HOTEL DEVELOPMENT IN RUSSIA

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HOTELDEVELOPMENT IN RUSSIA

• Cameron Sawyer, President
• GVA Sawyer
• Moscow

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Hotel development has been long neglected by
investors and developers working in the Russian
real estate. Primary reasons

• Relatively low level of yield, making hotel
  development unattractive if carried out using the
  same types of capital which have traditionally
  been used for other kinds of Russian real estate
  projects.
• High cost of land in Moscow, the only market
  known to most players in the Russian real estate
  market, which can often not be tolerated in hotel
  projects, which are more sensitive to land cost
  than many other kinds of space.
• The necessity, by the very nature of hotel
  development, of wide geographical distribution of
  activities, considered by most players to be an
  overwhelming organizational obstacle.

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However, hotel development has recently come into
the spotlight in a big way. Why?

• Availability of very cheap capital for hotel
  development, which creates leveraged returns for
  investors equal to or surpassing those achievable
  in other sectors.
• Growing regional economies has finally made it
  possible to consider geographically distributed
  programs of development, which are necessary in
  the hotel sector.
• Recent spectacular operating results in the
  Russian hotel sector have proven the depth of
  demand for new hotel rooms.

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Hotel development differs significantly from
other kinds of real estate development, and is
much more complicated. Why?

• Hotels are highly technological and are the least
  generic type of space. They must be
  built-to-suit according to highly complex
  standards of the particular operator, and in
  close cooperation with the technical department
  of the operator. This greatly complicates the
  design and construction process
• Hotels are more sensitive to location than office
  projects, and are almost as sensitive to location
  as retail projects.
• Hotel must be distributed more widely
  geographically by the nature of demand for hotel
  rooms.

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Despite the obstacles, hotel development in
Russia has now captured the attention of
investors and developers. Several ambitious
programs have been announced

• The most serious and credible large-scale
  expansion program comes from Accor, which has
  allocated around 500 million Euros to spreading
  their Ibis brand through Russia. An
  experimental joint venture with a Samara-based
  company, with additional financing from EBRD, has
  three hotels in various stages of development.
• Bonita Group, with a franchise from Best Western.
  The company is planning to build under this brand
  about 40 hotels in Russia including 10 hotels in
  Moscow.
• Menatep/ Marriot. Plans to build mid-range
  hotels under the Courtyard brand appear to be
  on hold after Menateps problems with Yukos.
  However, one has recently been opened in Moscow.
• Kempinksi - is focused on Moscow and St.
  Petersburg in the category of 5-star hotels. Has
  been attempting to develop a program of
  three-star hotels in the regions.
• South Africas Protea Hotels have its first hotel
  nearing completion in Ekaterinburg, and is rumor
  to be set to begin construction of the second of
  a series of regional hotels, in Novosibirsk. The
  company focuses also at such regional centers as
  Krasnoyarsk, Samara, Perm, Nizhny Novgorod,
  Chelyabinsk and Khabarovsk. Problems with the
  Russian licensee of the brand Bazovy Element
  have put this project on hold.
• Russian Gold planed to develop the chain of
  mid-scale hotel in regional capitals. However at
  present the project status is unknown.
• Rezidor in various local joint ventures. At
  present the company develops the 3-star segment
  under the Park Inn brand in regions. The first
  Park Inn was opened in Ekaterinburg last year and
  is bound to begin the construction of others in
  Kazan, Kaliningrad and Ryazan. The list of
  targeted cities includes Moscow, St. Petersburg,
  Nizhny Novgorod, Novosibirsk Ufa, Perm, Rostov on
  Don etc.

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• But apart from three old hotels in the
  vicinity of Sochi, operated under a Radisson
  franchise, a newly-constructed Marriot hotel in
  Samara and Park Inn in Ekaterinburg with Protea
  hotel under construction there and GVA Sawyers
  Novocity project under construction in
  Novorossiysk, there are no hotels of
  international standard under physical
  construction in the regions. The contrast between
  bold announcements of huge development programs
  and very little actual construction reflects the
  great difficulties in initiating and managing
  projects in the Russian regions.

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GVA Sawyer, active in Russia since 1993 as office
and residential developers, has recently moved
into hotel development in a big way. Some
of our hotel projects
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Novocity, Novorossiysk. A multifunctional
complex of 110,000m2 on the seafront in the
center of Novorossiysk, Russias largest port.
The complex includes a Novotel hotel of 156
rooms, and an Ibis hotel of 100 rooms.
Operator Accor Group. Under construction.
Owner A joint venture including OOO Kesco and
GVA Sawyer.
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Gostinny Dvor, Moscow. A 220-room Novotel
hotel next to Red Square inside the shell of the
historic Gostinny Dvor building. Construction to
begin Fall, 2006. Operator Accor Group.
Owner a joint venture including the City of
Moscow, Torgovy Dom Shater, and GVA Sawyer.
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Ligovsky Prospekt 54-56, St. Petersburg. A
300-room Ibis hotel in the center of St.
Petersburg quite close to the Moscow Railway
station. Built in two phases, the complex
includes 18,000m2 of office and retail space
besides the Ibis hotel. Operator Accor Group.
Under construction. Owner OOO Kesco.
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VOLGA, MoscowReconstruction of the existing
Volga hotel complex and new construction of
a mixed-use complex of international class
located  at  the crossroads of  Dokuchaeva  Lane
and Bolshaya Spasskaya str., close to the
Garden Ring  Road,  in the historical zone of
the Central  Administrative District of Moscow.

The project comprises a 250-room three-star
hotel and Class B offices.

• Total area of the complex 43 520,0 sq.m, incl
• The hotel 15 550 sq.m
• Offices 14 550 sq.m.
• Volga is planned to be commissioned in 2009.

• Operator Rezidor SAS.
• Owner Torgovy Dom Shater
• Developer GVA Sawyer

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Other GVA Sawyer hotel projects

• Hotel Rocco Forte Prechistenskaya
• A 150-room ultra-luxury class hotel in the
  immediate vicinity of the Kremlin. Operator
  Rocco Forte Hotels. Owner a joint venture
  including Torgovy Dom Shater, GVA Sawyer, Rocco
  Forte Hotels.

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Conclusions

• Hotel development in Russia, particularly in the
  Russian regions, where there is virtually no
  supply of modern hotel rooms, and where economies
  are growing rapidly, offer fantastic
  opportunities.
• Hotel development in Russia is complicated by the
  necessity of forming efficient financial
  structures, necessarily complicated.
• Hotel development is more complicated than other
  kinds of real estate development, because of the
  complex demands of the operators and resulting
  complexity of the design process.
• Harmonizing the demands of international hotel
  operators with local buildings codes can present
  challenges.
• The Russian regions offer the greatest
  opportunities to hotel developers and investors.
  But working in them is complicated because of the
  great distance between them, and the
  peculiarities of local legal and political
  environments. These difficulties are reflected
  in the huge gap between the large number of
  announced development programs and the small
  number of hotels actually under construction.