HVS examines hotel development bottlenecks in Russia

RUSSIA There are a number of bottlenecks facing potential hotel investors in Russia. Advisory firm HVS examines the most critical of them as the industry emerges slowly from recession.

In Russia, an investor’s first choice should be to obtain vacant land plots and build hotels according to the specification of a chosen brand or management company, says Marat Khusainov, managing partner at Capital Consult Realty Hotels. A vacant plot of land can be bought at a government held tender, either through auction or a competitive bid. Investors can also acquire plots through provision of land on a targeted basis, in which the investor applies to the state authorities for a plot of land required for specific construction purposes.

As vacant plots in prime city locations are rare, they are valued highly, notwithstanding the global economic slowdown. On the other hand, prices everywhere else have plummeted dramatically. Even though vacant plots are the preferred choice, foreign investors rarely commit sole development of such land plots due to risks associated when dealing with the authorities directly, says Irene Engel, a partner at CMS Russia.

Investors can also purchase land with existing buildings. It is then possible to either demolish or restore those buildings, depending on the government conditions associated with that plot. For example, the city of St. Petersburg is releasing plots of land with heritage buildings, which of course can only be restored.

Hotel operators face the challenge of keeping to their desired brand direction while catering to the specific needs of the market. Michael Cooper, IHG’s vice president of strategic development in Russia and the CIS, notes that Russia law requires only that hotels have only smoke detectors, whereas IHG will additionally install sprinklers as demanded by their internal standards. Anatoly Kondratenko, director of development in Russia for Starwood Hotels and Resorts, says that currency exchange booths in the hotel lobby are not in Starwood’s brand standards, but since currency exchange is not allowed at the reception desk, such booths are placed in the lobby.

Normally, when commissioning a feasibility study, the potential investor will be advised on the appropriate positioning of the proposed hotel. Nevertheless, it is important to understand some general risks associated with development of luxury hotels: they require large capital investments, longer construction terms, higher operating costs and usually demand that professional management companies carry out operations.

Lower positioned hotels would normally experience lower levels of risk associated with the elements described above. Thus as we go down the positioning scale, risks associated with development would normally decrease. It is important though not to confuse development risk with return on investment. In Moscow, many experts agree that due to high value of land in prime locations, development of limited-service hotels may not be profitable.

Harsh weather conditions, such as Russia’s infamously cold winters, are no longer a construction stopping factor, says Alexey Afanasiev, project manager at Akademproekt. Modern equipment and materials allow companies to conduct certain phases of construction even in the most extreme weather conditions. No matter how advanced materials or equipment are, however, commencing interior work if the building shell is not sealed will only lead to poor results. Absence of necessary permits or delayed raw materials coupled with an erratic payment schedule will delay construction more than adverse weather conditions will.

HVS strongly advises foreign investors to obtain a reliable Russian partner to assist with investing in the country.