Moscow news
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06-Jun-2007
Businesses Drive Hotel Room Demand
By Bojan Soc The Moscow News
Lowest occupancy rates do not stop Moscow hotel owners from charging the highest prices on the continent
What do Lord Browne, the Klitschko brothers and Pamela Anderson have in common? Not much, really, apart from the fact that all four have recently been in Moscow on business - the BP chief was introducing his successor to President Vladimir Putin and his entourage, the Klitschko brothers met with the press to unveil their future plans, while the voluptuous blonde paid a visit to host Russia's MTV Movie Awards ceremony. Though picked at random, this company of four is a reliable indicator as to what is driving record revenues in the Russian capital's hospitality sector.
Profiling an average tenant at any of Moscow's prestigious hotels located within a stone's throw from the Kremlin walls, you're almost sure to bump into a high-ranking company executive on a business trip, an entertainer or a top athlete. These are the kind of people who can afford $300-per-night-and-higher room rates that have made Moscow one of the world's most expensive places to stay in. In addition to visiting corporate chiefs, showbiz icons and sports superstars, Moscow's elite hotels also host large numbers of locally-based expatriate businessmen who run rep offices of many of the world's largest companies.
While its reputation of the former Soviet Union's chief business hub has helped Moscow lure investors and attract capital, its image of a tourist destination has been hurt by sky-high accommodation rates, driven by business-generated demand.
This, in turn, has created a paradox - according to a survey, conducted by the London-based TRI Hospitality Consulting (see chart), in 2006 Moscow had the lowest occupancy rate among the leading European capitals (69.2 percent), and still boasted the highest rates per room at 140.56 euros. Second-place London earned 106.41 euros per room, while leading in occupancy with 83.9 percent.
"A major factor contributing to high margins is Moscow's very low wage costs of 18 percent of sales, compared to 39 percent in Paris and 26 percent in London," TRI Hospitality Consulting told The Moscow News in a statement.
According to TRI Hospitality Consulting director David Bailey, Moscow's astounding profit levels are fueled by the ever-increasing presence of national and international corporations in Moscow. This is a reflection of a general boom in the Russian economy, which is experiencing growth in every sector, not just hotels.
"International companies naturally affiliate themselves with other international brands that they know and trust. Given the relatively limited number of international branded hotels in the city it is clear that hoteliers are profiting from healthy room rates combined with extremely low wage costs," Bailey told The Moscow News.
Meanwhile, the lack of affordable accommodation for tourists remains the main problem. City officials have drawn up plans to increase the number of beds within three years to 170,000-200,000 - almost three times the current number. Last July, city authorities announced a set of measures intended to attract developers and boost hotel construction. These included the Moscow government's decision not to own stakes in newly-built hotels, to slash land lease rates to 10 percent of nominal value for developers during construction, and to compensate up to two-thirds of the interest rate charged on hotel construction loans. Recently, Deputy Mayor Iosif Ordzhonikidze told reporters that as many as 15 new hotels would be commissioned this year. However, these ambitious plans seem to fail to enthuse experts.
"There is an abundance of plans and announcements about prospective projects, but actually not many hotels are being built. The main reason behind such low activity is the lack of incentives for developers," Marina Usenko, senior vice president, Jones Lang LaSalle Hotels told The Moscow News. "Hotels are the most expensive real estate in terms of building cost and also the most demanding when it comes to efficient, cost-effective operation. Those hotels that do get built are, as a rule, commissioned with delays."
According to Usenko, Ordzhoniki-dze's pledge to open 15 new hotels sounds rather optimistic. The figures can be misleading, though, as city authorities and real estate agents seem to be operating with different classification standards.
"City authorities sometimes refer to structures that essentially are worker dormitories as hotels. Recently, a colleague went to see the 360-room (over 1,000 beds) Druzhba Hotel, commissioned by the authorities," says Usenko. "It turned out to be more of a dormitory, with two bunk-beds per room, and it was still classified by authorities as a hotel, though by international standards it is not."
In recent years the room deficit was increased further after three large hotels - Rossiya, Moskva and Intourist - were demolished in the city center.
"The deficit encompasses a few thousand rooms (roughly 4,000), which need to be built so that the Moscow hotel market can start breathing again. The number of rooms lost through the demolition of these three hotels approximately matches the deficit," Stephane Meyrat, associate director Valuation & Consulting Department Colliers International, told The Moscow News. But the replacement numbers don't seem adequate.
"Instead of 1,000 rooms, the Four Seasons Hotel opening at the demolished Moskva site will only have 210 rooms. It is still not clear what will be built instead of the Rossiya Hotel, which had 3,100 rooms before it was brought down."
Room count will also be sizably reduced at the Ritz-Carlton (334 rooms), which is expected to open in June at the site of the former Intourist (475 rooms), adds Meyrat.
According to Usenko, measuring the actual deficit in mathematical terms isn't easy as the sector is characterized by fluctuating demand, which "over the last three years in Moscow has gone wild." And yet, unlike London and Paris where a large proportion of rooms is occupied not only by businessmen, but by tourists and transient passengers as well, the Moscow hotel sector - specifically, its upscale segment - is predominantly business-driven."Tourists account for only around 20 percent of occupancy, while the remaining 80 percent of rooms are sold to businessmen," she says. With an estimated 10,000 rooms that meet international quality standards, Moscow lags behind 75,000 graded rooms in Paris, or 69,000 in London, explains Usenko.
Analysts agree that receipts from tourism would be higher if the city offered more rooms in the budget, three-star hotel sector, which, according to international standards is almost non-existent here. Luring a cost-conscious foreign tourist into five-star properties is a waste of time, believes Meyrat, recalling times when tourist groups could strike $50 per night room deals at demolished Rossiya. "I am afraid that the rates like this at a location Rossiya had near Red Square will no longer be available," he says.
At the same time, three-star hotels generate business interest among prospective operators only if they can command extremely high rates of $250-$350 per night. "This is the case of the Holiday Inns at Lesnaya, Suschevsky and Sokolniki. These are three-star internationally branded products but they are trading at very high rates, due to the fact that good hotels are few and far in between in Moscow," explains Meyrat.
According to Usenko, the developers' lack of enthusiasm to build three-star hotels in the city center is understandable. The high cost of land downtown makes construction commercially unviable because of an unattractive profit margin. "That is why these hotels are usually located beyond the Third Ring Road," she says.
One rare example trying to prove the opposite is the effort by Moscow businessman Igor Lavrik, the owner of Stabilnaya Liniya company, who some time ago tried to launch an ambitious project to build a chain of inexpensive three-star mini-hotels in Central Moscow. However, his first project, the Assambleya Nikitskaya Hotel, got stalled as unforeseen costs piled up, mostly due to having to meet stringent regulations from Moscow utility authorities who issue approvals. The hotel still hasn't been commissioned and it's not clear when it will be.
The Moscow News