But on the leisure front, the city struggles to attract tourists.

At The Rezidor Hotel Group hotels, occupancy during the week is always 100%, Blanchard said, but it drops off as low as 30% and 40% on weekends.

“Unlike in major capitals in Europe or the states, there isn’t that weekend leisure business to fill the voids of the downturns during the weekends,” he said.

Mitrovits from Kempinski said 65% of guests are business visitors and 35% are tourists visiting during the weekends.

“Therefore you can see that Moscow is now perceived mainly as a business destination and has a lot of perspectives to develop as a leading travel destination,” he said, highlighting that occupancy in 2013 has returned to the high levels of 2006 and 2008.

Collini said that a report Hilton conducted found that incoming tourist expenditure in Russia could double to $15.3 billion by 2016, proving there is an opportunity for hoteliers to “meet the demand from visitors to the country over the coming years,” he said.

“For a long time Moscow was one of the greatest hotel investment opportunities in the world,” Blanchard of Rezidor said. “I still believe it is.”

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