Potential high returns for investors in Russia and CIS as hotel values set to climb in the region, says HVS

Upscale hotels in Moscow, which command some of the highest average hotel rates in Europe, are expected to achieve a value per room of €391,000, up from €353,000 in 2010, with the average value of a hotel room in the region overall reaching €163,000.

The HVI report, published ahead of next week's Russia & CIS Hotel Investment Conference in Moscow [17-19 October], says values in the region are likely to continue climbing to 2016, fuelled by the relatively poor standard of existing hotel accommodation, the hosting of large sporting events and an increasing share of international travellers.

Russia, the CIS and Georgia offer huge potential for international hotel investors as demand for hotel rooms grows and diversifies, with returns that could far exceed those of more established markets. However, the report warns that investors are still being deterred by risks such as the possibility of oversupply in some markets, excessive bureaucracy and long development lead times.

"Investors need to weigh up the potentially high returns against some of these issues and take a longer-term view. We expect demand to grow and diversify and the market to broaden for a greater variety of players," says report co-author Saurabh Chawla, director, HVS London.

"Those who persist and invest in a solid location, a quality product and work with a professional operator will be poised to realise healthy returns in the longer-term."

The report advises hotel investors to give consideration to hotel branding and affiliation, which will become more important as the Russian market becomes more competitive and guests more discerning. Operating as a branded hotel, or being part of a hotel affiliation, will help increase market share and subsequently profits and valuations.

Retaining the services of an asset management company is also advisable. "As the market develops it will become more difficult to improve cash flow and net income levels through aggressive rate increases. Hiring a professional asset management firm can be beneficial by helping to establish standard operating procedures and streamline operations across the various departments; thus, reducing costs and improving bottom lines," adds Chawla.

The report shows that 2010 proved to be a year of contrasts for the region – some markets exhibited signs of recovery from previous decreases, owing mostly to renewed business activity leading to more room nights and a slightly improved investor sentiment. But many markets continued to register decreasing values, as performances in those markets had not yet levelled out. Overall, values decreased by 4% in the region, lagging markedly behind the European average, which grew by approximately 7%.

"For 2011 a brighter picture can be expected as most markets return to value growth," forecasts Chawla. "The top eight performers are set to achieve a growth rate of 10% and above following depressed trading levels or due to some special events. Overall, values in the region are expected to increase by around 7% in 2011, with the average European growth forecast only slightly over half this figure."

Through its offices in London and Moscow, hotel consultancy HVS has tracked trends in hotel values in 14 key markets in Russia, the CIS and Georgia since 2007.

To download a copy of Russia, The CIS and Georgia - Hotel Valuation Index by Alexey Korobkin and Saurabh Chawla click onto: http://www.hvs.com/Content/3186.pdf (in English) or http://www.hvs.com/Content/3187.pdf (in Russian).