Industry Update
Opinion Article16 July 2009

Is Russia still the investment community’s sweetheart?

By Tatiana Veller

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In the current times of economic turmoil, does the once lucrative market still present an attractive proposition for international hotel brands and investors? HVS Executive Search investigates further.


For much of the last decade, international institutional and private investors were begging the Russian real estate industry for attention. Land was scarce, acquisition opportunities were dear and returns riding the highest wave.

Russia went down with everyone else a victim of economic difficulties, as did the oil prices. However, the Russian government speculates that the country’s budget was built on ultra-conservative predictions of $40 per barrel of oil; it is now at about $60 per barrel and stable, but the country’s economy is nowhere near the safe haven the government had hopes for.

Prompted by a recent report by the World Economic Forum (WEF) on the Travel & Tourism Competitiveness of various markets in the world, HVS Executive Search decided to take a look at how competitive Russia remains for investment in its hotel real estate for market entry by hotel brands, and for further development in it.

To preface the story, allow me to share a recent announcement by furniture retail giant IKEA. The company has announced a freeze on all its development plans in Russia, citing as the main reasons their inability to cope with Russia’s bureaucratic red tape and uncertainty of administrative procedures in the region. The truth is that under Putin’s reign, and more recently under Dmitry Medvedev’s Presidency, Russia has become a much more corrupt and jingoistic country. The years of sky-high oil prices were not taken advantage of and the country did not develop a self-sustaining manufacturing or service industry. No investment was made in infrastructural improvements and the money has found home in the pockets of Siloviki and oligarchs.

However, in the study mentioned above, Russia ranks number 59 out of 133 on the overall Travel &Tourism Competitiveness (not too bad, I thought to myself, Russia made it to the top 50%!). It’s strong points are health & hygiene regulations, human, cultural and natural resources; the weaknesses – government policies, lack of environmental consciousness, poor quality of ground transport and tourism infrastructure and the lack of price competitiveness of the hotel and tourism industry. Let’s look slightly deeper at what this ranking is made up of.

On the bright side, Russia has one of the highest number of natural and cultural heritage sites in the world (ranks 5 and 9, respectively), it’s air and railroad infrastructures are extensive (ranks in the top 25% for both), and overall, WEF recommends extension of business trips for touristic purposes when in Russia.

However, Russia’s foreign policy leaves one wishing for more: prevalence of foreign ownership, impact of business rules on the country’s FDI attractiveness, ambiguity of policymaking by government and tough visa regulations have all scored at 120 or higher out of 133.

Another factor going against Russia’s competitiveness is the shortage of quality hotel rooms (ranked 85 out of 133); and this is where the real conversation for those looking for opportunities in the hospitality arena in Russia, begins.

Moscow alone still faces a vast undersupply. This is hardly news for anybody who’s been observing the development of the industry here, or has at least travelled here. For a population of 12mln, Moscow only has 6,000 Western-standard beds, compared with 100,000 in Paris and 90,000 in London. In addition, there are 14 cities with a population of over 1mln people in Russia, and most have none, or at best 1 western-style hotel.

Notwithstanding the pressures brought on by the financial crisis, most hotel companies still take Russia very seriously. Mike Collini, VP Development Northern Europe for Hilton, which has Hilton Moscow Leningradskaya and Hilton Garden Inn Perm in Russia, believes that the country still represents some of the greatest potential for growth in the world today.

Rezidor Hotel Group, with 12 hotels currently operating in Russia (6 under Radisson and 6 under Park Inn brands) and the largest pipeline among all international hotel groups present in the market, has set up a full-fledged corporate and operations office for the Russia/CIS markets, and has no plans for downsizing. Arild Hovland, SVP Development Russia, comments: “With the prevailing bad economic news and ’Russia-bashing‘ from the Western press we believe that there will be both opportunities and rewards for those who stay on a steady course. In our business the fact remains that there is a strong imbalance of demand and supply of accommodation in Russia and particularly in Moscow, a city which despite the crisis, is still producing one of the highest RevPARs in the world.

The crisis has in many ways been very healthy for Russia – the cost of land and construction is down (not to speak of related costs), developers are "down to earth" again and most of the ’cowboys’ are no longer in the market. Quality in design, a realistic budget and good project planning have become the prerequisites for financing and many Russian companies have started to consider the value of good governance and transparency in business.

The Rezidor Hotel Group is fully committed to continue our hotel expansion in Russia and we are well on course to achieve our target of adding 10 new hotel project to our management portfolio this year.”

Adding to this, the WEF report also ranked Russia low on its hotel price index (115 out of 133) portraying this factor as a negative for travelers to the region, but in this material HVS Executive Search is considering things from the side of hotel owner, investor, operator! In a May 2009 release by STR Global, a leader in lodging industry benchmarking and research, Russia posted somewhat startling results – occupancy dropped to about 52.9%, ADR (in Moscow) decreased 41.9% to Euro165.49 and the RevPAR dropped 49.7% to Euro101.15.

These numbers aren’t as alarming as they seem. Moscow had a lot of fat to shed – having led the market for a while in ADR and RevPAR, it isn’t time to worry yet, explains Andrey Smirnov, Regional Revenue Director for Interstate in Russia: "The Moscow hotel market in our competitive set experienced RevPAR decrease of over 33% during the first half of 2009. The main reason for such decrease is a fall of average room rates by 24%. It is important to mention that Moscow had been showing significant RevPAR growth since 1999. Lack of supply had allowed Moscow hotels to push rates and profitability to levels that couldn't be reached by other major global cities. So the drop that Moscow hotels are experiencing now is from a much higher level than other markets, helping Moscow maintain its leader position in ADR and RevPAR."

At the same time, the market agrees that there are quite a few hurdles to jump in the process of developing a hotel in Russia and the CIS. The main one is the need for political clout and connections – this is the only way to insure oneself against unexpected challenges. One has to be extremely cautious when selecting a local partner to work with – if relationships go sour, it’s easy to lose 3-5 years of development time. A good way to safeguard against this, or at least help soften these challenges, is to have a development office staffed with native Russians (of course, having a Western outlook and prior exposure to hotels and franchise development helps). Several companies operating in this market have already recognized this need – Hilton, Accor, Starwood, Hyatt have all added Russian development executives to their teams in the last couple of years.

Moreover, in recent PricewaterhouseCoopers research released in February this year, “amid a pan-European downturn, Moscow remains in top ten and moves to sixth place in 2009 for European real estate investment prospects” according to the highly regarded real estate forecast, Emerging Trends in Real Estate® Europe 2009.” They also add that “survey participants seem to be mixed on office properties … Nonetheless, 48 percent of survey participants find favorable buying prospects for both retail and hotel properties.”

What we attempted to establish in this article is whether Russia still displays an attractive hospitality industry investment landscape. It certainly seems so, which is additionally proven by such world-renowned brands as Wyndham (Ramada), TUI, Shangri-La, Mandarin Oriental, Four Seasons, Raffles, InterContinental with their first properties about to open or under development here. Investors will be well-positioned also, if they endeavor into the market at this stage – the barrier of entry has been significantly lowered!’s latest annual update of their “World’s Largest Hotel Companies” helps support this argument - only 2 companies in their top 10 list are currently not yet present in Russia – Choice and Best Western (this is mainly due to their development model of only Franchise contracts). At the same time, when you look at the companies in places 11 to 20 on that list, only 1 of the brands is present in Russia, spelling potential for the region.

A new breed of investors appeared recently in the vast plains of the Russian investment market – a private individual, possibly a businessman from the Russian Regions, who, having profited from his core business over the years, stashed up $15-20mln in equity. Such investors are looking for an opportunity to safeguard and possibly multiply their monies. Many developers in the market reported meeting such investors recently, and some even said they prevail among the “live” leads currently coming in. Hotels remain an attractive opportunity for them because they’re glitzy, prestigious, seemingly safe and apparently profitable. What these investors often don’t take into consideration is the complexity of the operation, the length of return, the continuous inflow of capital required to maintain the property in saleable condition.

HVS would like to question the inaction by international and Russian institutional investors, who have the sophistication to realize the complications embedded in owning hotel real estate, but also to fully appreciate the opportunity which the market in Russia holds. Russia has its challenges, no doubt, but it also has several advantages in the form of a lack of quality accommodation, sky-high prices for western-standard rooms, a vacant 3-star segment, regional cities that are severely underserved, the forthcoming 2014 Sochi Olympics, the country’s potential for tourism, declining salaries along with the cost of construction and much more.

Related Event

Russia Hotel & Tourism Investment Conference 2017

Radisson Blu Belorusskaya — Moscow, Russian Federation
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Tatiana Veller

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    HVS is the world's leading consulting and valuation services organization focused on the hotel, restaurant, shared ownership, gaming, and leisure industries. Established in 1980, the company performs more than 4,500 assignments per year for virtually every major industry participant. HVS principals are regarded as the leading professionals in their respective regions of the globe. Through a worldwide network of over 50 offices staffed by 300 experienced industry professionals, HVS provides an unparalleled range of complementary services for the hospitality industry. For further information regarding our expertise and specifics about our services, please visit

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