Investors refuse to build inexpensive hotels in Moscow due to the exorbitant price of land and the lack of transparency of the Moscow land market.

Ilya Stupin

In October, a tender will be held in Moscow for investors to build a new multi-purpose complex on the current site of Hotel Rossiya. In late August, Moscow officials decided to tear the Rossiya down. Many Soviet-style Moscow hotels have met with the same fate. The Intourist has already been torn down and a new first-class hotel with 250-350 rooms, underground parking, a casino, and conference rooms will go up in its place. The demolition of the Moskva is almost complete. In its stead will rise a new 180,000 m2 building that will include around 220 hotel rooms, as well as offices, a department store, elite apartments, and an underground garage for 800 vehicles. In addition, the Hotel Sport was torn down just a few days ago, and its site will be home to a new hotel and entertainment complex. Plans to renovate and improve a number of other Moscow hotels, such as the Budapest, Leningradskaya, Tsentralnaya, and Ostankino, have also been announced. Overall, as a result of this hotel “perestroika,” around 6,000 hotel rooms will be taken off the market by 2006.
Many Muscovites feel that these old Soviet hotels do little for the city and think that authorities are doing the right thing at the right time. Others, while admitting that these hotels are far from architectural masterpieces, think that they represent the city and that they should stay. Those on the hotel market are doing their best to understand how authorities will make up for the thousands of lost inexpensive rooms. The majority of the demolished hotels will be replaced by luxury four- and five-star hotels too expensive for most Moscow visitors.

The end of the cheap hotel

According to data from Jones Lang Lasalle, Moscow has approximately 20,000 hotel rooms. This number includes both Soviet-era hotels such as the Rossiya and Ukraina, as well as modern brand-name hotels like the Balchug Kempinsky, three Mariotts, and two Novotels. Despite the fact that most of the international hotel chains have hotels in Moscow, the number of quality hotels is tiny. At present only around a fourth of all hotel rooms meet Western standards. The majority of hotels of international quality have four or five stars and rooms cost more than $200 a night. There are barely 7,500 three-star hotel rooms in hotels like the Kosmos, Rossiya, Ukraina, Leningradskaya, Katerina City, Marco Polo, Novotel Moscow Center, Novotel Sheremetyevo, and Iris. This is clearly not enough for a city like Moscow. As the old Moscow hotels go down, the deficit of affordable, economy-class rooms will grow. Travel agents are already upset about the mass demolitions. As Irina Tiurina, Head Specialist at the Russian Travel Industry Association, stated recently, the elimination of 3000 rooms in a city with a severe shortage of economy-class hotels is doomed to drastically reduce the number of tourists. According to Tiurina, not a single new tourist-class hotel has been built in Moscow in the past several years. If city officials want to increase tourism, they need to think seriously about resolving the three-star deficit.
The consequences of eliminating several Moscow hotels are already apparent. According to estimates by the Hotel Consulting & Development Group, the average fill rate of Moscow hotels has reached record levels, 70%, up more than 20 points from last year. Travel agents expect prices to rise next season by an average of 30%.
What will make up for the lost rooms? Only 300-325 new rooms are scheduled to hit the market by year’s end and these are in higher than average price categories in small hotels. The remaining projects will not be on the market for quite some time. After a year, the new Intourist has yet to rise above the fences surrounding the site as the project changed strategic investors. The Minsk, Kameny Most, Srednie Torgovye Ryady, Ural, and several others are sunk in a swamp of legal and financial problems.
By May 2005, a Swissotel first-class hotel with 235 rooms will open as part of the Riverside Towers complex. Another luxury hotel is planned to open in the building of the former Nizhnie Torgovye Ryady on Red Square facing Moscow’s most famous cathedral. The Korean company Lotte Group has begun work on a multi-purpose commercial building that will include hotel rooms. Hotel rooms will also be part of Moscow-City in its so-called central core. Yet another hotel will be part of the Aquapark project along the Moscow River. However, no one yet knows exactly how many rooms of what quality these projects will bring to the market.

No land, no money

Not long ago, the Moscow city government approved yet another general plan for hotel accommodations which stipulates that by 2010 almost 62,000 rooms will be built in the city. This plan includes more than 50 projects concentrated in the center of the city, as well as in the northeast and west. The majority of the new hotels will have three stars. Yet many on the market doubt that the good intentions of the Moscow authorities will ever become a reality. When making their list of future addresses and responsible persons, officials seem to have forgotten to think up a way to realize these projects. What is holding back hotel development in Moscow, anyway? According to officials from the hotel department, city programs are stuck for a variety of reasons.
First of all, there is a deficit of available sites appropriate for hotel construction. Secondly, investors do not have the long-term money or the desire to get involved in long-term construction projects. “Hotels take a longer time to see returns than, say, office or residential space. In addition, hotel management is complicated and requires a professional approach. Why do city officials bother coming up with these various programs then? On one hand, they claim to be proponents of the free market, but on the other they are forcing business into a corner by coming up with programs, plans, and schedules. This is one of Moscow officials favorite pastimes related to the construction business. It would be better if they would take care of the land issue,” one Moscow entrepreneur complains. “I can’t explain to international partners ready to invest a hundred million dollars in building a Moscow hotel what in the world this ‘right to buy out rent’ means. They don’t understand that you have to buy land and then pay for it again.”
The price of land in Moscow is yet another important topic of discussion. According to developers, it is hard to find a commercial site in central Moscow for less than a thousand dollars per future square meter. Under such conditions, it simply doesn’t make business sense to build three-star hotels.
Specialists admit that the Moscow hotel market is potentially very attractive and the demand for hotels high. For the time being, however, it is more profitable to build hotels in other cities like St. Petersburg. In central St. Petersburg GVA Sawyer together with the Kesko Company and internal hotel operator Accor is building a 222-room three-star hotel. “In St. Petersburg, land is significantly cheaper and we bought our site on the secondary market. In general our plans include construction of ten other hotels in Novorossiisk, Krasnodar, Ufa, and Novosibirsk. To make the hotel business grow in Moscow, officials need to set appropriate prices for land. And the conditions under which sites are granted should also change for the better. For example, in Europe, the cost of land is not connected to the cost of a square meter in the future building,” explains Cameron Sawyer.

No kidding

In addition to the cost and good location of a site, long-term financing is a major concern of hotel developers. For example, participants in the bidding on the Rossiya reconstruction project have to present proof that they can finance the project or confirmation that they have or can raise at least $500 million. In addition, the winners are obligated to hand over 49% of the total complex, including a concert hall and movie theater at least 55,000 square meters in size, to the city. “You’ve got to be kidding,” market players laughed.
It is already clear today that these global projects will take much longer to complete than first expected. Especially as there are practically no developers specialized in the hotel business in Moscow. For the majority of real estate market players, the hotel business is terra incognita. According to Alexei Belousov, General Director of Capital Group Marketing, without hotel brands, developers cannot completely understand investment in this area. Banks are also not about to take the risk. “Banks want to see international operators in projects,” says Alexander Lesnik, General Director of the Hotel Consulting & Development Group. “This guarantees that the hotel will run smoothly and that things will go according to the business plan.”
At the same time, international hotel chains like Hilton, Starwood, Four Seasons, Ritz Carlton, Rezidor SAS, and Accor are wandering around in a daze. This is not their fault: Moscow officials are forcing them to. Instead of trying to create an open market, they are simply making them play according to their strange and murky rules.

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