Red tape strangles Red Square

Moscow, and Russia's second city, St Petersburg, have been tipped as the markets to watch for hotel investors. There is a shortage of rooms meeting international standards in both the upper and middle tiers and room rates are high with a healthy profit margin.

Mark Wynne Smith, European CEO of Jones Lang LaSalle Hotels, has carried out extensive research on the hotel market in Russia and is buoyant about its prospects: "With a stable situation, a growing economy, increasing global prominence and increasing tourism, Russia is emerging as a hotspot for investors."

Indeed, the market would be wide open were it not for bureaucracy hampering development and openings and the complex visa process for tourists. "There's a lot of bureaucracy and it's time-consuming to get permits to develop and open hotels," adds Wynne Smith.

Jeroen Bergmans, travel editor at design and travel bible Wallpaper, has travelled extensively in Russia and thinks the market is going through an interesting phase. He is not impressed by the current hotel selection and believes things will only improve if someone cuts through the red tape. "Moscow in particular has shocking hotels. The city is one of the highest in terms of room rates, but what you get for your money is not very much."

So what can be done? "I think it's very difficult to get anything done in Russia," he says, "so it's very difficult to set up a hotel, and the visa system goes back to Stalin."

MOSCOW: A WORK IN PROGRESS

Currently, more than 30 million people visit Moscow each year – 80% of demand for hotels comes from business travellers.

The room stock in Moscow is about 40,000 in 183 hotels, though only 9,500 of these meet international standards. And while the top end is better off, with Kempinski, Ritz-Carlton, Hyatt International and Marriott, there is room for development across the board.

The domestic market is healthy, with groups such as Heliopak and Asimuth looking at regional properties where land is cheaper and rates lower.

Wynne Smith predicts that quality room supply will double by 2012, with the mid-market booming once the upper end, with its higher profit margins, is saturated. "It's not an easy city to develop in, but not all the new hotels are going to open within six months, which is what we previously feared, so any effect on performance will be spread out," he adds.

However, with average quality room rates reaching $290, second only to London at $370 per night, the capital is one of the most expensive cities in Europe.

"Operators are doing great things in keeping prices up and to some extent we can't argue with that," says Wynne Smith. "But what it does do is stop people staying in the city as long, so the average length of stay will come down and you will reach a point where people will think carefully about going at all."

According to Bergmans, there are essentially three types of hotel in Moscow: those like the Metropole, tired and shabby and not able to compete on a global scale; international chains such as the Park Hyatt which can charge a fortune because there is no alternative; and boutique hotels such as the Golden Apple, which he hopes to see increase in number.

Bergmans says that, although Russian guests have historically veered towards the big and brash and were unaccustomed to a culture of pre-booking, they are now leaning towards more Western tastes.

As general manager of the Baltschug Kempinski in Moscow, the first deluxe Western hotel to open in the capital in 1992, Gianni van Daalen has seen many changes in the city over the past two years, with several major hotels being converted into modern Western hotels. "The rebuild plans are quite active and there are big changes." he adds.

While the Baltschug Kempinski is doing well and is largely unaffected by increasing competition, the industry is constrained by the lack of tourism. "Moscow is a business-only destination; we are full from Monday to Thursday and very low from Friday to Monday. So 52 weekends are very low – that's 104 days – and then we have the season from August when the city is empty. That's a third of the year when occupancy is about 15–20%.We need more visitors in the summer to generate spending in Moscow and make it more of a tourist destination."

THE VENICE OF THE NORTH

The small, cosmopolitan city of St Petersburg attracts far greater numbers of tourists than Moscow. "St Petersburg has far more leisure and tourism travellers, especially during the summer, but also has a good supply of business travellers," says Michael Cooper, vice president of strategic development for Russia and Ukraine at Intercontinental Hotel Group (IHG).

The city is often described as 'the Venice of the north' and tourism comprises 15% of the city's economy. The city has about 200 hotels, with 17,500 rooms, and fewer than 5,000 are considered to be of international quality, with an average occupancy rate of just under 60%. Average room rates are high at $270.

The city is in the process of an ambitious construction boom – Canary Wharf-style offices should boost corporate demand and prop up seasonality. Wynne Smith says: "St Petersburg has huge potential. There are more hotels being developed, but it's very seasonal market and needs commercial growth and I don't think that will happen for the next few years. It needs government promotion."

IHG LEADS THE CHARGE

IHG is leading the way as one of the big brands expanding their presence in Russia. "The need for brand recognition, and the standards that those international brands offer, is as true for Russian travellers as it is in other parts of the world," says Cooper.

IHG has four Holiday Inn hotels in Moscow, with 1,300 rooms, a 575-room Crowne Plaza opening later this year and a 205-room InterContinental Hotel under construction on the site of the former Minsk Hotel.

It also has two Holiday Inn hotels and a Crowne Plaza under construction in St Petersburg. Regionally, the group is opening a 170-room Holiday Inn in Samarra this summer and the Holiday Inn Riverside in Chelyabinsk in 2008.

"We feel that the overall state of the industry is very underdeveloped," explains Cooper. "The reality is that outside Moscow and St Petersburg there are almost no international standard or branded hotels, and these are the hotels that customers are increasingly looking for."

So, while red tape and low standards may be stalling a full-blown hospitality boom in Russia, it seems that better rooms and rates are on the horizon for hotel guests over the next five years, promising strong profit margins for hoteliers.