The Hilton Moscow Leningradskaya is one of three hotels Hilton Worldwide operates in Russia at present and its only in Moscow.
MOSCOW—Though its fellow BRIC countries of Brazil, India and China might attract larger shares of the spotlight, Russia still boasts ample opportunity for hotel development, according to researchers and owners.
“It’s a great market for a lot of hotel developers to enter,” said Marina Usenko, executive VP of Jones Lang LaSalle Hotels in Moscow.
Boasting a land mass of more than 6.5 million square miles and 13 cities with populations of more than 1 million, the country is nowhere near saturation—even in the more populous metropolises of Moscow and St. Petersburg, she said.
There are 21,302 guestrooms in the active development pipeline, or approximately 25.5% of existing supply, according to November 2012 pipeline data from STR Global, sister company of HotelNewsNow.com.
Jones Lang LaSalle Hotels
Most of that is attributable to global brands, Usenko said.
Hilton Worldwide, for one, has 30 hotels comprising 5,638 rooms under development in Russia—the company’s largest pipeline within any country in Europe, according to Mike Collini, VP of development, Turkey, Russia and Eastern Europe. Hilton operates three hotels in the country: Hilton Moscow Leningradskaya, DoubleTree by Hilton Hotel Novosibirsk and Hilton Garden Inn Perm.
The company during 2013 expects to open four new hotels, representing a mixture of managed and franchised properties, he said.
A handful of smaller domestic brands are making headway as well. Azimut Hotels, which owns and operates 12 hotels comprising more than 3,500 rooms in Russia, has an “ambitious pipeline” for Russia and the Commonwealth of Independent States, according to Alex Slesar, director for acquisitions and development, Europe Russia and CIS.
“Azimut will continue its growth strategy via acquisitions and new development, but also our growth strategy is focused on management opportunities as well. Currently, there are over a dozen of new hotel opportunities, which we are actively pursuing across Russia,” he wrote via email.
Routes of growth
Hotel development to date has been concentrated in the major markets of Moscow and St. Petersburg, JLLH’s Usenko said.
And for good reason.
“People will always have to come here,” she said. And Moscow, in particular, “still offers extremely good returns.”
Developers have either already followed that demand or are scrambling to take advantage.
The Azimut Tulskaya Moscow is Azimut’s first property in Moscow.
Azimut in July opened its first flagship property in Moscow—the 144-room Azimut Tulskaya Moscow, which incorporates new brand standards and a modern concept for the business traveler-focused chain. It also operates the 1,000-plus room Azimut Hotel Saint Petersburg.
Hilton, meanwhile, will open its first property in Moscow this year: the DoubleTree by Hilton Moscow Leningradsky Riverside.
“The major markets for development are Moscow and St. Petersburg where there is great potential to develop the full portfolio of our brands from luxury to economy,” Collini wrote via email. “Hilton Worldwide’s Russian development team, based in Moscow, is also focused on key regional cities across Russia– particularly for Hilton Garden Inn and Hampton by Hilton.”
While opportunities certainly exist in Russia’s 11 “millioniki” cities—those with more than 1 million residents, excluding Moscow and St. Petersburg—as well as second-tier and tertiary markets, Usenko advised caution when branching out.
“There are quite a number of million-resident cities, but not all of them are quite equal to each other,” she said. “They are not as active with development.”
Opportunities abound but so do roadblocks, Usenko said.
For one, debt is hard to come by. And what debt is available is “very expensive,” she said.
“That’s why I would say there are not as many hotel projects on the way as one could possibly think,” Usenko said.
For another, the country’s relative infancy in the global hotel market means there is a dearth of experienced developers.
“There are very few professional developers who know how to build hotels,” she said, citing a high percentage of first-time buyers who sacrifice long-term viability for short-term gains and quick fixes.
And even for an experienced company such as Hilton, which has been operating hotels in Europe for more than half a century, the maze of government red tape can slow development to a slog.
“There are some aspects of development which are considered more difficult in Russia than other markets,” Hilton’s Collini said. “These include bureaucracy and administrative procedures, which despite recent improvements are notoriously complicated. Specific examples include complications in securing land title and the permit approval process. Both areas could be speeded up and improved.”
The tumultuous landscape has made hotel companies more flexible to leverage a broader spectrum of opportunities, sources said.
Hilton drives growth primarily through ground-up development, but the company often provides guidance to assist owners through the process, Collini said.
And Azimut, which grew primarily through acquisitions and development funded by the company’s own equity in addition to bank financing, is seeking third-party management arrangements now as well, Slesar said.
An expanding horizon
The success of future development in Russia is wholly tied to the global economy, Usenko said. “We are not immune to what’s going on in the world.”
The development landscape took a big hit during the most recent downturn, she said, which brought about some silver linings. Not only were a number of less-savvy investors filtered out of the market, but those who stayed grew more cautious and strategic in their investments. The result is a smarter, more streamlined group of would-be developers.
That jolt also changed the nature of Russia’s hotel pipeline, Usenko said. Whereas high-end, luxury hotels once dominated, today developers are perusing more pragmatic, economy and mid-market assets.
That plays right into the hands of companies such as Azimut and Hilton.
“The biggest growth sector in Russia is currently the mid-market segment, with value Hilton Garden Inn and Hampton by Hilton brands making up the majority of new deals in Hilton Worldwide’s pipeline,” Collini said. “This is not solely in Moscow and St. Petersburg but also in other regions and cities of the country. In the next few years, Hilton Worldwide plans to open 14 Hilton Garden Inn and nine Hampton by Hilton hotels in locations across Russia.”
Indeed, the biggest opportunity in Russia lies not in the major markets but in the untapped markets, Azimut’s Slesar said.
“The biggest opportunity lies in recognizing potential in the cities which were overlooked in the first wave of hotel expansion,” he said.