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07.07.10
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Sweet Dreams
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By Tai Adelaja
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Even though Russia’s overheated hotel market took a cold shower from the global economic downturn, the country’s hotel business continues to feel the hazy heat of the recession. Summer-time profitability dipped by a third and industry experts predict that the market will continue its downward trend.
In the megalomaniac pre-crisis days, no fewer than a third of all investors dreamed of putting money in the nation’s hotel business, partly lured by the hard-to-ignore hyper profit in the sector, the state-owned Rossiiskaya Gazeta reported on Monday. In Moscow, where more than half of the nation’s hotels are concentrated, revenues in the hotel business spiraled up 25 percent in 2008, far more than in other European cities such as Paris, with 16.6 percent, and Berlin with 4.8 percent, the paper wrote. The hotel business was also one of the few sectors of the domestic economy that had been growing by leaps and bounds in pre-crisis Russia. Between 2003 and 2010, the number of new hotels had grown by more than 30 percent to 11,700 from 8,500, figures from the Russian Hotel Association show.
The Russian hospitality market, which was worth over $2.5 billion last year according to the Discovery Research Group, a marketing agency, is concentrated in the nation’s main centers of commerce, such as Moscow and St. Petersburg. Of about 13,000 hotel rooms that meet international standards, 10,000 are located in Moscow, 1,500 in St. Petersburg and the remaining 1,500 are scattered around other Russian cities. In addition, over 80 percent of hotels located in Russia’s regions are housed in old Soviet-era buildings, and many require heavy investments in repairs to even make the three-star category.
However, with tourism sagging in the wake of the global economic downturn, revenues in the hotel business declined by an average of 30 to 50 percent, while the overall vacancy rate increased by 30 percent, experts say. Gennady Lamshin, the president and CEO of the Russian Hotel Association, said that both the number of tourists and people on business trips have been greatly reduced within the past 18 months and, sapped of funds, many Russian hoteliers have scrapped their advertizing budgets altogether. “Domestic demand for recreation and hospitality fell by about 25 percent, while business travel was down 30 percent,” Lamshin said. “It is telling that Moscow, which was leading both by the volume and tempo of growth before the crisis, is now leading the decline.”
Moscow indeed epitomizes the paradox of a hotel business in crisis, while also maintaining higher-than-average daily rates, which have so far failed to yield to the market forces of supply and demand. Out of some 246 hotels in Moscow, quality economy class hotels are hard to come by, but the average daily rate (ADR) remains one of the highest in Europe. Ernst & Young estimated that there are 19,900 rooms in three-star mid-class hotels in the city, with an average daily rate (ADR) of $162 (or 5,239) rubles – a drop of 39 percent in terms of dollars and 19 percent in ruble terms from the pre-crisis level. In the four-star category, the ADR was $197 or 6,394 rubles, 41 percent and 20 percent less than in 2008, respectively, while in the five-star category it is $313 or 10,155 rubles (a decrease of 33 percent and 11 percent).
The shortage of good economy-class hotels is aggravated by the fact that most of the new hotels under construction in the capital are in the top four-star and five-star category, adding to the pool of 8,000 rooms already on the market. However, the financial crisis appeared to have tempered ambition in some areas, leading to a halt in planned commissioning of some landmark hotels such as the Ukraina Hotel, slated for opening last year, and the long-awaited opening of Hotel Moskva. There has also been little progress on a similar Pekin Hotel project, which is now meant to open in December 2013.
The ratio of the high-prices to the low load rate is a characteristic feature of the hotel market in Moscow, and reflects a deficit of quality guest rooms and the low level of competition between the hotel operators, Frank Knight wrote in a research note. This strategy provides perfectly acceptable by European standards levels of profitability per room (RevPAR) and, at the same time, reduces the operational burden on rooms, the reality agency said. Lamshin, however, said that hoteliers are not wholly responsible for the high price of hotel rooms. “In Russia, the real cost of a room is above average when compared to the cost in other countries. The cost of utility and infrastructure such as gas, electricity, heat and even the drainage system is not only sky-high, but it increases regularly,” Lamshin said. “In addition to high value-added tax, there are property, transport and land taxes to be paid by hoteliers. It is hard to cut down cost under these circumstances.”
At a roundtable organized last week by the Russian Union of Industrialists and Entrepreneurs (RSPP) dedicated to analyzing trends in the Russian hotel industry, hoteliers blamed poor conditions of roads, airports, rail and air transportation, as well as the lack of modern and comfortable resorts, for the present decline. Hoteliers also expressed dissatisfaction with the quality of training for hotel personnel in Russian universities and specialized colleges, saying that many fall below acceptable international standards.
The near-absence of a star classification system, which is used to rate hotels, has been giving tourists a hard time in aligning room prices in their choice hotels with their budgets, industry executives said. “There are many hotels in the country which label themselves as three-star hotels even though the services they provide do not qualify them for the three-star category,” Lamshin said. Though the government has promised to introduce mandatory categorization of hotels very soon, he said, legislators still have to pass a law that will make it imperative for Russian hoteliers to allow standardization experts to categorize them.
As with everything in Russia, the ever-present bureaucracy has also been aggravating problems for the domestic hospitality industry. For instance, until very recently, Russia’s immigration regulation obliged foreign guests lodged in the country’s hotels to make daily visits to the Federal Migration Service (FMS) to pay a two-ruble state duty, Lamshin said. “After a series of requests, the FMS has finally agreed that hoteliers can pay the duty monthly through bank transfers while supplying the relevant information about the foreign guest as required by law,” Lamshin said.
Yevgenya Sukonnikova, the deputy head of the tourist market and statistics at the Federal Tourism Agency (Rosturism), said that despite an 8.3 percent decline in the number of inbound tourists last year, the share of tourism in Russia's GDP increased to 2.5 percent from 2.28 percent in 2008. She noted, however, that besides underdeveloped infrastructure, national tourism products are weakly promoted on foreign markets. "The budget for the promotion of Russia as a tourist destination in 2009 amounted to only four million euro, while Turkey has spent 112 million on advertising, Spain – 76.8 million, Italy – 132 million, Austria – 52 million, Cyprus – 40 million euro and Poland, for which tourism is not a key source of income, spent almost twice as much as Russia," she said.
Industry executives also warn that lower profitability in the hotel business will inevitably result in reduced funding for new projects and an increase in payback periods. This in itself could impact the rate at which new high-quality hotels are built around the country, they say, pointing to some dismal statistics. Presently there are 4.2 hotel rooms per 1,000 inhabitants in St. Petersburg, 3.5 rooms in Moscow, 2.1 in Yekaterinburg and 0.8 in Novosibirsk.
The government’s fiscal policies have not been helpful, some experts say. Unlike other European countries, where the VAT is about five to seven percent, Russian hoteliers continue to pay a whopping 18 percent in VAT, Lamshin said. “We have lobbied hard and sent representatives to the government to reduce the VAT, but it appears no one is listening,” he said. Industry executives also point to high expenditures on utilities and taxes, particularly on land and property. In the past, land tax was calculated using a standard-cost method, which enabled property owners, especially hoteliers, to pay lower taxes. But since 2006, the municipal authorities began calculating the property tax using the so-called “cadastral values,” which slightly increases the tax burden on property owners.
On the brighter side, market participants say there are indications that the market is returning to pre-crisis level, as more countries report an upswing in international tourism and a decrease in the vacancy rate. Traditional centers of tourism like Turkey, Thailand and the Dominican Republic have reported a significant increase in tourist activity on the part of Russians in the first four months of this year, a further indication that the tourist industry is set for a rebound.
One dissenting voice is that of Alexei Volov, the director of global sales for Russia and the CIS at InterContinental Hotels Group, who predicted that the depression in the hospitality industry will continue for a few more years. The Russian hotel business, he said, experienced the deepest drop in profitability in Europe as a result of the crisis, making quick recovery an unlikely prospect. However, some industry executives like Sergei Shpilko, the president of the Russian Union of Travel Industry, disagreed, stressing that the current downturn in the hospitality market has sanitized the market by removing the pre-crisis "overheating." "There used to be excess profits before the downturn, and now there are simply profits,” Shpilko said. “The situation is not critical." |
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