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Ukraine, the land of Cockaigne hit hard by the crisis

In the middle of the first decade of the 21st century, the Ukraine appeared to be the promised land for hotel development. A satellite of the Soviet block, this country that is bigger than France or Germany wanted to free itself from 80 years of oppression to enter the dance of the great European nations. Money did not appear to be a problem, even if its origin sometimes smelled of sulfur and fortunes that had been built up quickly on the spoils of communism. The financial crisis of 2008 quickly reminded many promoters of the reality of statistics, while ever nit-picky bureaucracy did the rest to slow the hotel explosion brought on by the announcement of the organization of the UEFA Euro 2012. Today the market is unfurling; projects –at least the ones that survived– are rising up; and the administration is speeding up development by occasionally taking action. The land of Cockaigne, even when beaten hard, should bear some fruit..

With the announcement in 2007 of the choice of the tandem Poland-Ukraine to host the matches of Soccer Euro 2012, the way Switzerland and Austria co-hosted in 2008, the public authorities and private investors doubled their energy to make up for the Ukraine’s formidable outdatedness in terms of equipment. To welcome the Euro 2012, some €7 billion would be necessary. The list of infrastructures to be inaugurated prior to the fatidic date of 2012 has grown dizzyingly longer. Four towns are the primary focus: Kiev which will host the final match, Donetsk, Kharkov and Lvov where the qualifying matches will be held. At the beginning of 2010, there was concern about delays accumulated by the Ukraine and doubts about its ability to manage such a complex organization. The distance between stadiums where the qualifying matches take place is impressive and the financial crash of 2008-2009 didn’t help any. Michel Platini, president of the UEFA, put the country up against a wall, threatening to rescind the organization of the Championship.While inaugurating the new international airport terminal in Kharkov, 400 km East of Kiev, president Viktor Ianoukovitch wanted to reassure the directors of FiFA and the international community: the Ukraine will be ready. This date is vital for this country, which has been independent for over twenty years, but lived under the control of its immense neighbor Russia for a very long time. The biggest European country in terms of surface area, the Ukraine has many assets to promote. In addition to its market of 46 million inhabitants, it benefits from a growth forecast for its GNP of +3.7% in 2010 according to the IMF. Treversed by the Dniepr River, ringed by the Carpates mountain range, the country benefits from extensive access to the Black Sea and is positioned as the veritable crossroads to the Eastern block. Much of the gas distribution between Russia and its dependencies and the rest of the European continent pass through the Ukraine. The new Ukraine, officially freed from Soviet control, continues to hesitate between loyalty to its powerful neighbor and its attraction to the West, ready to join forces with the European Community as quickly as possible. The Orange Revolution of 2004 brought to power a team with Western values, but it also caused great political instability. Since then, pro-Russian forces have regained the advantage and the situation appears greatly “pacified”. Nonetheless, the country’s transformation is underway, sometimes chaotically, as was the first phase of soviet liberalism. The economy remains dominated by the oligarchs who took advantage of privatizations and arrangements between friends in power. Transparency is not their best quality and on the field, the tug towards a healthy market economy is felt between the different regions, that more or less experience Russian influence. This acceleration in the development of hospitality infrastructures in a country that is not very open to mass tourism is now the country’s primary challenge, a veritable race against time. Even in Kiev, the capital, the weakness of the hotel supply may be felt. Today, only three properties operate under international brands: InterContinental, Radisson Blu and Hyatt Regency. With its “Intourist” heritage, at the beginning of 2010 the city had 150 hotels for some 10,000 rooms, many of which do not adhere to modern standards. It was necessary to wait for the beginning of the 2000s to see a new generation of properties, like the Premier Palace in Kiev, a local monument dating from 1910 and entirely revamped, or the Opera Hotel, the first 5* boutique hotel that opened in 2006.Meanwhile, the projects begun by Euro 2012 bear on forty or so additional hotels for a total of 8,000 rooms across all categories. All the Western groups wanted to participate in this expansion and the few local operators, such as Premier International, are no different. Since the beginning of the year, openings have been regularly postponed because of the financial crisis, and many projects have been delayed. Some changed owners while others will not survive the difficulties faced by promoters. Thus, the management contract of a luxury hotel belonging to First Ukrainian Development Kiev, in Kontcha-Zaspa, negotiated by Starwood Hotels for Le Méridien, is still in suspense. In Kiev, four major projects that should already have opened, are continuing to move forward with a few difficulties: the Fairmont Hotel (260 5* rooms, now forecast for 2011), the Ibis complex (214 3* rooms, spring 2011), the Radisson Royal and the Hilton.The case of the Hilton hotel is typical of the current situation. The agreement was signed in 2006 between the American group and the International Business Centre for the management of a 257-room hotel in a futurist building designed by London architect John Seifert, in partnership with a local colleague Andriy Pashenko. It is destined to become the central point of interest on Taras Shevchenko Boulevard near the opera and the district of ministries. In 2009, the project was saved from the IBC debacle by two wealthy investors, Boris Fuksman and Oleksandr Rodnyansky, founders of the new national television station 1+1. The project calculated at $150 million is back on its feet, but with a big lag-time. Will the hotel be ready for the finals of the Euro in July 2012? Nothing is less certain despite a worksite that is busy nearly 24-hours a day. “We are doing everything in our power to complete the project in time, and yet hotels of this caliber are very difficult to complete in less than two years,” recognizes Boris Fuksman, who still wants to believe in it.The Accor group has been keeping an eye on this market for a long time and will at least see its Ibis project in the center of Kiev come to fruition in a first stage of development that is more complete in the capital thanks to the group’s other brands, with a deployment of Ibis in the rest of the country. “It must be observed that things are particularly complicated in the Ukraine. Beyond the effects of announcement, it is necessary for the projects to go down the entire investment and authorization chain,” explains Alexis Delaroff, general manager Accor for Russia and the CIS that has followed the project for five years. “We are lucky our Ibis project is Accor’s first concretization in the Ukraine, because it is part of a market that better corresponds to the local buying power.” And yet, Accor signed with a local investor – 21st Century SA – for a city center project by Sofitel with some 200 rooms, where works costing $100 million will soon begin. The group is also very advanced on a 180-room M Gallery in a historic neighborhood in the capital. In the end, a Novotel should complete this picture. The cruel shortage of hospitality infrastructures of tourism of an international caliber offers a two-fold reason to believe in Ibis’s potential in the other cities in the country, such as Odessa, Lvov and Kharkov. “Our strategy continues to develop a solid foundation in the capital before spreading throughout the country. I think that will take time, but we must remember that the Ukraine was closed for 80 years.”Flamboyant starlet at the great real estate trade shows, such as Mipim, prior to the crisis of 2008, the Ukraine appeared to be the promised, financed by money that flowed freely. 2009 marked a brutal halt from which the country is just recovering. “The crisis hit the entire world, but the situation was particularly tense in the Ukraine,” explains Matthieu Evrard, in charge of International Development for Louvre Hôtels/Golden Tulip. “We totally turned away from the country, putting our projects on hold. Confidence returned at the beginning of the year. The entire economic fabric appears stabilized and the Euro Cup plays a structuring role that can not be ignored, as it liberalizes procedures and energies.” Just a few years ago, the Ukraine was the land of Cockaigne for investors and promoters. The global economic crisis affected the Ukraine’s economy full force, drying up a good share of sources of bank financing. “Most of those who back projects had only 10 to 15% of the funds available to finance their projects, overvaluing a terrain and relying on banks to pick up the rest,” reminds Alexis Delaroff. “Now without at least 50% in capital stock, no project is possible.” This problem is confirmed by Didier Boidin, Vice president Operations IHG for Northern and Eastern Europe. “We have several projects going on in Kiev and especially a Holiday Inn hotel with 210 rooms that will be ready for the Euro 2012. This is an important project for the organization because this property is a few hundred meters from the stadium where the finals will be held. But the Ukraine nonetheless remains a difficult market experiencing more difficulty pulling out of the crisis than neighboring countries such as Russia. Political instability did not help the country return to the steady growth track. The primary difficulty remains financing the projects. Institutional investors are very cautious and it is difficult to complete financing.” Although the focus is on the capital of Kiev, the situation is not any brighter for the three other cities participating in Euro 2012: 3 projects are in their final stages in Lvov, 4 in Donetsk and 2 in Kharkov. Although it is not directly concerned by the Cup, Odessa, the second largest city in the country, located on the shores of the Black Sea, wants to take advantage in order to bolster its occupancy. Nine projects for new hotels with more than 2,200 rooms and 14 renovation programs were on the calendar prior to the crisis in 2008. Some should succeed nonetheless.The Rezidor Hotel group, which is well established in Eastern Europe, has thirty or so projects in the works with investing partners, a dozen under the Radisson brand, in addition to Kiev, in Kharkov, Dniepropetrosk, Lvov and Yalta, and, moreover, fifteen or so under the brand Park Inn in big cities such as Kiev and Odessa and secondary cities. The group is also looking to eventually do a Missoni Hotel in the Ukrainian capital. “With regard to the wider region, it is one that continues to attract our interest. We are looking at all suitable locations to introduce various brands from our Hilton Worldwide portfolio - predominantly on a managed and franchised basis, although nothing else has been confirmed at this stage,” indicates Patrick Fitzgibbon, Senior Vice President Development, Europe & Africa, who is also developing these brands in neighboring Russia.Most of the major hotel operators do not – fortunately – have just the Euro2012 in their sights. They in fact consider the Ukraine to be a territory that is worth their attention in the long term. And the Euro has served as a trigger or catalyst for unblocking projects. “Some hotel projects are now a compromise and it must also be understood that aside from Kiev and Odessa which are developing, the tourism market is very weak, more time will clearly be necessary for the Ukraine to become a destination that matters,” tempers Didier Boidin.Of the groups interested in development in the mid-term, Louvre Hôtels-Golden Tulip decided to develop an exclusive partnership with a solid local partner: Universal Development and Construction Holding (UDC Holding) to take over the management of at least six new Campanile hotels that are to be built throughout the country. Some 54M€ will be invested over the next two years with the first openings expected in September 2012, after the Cup. These New Generation Campanile hotels, with 120 to 220 room capacities, will be built in Kiev, Lvov, Odessa, Donetsk, Dnipropetrovsk and Kharkov. “This represents major progress for us since the Ukrainian Market offers a real opportunity for Louvre Hotels,” comments Pierre-Fre´de´ric Roulot, its Chairman. “The economy hotel market is limited there and still not highly developed. It presents strong growth perspectives for our brands. Moreover, our experience in Poland will allow for efficient operating management, while turning the skills we have acquired in Eastern Europe to profit.”UDC Holding has been present on the Ukrainian real estate market since 1998; a lodging specialist, it had not yet launched into the hotel construction business. “It is a first for us,” confirms Leonid Bogdanov, President & CEO of UDC Holding, “and we are thrilled to sign this partnership with an international operator like Louvre Hôtels. The hotel business is not very developed in the Ukraine with respect to our neighbors in Eastern Europe and we are certain that this new brand will be received well.” “We like this type of partnership, like the one we developed with Warimpex in Poland,” explains Mathieu Evrard, International development manager. “UDC has a culture and roots in real estate that provide guarantees in terms of awareness of local procedures, understanding of property ownership, calls to tender and construction.” Soviet-style bureaucracy is still omnipresent and it is responsible for a large share of the cumulated delays. “We think the building began too late. There were too many discussions, negotiations, bargaining and different obstacles opposing good faith developers and investors and preventing their projects from being completed within the initial time frame and budget,” analyzes David Jenkins of DTZ, a real estate adviser with a strong presence in Eastern Europe. “Afterwards the crisis was rife and now everyone’s excited and upsetting the calendar.”Especially since the Government has just taken specific measures for hotel development to open a shorter process that will facilitate the achievement of ongoing projects thanks to fiscal incentives and relaxed requirements. The vice Prime Minister in charge of the Euro 2012 dossier addressed a letter to all the hotel investors and operators to share with them the urgent measures that had been taken to accelerate the tempo (see box). The primary carrot being dangled in front of investors’ noses is a near-total tax exemption for any property completed prior to the beginning of the Championship. “We remain careful about the timing of openings, officially scheduled for end of 2012, but it is not impossible that some may open prior to that date,” says Evrard. Urgency plan for Euro 2012Deputy Prime Minister Kolesnikov indicated that Central government will do everything in its power to give priority to fast track local permits and approvals for all of those developments for which a commitment had already been made so that they can be completed on time for Euro 2012.The Deputy Prime Minister agreed to look into the suggestion to establish a central hotline for hotel developers who encountered bureaucracy or red tape at the local or regional level and to assist fast track approval.Attending the Conference regarding the preparation of Euro 2012, delegates stressed that a hotel development typically has a payback of some 15 years, and the impact of major sporting events lasting 2 or 3 weeks does not affect the overall business plan of an investment.If the shortfall in hotels is to be addressed there needs to be some fiscal incentives devised and implemented to make investment in hotel development at least as attractive as investment in other property sectors.The fiscal incentives could be made through certain VAT exemptions for hotels and tourism activities, or through corporation tax incentives for hotel development, or a mixture of such measures. Many delegates raised the question of VAT refunds; this has a direct impact on the cost of building materials, furniture and fixtures imported by construction and decorating companies building hotels in Ukraine.The Deputy Prime Minister expressed understanding of the importance of this issue for developers and explained that the whole question of VAT refunds is the subject of national policy, and the introduction of the new bond system.The Deputy Prime Minister indicated that the government would be publishing a comprehensive Tourism Strategy for Ukraine in the coming months. The aim is to promote Ukraine’s tourism potential internationally and to leverage the opportunities presented by Euro 2012 to significantly increase the numbers of visitors (tourist and business) to the country.

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