Holiday resorts near Moscow are the most profitable investment projects in the Russian hospitality industry

Marina Tupikova

Until recently, Moscow was considered the main center of development for Russia’s hospitality industry. However, the hotel boom in the capital came to the end back in the 20th century: over the last few years, only two or three notable projects have emerged. This doesn’t mean that there is no demand for new hotels on the Moscow market or that investors don’t want to invest. The explanation is simple: with the numerous restrictions that arise when selling hotel projects, they go either to other industries and projects or to other regions. The suburban area near Moscow, called “Podmoskovye” in Russian, has become just such a region, and new hotels and resorts are currently popping up everywhere. The demand for the services provided by modern suburban clubs and vacation hotels is huge, and their average annual room occupancy is 70-85% and as high as 100% in the summer and during national holidays. This year, for example, 70% of the rooms available for the entire summer season sold as early as March.

The business of recreation

Today, there are four types of country holiday resorts in the region near Moscow: former Soviet vacation hotels, foreign hotels and clubs, recreation centers belonging to specific companies and organizations, and, finally the “new Russian,” post-Soviet vacation hotels. Facilities inherited from the former regime with Soviet-style management make up more than 60 percent of the market. Despite renovated rooms and low prices ($15-20 per room per night), these vacation hotels attract few customers because of their undeveloped infrastructure and modest level of service.
Western complexes, such as Le Meridian Moscow Country Club in Nakhabino and the Holiday Inn at Dmitrovskoye Parkway were the first to offer high-quality rest and relaxation. However, due to rather high prices, clubs with foreign management have taken up a specific and quite narrow market niche: corporate customers account for as much as 70 percent of their clientele.
Russian state organizations and natural resource monopolies were the first among domestic investors to develop the recreation market in suburban Moscow. However, the resorts and hotels they have refurbished or built cater mainly to the companies’ needs and don’t have a significant impact on the market, as only 20% of the rooms are available.
Investors who see the hospitality industry as a business appeared only very recently. New resorts such as Volen Sports Park, Heliopark, Istra Holiday Dachnye Oteli (Istra Holiday Country Hotels), Atlas Park-Hotel, Akvareli Vacation Hotel, Usadba Zagorodny Klub (The Manor Country Club) and others, are designed for a wide variety of vacationers. Services provided by the new holiday resorts have immediately come into demand on the market, and their occupancy during a peak season can be as high as 100%. “Demand is so high that at times, we are short of rooms,” says Sergey Kolesnikov, General Director of Heliopark Hotel Management. Those behind these resort projects have a clear vision of their market concept: “We provide vacations on a moment’s notice, without problems like customs, tickets, or visas. You can decide today and already be relaxing tomorrow.” Their concept assumes a new standard of quality, including comfortable accommodations, a variety of extra services, an entertainment infrastructure comparable to Turkish resorts, and decent service. In general, all the new resorts target the medium and medium-expensive segments of the hospitality market. These vacation hotels and resorts near Moscow are fastest growing sector in the Russian hospitality industry. The market expands 10% in terms of rooms and at least 20% in monetary terms a year.

Profitable business

Most new resorts are renovated pioneer camps and Soviet recreation centers. “In terms of investment, it is cheaper to reconstruct a hotel than to build it from scratch. The legal status of the site is clear and all utilities are already on site. Moreover, old hotels were traditionally located in convenient places for recreation,” says Elena O’Hara, General Director of Istra Holiday Company.
Experts estimate that building a three- or four-star hotel with 150 rooms can cost owners $5-7 million (without taking into account the land it is built on). “Investments in constructing recreation facilities near Moscow, especially first-class projects, are promising,” says Marina Smirnova, Deputy Marketing Director of the Hotel Consulting and Development Group. “The market expands 15-20% a year in monetary terms and is far from saturation.”
According to available estimates, investments in country resorts are repaid in four to five years. By comparison, investments in constructing a hotel in Moscow are twice as high and repaid in eight years.
Meanwhile, owners of existing resorts are not resting on their laurels. Despite the fact that demand for their services by far exceeds supply, all of them are trying to contrive their own “catch” to attract customers.

The battle for the market

Most of the vacation hotels available on the market are single installations, and only two projects envisage establishing a chain, Istra Holiday Dachnye Oteli and Heliopark. Istra is a part of the Rosevrogruppa Holding, which began three years ago by renting cottages on a long-term basis in the Lada Holiday Vacation Hotel. Currently, the company owns two facilities, Lada Holiday and Istra Holiday located a 10-minute drive away near the Istrinskoye Reservoir.
There will soon be three Helioparks in the region near Moscow. They are managed by Heliopark Hotel Management, which formed as a result of the merger of two tourist operators active on the Turkish and Egyptian markets. They merged in 1999, when the number of Russian tourists traveling abroad declined and the suburban Moscow market became potentially attractive for the tourist business.
The hotel chain enables the two companies to apply flexible pricing and offer prices in the range of $40-60 a night without sacrificing quality, whereas similar individual hotels ask for $100-250. “We are building a chain, because it’s always easier to develop chains and much cheaper to maintain facilities,” says Sergei Kolesnikov. Besides, with the absolute shortage of rooms, a chain can take over the market quickly.
The emergence of hotel chains on the suburban Moscow holiday market is a significant event for the Russian hospitality industry across the board. It points, first, to the development of the industry proper and, second, to the appearance of Russian management companies able to extrapolate their experience. At present, a nationwide company managing a number of hotels has never emerged on the Moscow hotel market so far. Moreover, there is no full-fledged nationwide hotel chain in Russia at the moment.

Local color

Both chains plan to further increase their share in the suburban Moscow recreation market. For example, Heliopark Hotel Management is considering taking over failing hotels and resorts and even transiting to franchising in the future. The company’s managers hope that there will be as many as six Helioparks in Russia by the end of this year: not only vacation resorts near Moscow but also a mini-hotel in Nizhny Novgorod, a hotel and tourist complex in Yasnaya Polyana, and a tourist complex on the Black Sea. “We plan to enter the Moscow and St. Petersburg markets,” Kolesnikov states. “There are no decent resorts in St. Petersburg at all. As for the Moscow market, you have to enter it with a good reputation. It is easier to manage city hotels, since there is a ready municipal infrastructure in place, but a resort is a separate town with its own infrastructure.” Marina Smirnova from Hotel Consulting also believes that before entering the Moscow market, companies should build up experience by managing projects in Russia’s regions. “Moscow owners will commit to projects only if they see the results from other cities,” she says.
Istra Holiday Dachnye Oteli also proposes to manage facilities. However, the company also sees another road to expansion, namely developing country hotels in alliance with international chains. “If foreigners want to enter the Russian market, it would be much easier for them to do so in partnership with pro-Western Russian companies that know the rules of the game on the Russian market. And foreign companies would provide us with their know-how and technology,” believe executives at Dachnye Oteli.
Both of these large resort companies plan to broaden their customer base by attracting foreign tourists to their resorts outside of Moscow. For example, Istra Holiday Dachnye Oteli will welcome about 33,000 foreign guests to their hotels next year. To get a steady stream of foreigners, the chain’s owners want to join international hotel reservation systems and get on Western tour companies’ lists. The company expects the demand from foreigners to be quite high. Many foreigners see the suburban Moscow setting, ethnic programs with bears and bells, and staff unversed in English as “local color.”
 
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