Despite Russia’s slowing economic growth and difficult development hurdles, Moscow and Sochi, the site of the 2014 Winter Olympic Games, are seeing significant pipeline activity.
Domestic operator Azimut Hotels, Moscow, sees opportunities to fill a shortage of midscale product in the country. In October Walter Neumann was appointed as the new CEO of Azimut, and HOTELS spoke with Neumann to find out more about his outlook on the Russian hotel market and about the company’s portfolio-wide renovation program with under the SMART room concept.
Editor’s note: This is the second of a four-part Q&A series covering the BRICs. More on the BRICs hotel markets is featured in the December issue of HOTELS’ Investment Outlook. Click here to read the first part of the series looking at Brazil.
HOTELS: How is the slowing economic growth of Russia compared to previous years affecting hotel performance and development?
Walter Neumann: We are seeing growing occupancy. Even though work is under way in several of the chain’s hotels and some rooms are unavailable due to remodeling, Azimut Hotels manages to maintain an overall rate of occupancy of 65%. Rooms that have already been renovated enjoy a boost in occupancy of 8% to 12%.
The flagship hotel of the chain, the Azimut Hotel Moscow Tulskaya, has shown a very high level of occupancy, around 80%, from the first day it opened in 2012. The RevPAR for 2013 has more than doubled.
In the last few years there has been a significant increase in the number of rooms available as international hotel operators have broadened their expansion into Russian cities and the upcoming Olympic Games in Sochi in 2014 and the FIFA World Cup in 2018 have played some part in raising investor interest in the hotel sector. The 2014 Olympic Games will provide a definite boost to the country’s hotel industry. Our information indicates that those attending the Olympics in Sochi also want to visit Moscow and St. Petersburg, which will bring extremely high occupancy to the low season.
HOTELS: What is your outlook on Russia’s hotel market and which markets have the most potential for future development?
Neumann: In Russia there is still a shortfall of mid-priced 3-star and 4-star hotels. Our goal is to remodel all of our rooms so that they conform to the new international standards. We are aware of what business tourists need today and what kinds of hotel services will be in demand. The SMART concept that we are following, developed for us by Bruzkus Batek Architects, will serve for the next 10 to 15 years. We are quite certain of this because we have analyzed the mid-priced hotel segment in other countries and adapted foreign standards to the Russian market.
The main share of tourism in cities with over a million inhabitants consists of business tourists. During periods of low business activity, hotel occupancy in these cities drops quite a lot, typically falling 15-20% below the annual averages. The key cities that require a broader mid-priced segment are Moscow and St. Petersburg, but it is needed also in the secondary cities wherever there is considerable business activity.
HOTELS: What are the challenges of operating and getting deals to expand in this country?
Neumann: The main obstacles to the development of the hotel business in Russia are high taxation, which affects the price of accommodation, and high interest rates on loans for projects on the order of 15% for a term of five to seven years in Russia, while in Europe the rate is 5% to 7% for 10 to 15 years. A typical loan-to-value ratio for new hotel development financing would be 65-35.
There is also a lack of involvement by local authorities. For developing tourism, including business travel, the government must simplify the visa regime and make cities more suitable for visitors. Right now, most travelers come here on business.
Nevertheless, in the Russian regions as well as in the capital, we are now seeing a growth in hotel chains and the hotel market is becoming highly competitive.