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Moscow : the heart of the Russia Housse

Today the Russian capital is top priority for hotel developers who are attracted by the results of the first-comers. The still limited hotel supply and Russia’s growing appeal to businessmen have caused average daily rates to explode. To the obvious shortage of rooms fitting international standards may be added the ongoing renovation of the Soviet-era supply. In order to confront this shortage and develop leisure tourism, the city is backing many projects that should make Moscow one of the major destinations of the 21st century.

What is the "hottest" hotel market in the world? Just ask hoteliers, most will say: Moscow. No doubt. More than 30 million travelers go through its three airports Sheremetyevo, Vnukovo and Domodedovo. Year after year this figure has grown by 15%. All Russia’s indicators are positive: the financial crisis in 1998 is just a distant memory. This year the RTS market index reached a record high. And, according to Forbes magazine, Moscow has more billionaires than London and is close to New York. Backed by the very powerful energy sector, Russia’s economic growth is solid, with over 5% annual progress for the past six years. Economic development, political stability, entry into the WTO: all contribute to attracting investors to Russia, as many individual clients with high levels of individual spending in search of good accommodations in Russia’s capital.The Sheremetyevo airport is preparing to host 35 million passengers in 2010 and 50 million in 2015. To stimulate international clientele, Russian authorities are considering relaxing entry formalities by making 72-hour visas available at the airport for businessmen and short stays. The last area that needs improvement is promotion of the city. The project is vast. But Moscow has more than one asset at its disposal for making itself a favorite cornerstone for hotel groups.To this day nearly 80% of Moscow’s hotel clientele are businessmen and thanks to them average daily rates are taking off. In five years they grew from 100 to nearly 200 euros, with a sharp increase in 2005 (+29.4%). As a result, the RevPAR makes double-digit leaps, with a 14.5% increase in 2006. Across all categories the RevPAR rose above the 150-euro mark, surpassing London and Paris in terms of results. A single phenomenon explains these extraordinary results: under-capacity. “Moscow suffers from a harsh shortage of international hotels. On weekdays it is short 1,000 rooms each day,” observes Alexis Delaroff, Accor Director of Operations for Russia and the ex-CIS members.The law of supply and demand is fully in favor of the hotelier who is able to increase his rates with no fear that occupancy rates will drop. The occupancy rates at Moscow’s properties have settled at 75% as the annual cruising speed. Such a figure could probably come close to 100% if there were nothing to offset these high prices. Leisure tourism is down in the Russian capital. “Weekends do not fill up,” remarks Alexis Delaroff. Local tour-operators lose out on a good share of potential clients for two reasons: high hotel rates and a shortage of available rooms. Russia is an expensive destination. The cost of accommodations and services and the cost of domestic transportation have led certain tour operators to take Russia out of their catalogues.Moscow’s hotel supply is undergoing a metamorphosis. Nearly 3,000 rooms were pulled from the inventory through, in particular, the demolition of gigantic period hotels such as the Rossia and the Moskva. The Mir and the Kievskaya hould soon meet the same end. Depending on whether the hotel inventory is considered in its entirety or the most "presentable" part, Moscow is more or less well positioned with respect to major cities. The Russian capital has 35,000 rooms for a total of nearly 180 hotels. But most experts agree on a maximum figure of 10,000 rooms in conformity with international standards. The remaining 25,000 rooms do not come close to the desired level. "While some hotels make an effort, the level is weak overall," remarks the manager for the Accor group.Moscow’s City Hall wants to make up for this shortage of accommodations. Sergei Baidakov, the prefect of the district of Moscow, has high aspirations: "in order to make up for this severe lack of rooms, a total of 100 hotels – or 30,000 rooms – will be built by 2010". City Hall has set other criteria for hotel development. Only 20% of its properties will be four or five star, as the international quality upscale hotels hold the majority with a few jewels such as the Hotel Baltschug Kempinski, the Ararat Park Hyatt or the Royal Méridien National. These new properties should thus be positioned in priority on the midscale and economy segments. The final order: one third of these properties will be located in the center, two-thirds on the outskirts, meaning outside the Garden Ring, the ringroad that circles the heart of Moscow.This goal is considered "very ambitious" by Alexis Devaroff: "Finding space in Moscow is difficult. The cost of land is very high. It makes the hotel more expensive and puts short-term profitability at risk". A fortiori for an economy hotel. Reconstruction of the Rossia, which had 3,000 rooms at 50 euros a night on average, would cost its developer at least 600 million euros. The Ukraina – the tallest in the city at 206 meters with 1,000 rooms – is estimated at 200 million euros, not including 125 million euros necessary for bringing it up to today’s standards. Such acquisition costs almost necessarily implicate an upscale operation. In order for the city to achieve its goals, the director of Russian Operations at the Accor group suggests the implicating investors to favor the development of less glamorous hotels in the city center.Until these properties are built, Moscow’s hotel inventory continues is metamorphosis. It relies on regenerating the Soviet era supply. The Stalin era saw the building of a series of skyscrapers known as the “seven sisters”, one of these, the hotel Leningrad, will be fully renovated and reopen this year as a Hilton Moscow Leningradskaya. Properties built for the 1980 Olympics such as the Mezhdunarodnaya adjoining the Moscow World Trade Center should pass under the brand Crowne Plaza. Other operators have already taken action: a Four Seasons will be built atop the ashes of the Moskva, InterContinental on those of the Minsk, and the Ritz- Carlton on the remains of the gigantic Intourist.In 2007, InterContinental Hotels will become the most represented international group with 35% of the supply of corporate operated chains after the opening of a fourth Holiday Inn and the Crowne Plaza, two high-capacity hotels with more than 500 rooms. Its president, Andrew Coslett, is satisfied by his development: “Russia is strategic for InterContinental. Russia’s economic growth and many opportunities that appear in the region have attracted hotel operators and investors. This increases the demand for internationally recognized brands like our own all the more”. At Accor, a third Novotel should open in the center of Moscow in 2008 near Red Square. And ten or so projects are being studied or are already well on their way. The Ararat Park Hyatt, opened in 2002, will be joined in 2008 by a Grand Hyatt. Three Radisson SAS have been announced. In addition to the existing Slavyanskaya, the Radisson SAS Riverside Hotel, Hotel Belorusskaya and the Radisson SAS Olimpiiskaya Hotel will open their doors in 2009.Marriott is also completing its implantation. In order to open its Ritz-Carlton his month, the American group beat the record for the largest real estate transaction by Western investors. Merrill Lynch and the German Aareal Bank will put 160 million euros on the table to open the luxury brand two steps from the Kremlin, the Bolshoi and St Basil’s Cathedral. In this way they will refinance the initial project of a Kazakh real estate investor, Capital Partners. Today, the development of Moscow’s hotel inventory is mostly backed by local financiers. The Rossiyskiy Kredit Bank will invest more than 100 million euros to allow the InterContinental to rise out of the ground. The Bank of Moscow financed Holiday Inn with 50 million euros. Symbol of the dilapidated state of the Soviet empire, the building was begun in 1980 but never completed.Be they Russian or foreign, real estate investors must choose from among several investment models. The hotel industry is in direct competition with offices and shopping malls, which, for now, offer perspectives for a more rapid return on their investment. The great worldwide trend, multifunctional complexes are gaining popularity in Moscow. The Zolotoy Kolos and Ostankino Plaza projects show this by associating hotel operations and office spaces. The Swissôtel Krasnye Holmy found itshome in 2005 in the Riverside Towers complex next to 50,000 square meters of offices and the Moscow International Performance Arts Center.Moscow is coming close to Dubai’s outrageousness. Several mega projects are ongoing. A city in the city, Moscow City is growing fast. This immense 100-hectar, business neighborhood will also be dedicated to leisure. Around the Russia Tower, designed by Norman Foster and presented as the tallest skyscraper in the world reaching up into the sky 648 meters, and the Moscow City Hall, this alignment of multi-functional complexes will include an aquatic park with a hotel. In the heart of the city, the Golden Ring of Moscow addresses tourists first and foremost. The goal of the City is to make the area around the Kremlin a tourist and recreational area. Pedestrian neighborhoods, renovations, reconstruction of historic buildings, parking garages and, of course, more than a dozen hotels: in all total, two hundred distinct projects will cater to tourism in Moscow. Total cost of the operation: nearly 2 billion euros.With all these projects in the works, should we expect to see Moscow’s results quickly enter the ranks? “Its cyclical. One day the movement will come around,” Alexis Devaroff is aware. But in the more or less long term Moscow’s hotels continue to reveal a fine growth margin. First of all with respect to domestic clientele that continues to grow. Another advantage for absorbing the new openings: the development of leisure tourism. According to estimations, the number of foreign visitors should surpass 5 million in 2010 versus 3.5 today. And in 2015 it should reach 10 million.The Sheremetyevo airport is preparing to host 35 million passengers in 2010 and 50 million in 2015. To stimulate international clientele, Russian authorities are considering relaxing entry formalities by making 72-hour visas available at the airport for businessmen and short stays. The last area that needs improvement is promotion of the city. The project is vast. But Moscow has more than one asset at its disposal for making itself a favorite cornerstone for hotel groups.

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