Trends

Has hotel performance in Russia reached saturation point?

Year-to-May 2005 results from the European edition of the HotelBenchmark Survey by Deloitte showed revenue per available room (revPAR) in its capital, Moscow increased by 34.7% to US$158 compared to the same period in 2004.

Deloitte Russia is the largest country in the world extending over 11 time zones and two continents. Often called the bridge between Europe and Asia, this vast country covers 17.1m square kilometres - the equivalent of the USA and Europe. With immense landscapes and exciting cultures, Russia continues to be a key destination on travellers' wish lists. Year-to-May 2005 results from the European edition of the HotelBenchmark Survey by Deloitte showed revenue per available room (revPAR) in its capital, Moscow increased by 34.7% to US$158 compared to the same period in 2004.

All is not calm
In 2004, the number of visitor arrivals to Russia reached 22m. However, this figure remained relatively static compared to 2003. This was primarily due to negative press coverage surrounding various terrorist attacks, including the widely reported hostage siege in Beslan during the third quarter of 2004.

Following the months surrounding these attacks, there was a wave of cancellations in the tour operator market. This is estimated to have lost tour operators between US$300m - US$400m. Fortunately the only segment of the market that did not appear to be affected was business tourism, which helped sustain hotel performance during this time.

Spectacular growth
Despite continuing concerns regarding the safety of visitors, hotel performance in key markets across Russia has seen significant improvements over the past four years. The hotel industry has continued to grow, with almost all international hotel chains now having a presence in key cities. However, these chains only represent the upper tier of the market, catering for upscale business travellers and tourists. While construction in this sector continues, pushing it close to saturation, there is still a lack of mid-market hotels throughout Russia. If there were more mid-market hotels providing more affordable accommodation, Russia would be better placed to attract more tourists into these key cities. This is particularly true in Moscow and St Petersburg.

Magnificent Moscow
Moscow, the capital of Russia recorded strong growth in revPAR year-to-May 2005, up 34.7% compared to the same period in 2004. Although occupancy dipped slightly, average room rates reached US$229, an increase of US$62. While hotel performance in the city has been improving, there has been lots of activity surrounding new supply. Although there has only been one new arrival in recent months, many more are expected.

More big names arrive
Supply in Moscow can be divided into two groups, Western and Soviet-style hotels. Western-style hotels represent the upper-tier of the market and include some of the big names on the circuit including Radisson SAS Hotels and Resorts, Starwood Hotels and Resorts, Marriott International and Hyatt International. Although this section of the market is close to saturation, it has not stopped operators from continuing to enter the market.

In March 2005, the Holiday Inn Lesnaya opened its doors and became the second Holiday Inn hotel in Moscow. Located near the Belorussky Station in central Moscow, the 301-room Holiday Inn Lesnaya is the largest hotel to open since the 386-room Marriott Grand arrived almost a decade ago.

Double debut
Swiss˘tel will make its debut in Moscow when it opens the Swiss˘tel Krasnye Holmy Moscow on the 18 July 2005. Set in the heart of the city, the 235-room hotel will be the tallest hotel in the market with 34-storeys. The hotel will become part of the Riverside Towers complex which will also house 52,000 square metres of office space.

Ritz-Carlton is also due to make its first appearance in the Russian capital in the summer of 2006. The 332-room property will be located just off Red Square, within walking distance of the Kremlin. The hotel will feature the largest guest rooms in Moscow, measuring approximately 42 square metres. Looking further ahead, Accor also plans to build a 220-room Novotel near Red Square. The $45m property will be Accor's third property in the city. This is expected to open in late 2007.

While the construction of the four and five-star hotels continues, the demand for mid-market and economy hotels remains. While the Soviet-style hotels may not appeal to all travellers, their price tag is somewhat less than Western-style properties. The potential for budget brands to break into this market is huge. It will be interesting to watch and see who enters first.

Hotel performance in Moscow and St Petersburg - Year-to-May 2005 v 2004

Source: HotelBenchmark Survey by Deloitte

St Petersburg flops
Founded by Peter the Great in 1703, St Petersburg is deemed to be one of the most beautiful cities in Russia. With its palace-lined waterways, the city has been nicknamed the Venice of the North. While average room rates shot up in Moscow, St Petersburg saw average room rates fall US$2 year-to-May 2005 compared to the same period in 2004. However, to put this into context, St Petersburg saw average room rates of over US$200 in 2003, while it took Moscow until this year to achieve this.

In 2004, St Petersburg was still feeling the effects of the city's third centenary celebrations which took place in 2003. However, due to the over dominance of five star hotels and the city's tourism development budget being cut by more than 80% in 2004, hotel performance in St Petersburg is beginning to feel the heat.

Mirroring Moscow
Hotel supply in St Petersburg mirrors that of Moscow, with the top-end of the market close to saturation. The need for mid-market hotels is just as necessary as in Moscow, however despite this, four and five-star hotels continue to arrive. In July 2005, Accor will open a 233-room Novotel hotel in the centre of the city. The Novotel St Petersburg will be Accor's first hotel in the city. Later this year, Kempinski Hotels and Resorts are set to open their second hotel in the city, with the 188-room Hotel Moika 22 Kempinski. The hotel will be located in the heart of St Petersburg on the Moika River, opposite the Hermitage Museum.

How far can room rates go?
The lack of mid-market hotel supply across Russia to meet the needs of the money conscious traveller is obvious. However, as yet there does not seem to be any plans for mid-market brands to enter either Moscow or St Petersburg. Given the lack of choice, it is no wonder average room rates have increased so considerably in recent years. Although the devaluation of the rouble has made Russia an affordable destination, unless mid-market and economy hotels enter the market, tourists may well find cheaper destinations to visit instead.

Notes: All analysis in US$.

For further information on on this article please contact Jessica Jahns on +44 (0) 20 7007 0967.



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