Overview of Hotel Sector in Moscow for 1st Half 2006

Hotels positioned in the upscale price segment continue to capitalise on high demand. However, in comparison with 2005, this category has relinquished its leading position to the lower priced segment. In general, this is an indication of the increasingly negative influence of seasonality in the upper and mid-range segments of the market. This confirms the sensitivity of a significant proportion of hotel guests in Moscow to the rise in overall room rates, which results in greater cautiousness in implementation of projects in the higher price category.

Upscale Hotel Segment

The growth in total room count by 734 in the upscale segment at the end of 2005 and in 2006 and a continuing increase in room rates has caused a decrease in occupancy by 2.1%. At the same time, the price increase by 11.9% has compensated for a reduction in demand. During the first half-year the RevPAR achieved by hotels positioned in the upper segment grew by 11%.

Despite the excessively high average room rates by European standards, high demand for four- and five-star hotels has not ceded much ground. In June, occupancy in the upper segment hotels Moscow exceeded 80%. Such good results can be attributed to the enduring shortage of guestrooms. According to statistical analysis prepared by Colliers International, there is a daily deficit of 1,000 hotel guestrooms in the upper segment, even after new hotels have been added to the market.

On weekdays central hotels are almost completely full, and even at weekends, occupancy levels remain high. At the same time, hotels located outside of the historical centre lose nearly half of their guests at weekends. This situation demonstrates the difficulties in making progress experienced by luxury hotels located outside the Garden Ring.

The optimum concept in this segment is an international three-star hotel, which is incorporated into a western hotel chain through a management contract or franchising. In a good location, such hotels charge higher room rates in comparison with western hotels, while still achieving occupancy of approximately 80%. Examples of such successful hotel products include the Holiday Inn at Lesnaya Street and the recently opened Courtyard by Marriott on Voznesenskiy Lane, near Moscow's city hall.

Mid-Segment Hotels

A statistical report prepared by GAO Moskva shows that the average occupancy rate of three-star hotels has stabilized at 70.8%. The price difference between mid- and upper-segment hotels is around $170. Inconsistency in room availability and a passive approach to guestroom sales are factors that have discouraged demand for mid-segment hotels. In 2006, taking advantage of the deficit in hotel guestrooms in the city, most mid-segment hotels have abandoned all discounts previously on offer, which allowed them to raise the average room rate that is now almost comparable to the rack rate. But as a whole, the ADR indicator for the middle segment has risen insignificantly, only slightly exceeding the rate of inflation.

Main Events in 1H 2006

• The continued fall in the number of hotel guestrooms in the city has been accentuated by the destruction of the 3,000 guestroom in Rossiya hotel. The developers of the Rossiya land plot envisage building smaller hotel units in its place, which would comprise a total of 734 rooms.

• The share of upper segment hotels, particularly within the limits of the Central Administration District (city centre), is becoming disproportionately high.

• Moscow's hotel market dynamics have been besieged by a situation where supply massively outstrips demand and where hotel prices are exceedingly high in comparison to similar benchmarks in other major world cities.

• The consistent increase in profitability for Moscow's hotels has made this sector extremely appealing to local and foreign investors.

• The average lodging capacity per hotel building in Moscow has risen from 85 guestrooms in the period 2000-2004 to 299 in 2005. There are even plans to build hotels with 1,000 guestrooms, which is a clear sign of the growing trust of investors in this real estate sector.




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