Novosibirsk Bottleneck

Vedomosti

Hotel developers see an opportunity in the low number of rooms. Irregular demand, however, means existing hotels are occasionally overbooked but otherwise empty.

Over the past decade, more than 40 hotel projects were announced in Novosibirsk, most of them never to be built.

At various times, major global hotel chains including Marriott, Swiss Hotel, Kempinski and Holiday Inn announced the start of construction. Today, however, only the DoubleTree by Hilton has been built, while the Domina Hotel Novosibirsk is still under construction. Most of the other projects were either frozen or rejected at the development stage.

A variety of challenges face hotel developers, including an irregular influx of customers and a range of competitors. Nonetheless, investors' passion for Novosibirsk has not dissipated, and international and Russian companies alike have plans to build hotels here.

Meager Results

Today, Novosibirsk has more than 50 hotels, but none of them are five-star establishments. Four-star status is held by only three. Two of these, SkyPort Hotel and DoubleTree by Hilton, were built between 2008 and 2010. This January, the Novosibirsk, a 24-story congress hotel built in 1985 and fully reconstructed over the past two years, also gained four-star status. Three hotels hold three-star status, and the rest have not been rated.

The current supply of hotels amounts to about 1.29 rooms per 1,000 residents. This is a low ratio for a city of 1.5 million.

Anastasia Tsyganova, GVA Sawyer

"The current supply of hotels in Novosibirsk amounts to about 1.29 rooms per 1,000 residents," Anastasia Tsyganova, project manager at GVA Sawyer, said via e-mail. "This is a low ratio for a city of 1.5 million. In Yekaterinburg, for instance, there are 3.7 rooms per 1,000 residents."

Surprisingly, although mini-hotels are abundant in the city, only three major hotel projects — SkyPort Hotel, DoubleTree by Hilton and Avanta — have been realized in the de facto capital of Siberia over the past decade.

In October 2008, SkyPort Hotel opened at Tolmachyova International Airport. The hotel has 149 rooms, and its main guests are passengers in transit and airline crews. The cost of realizing the project has been estimated at 285 million rubles ($9.5 million). SkyPort Hotel was put into operation as a three-star hotel, but half a year later it was certified as four-star. The hotel is co-owned by the airport and its former executives and managed by a specially created managing company.

DoubleTree by Hilton, construction for which began back in 2006, was significantly delayed. First it was expected to be completed in fall 2008, then in mid-2009. Rumors spread on the market that Hilton representatives were not satisfied with the doorknobs and wallpaper in the rooms.

The setback was caused by delays in construction, as well as in agreeing and deciding on technical issues, a Hilton spokesperson said at the time. In Russia, there aren't any organizations that have experience in building and fitting out international-class hotels, the spokesperson added.

The hotel complex finally opened in September 2010. With a total area of about 10,000 square meters, the hotel has 188 rooms, 10 apartments and one presidential suite. Investment in the project, which was provided by London & Regional Properties, has been estimated at $65 million. The managing director of London & Regional Properties in Russia, David Geovanis, has tagged the payback period of Novosibirsk's Hilton at seven to 10 years.

Construction of the three-star, 46-room Avanta hotel, which started in 2007, finished and the hotel opened last year. Its cheapest room goes for 2,700 rubles ($90) a night, the most expensive for 6,000 rubles ($200).

The results are more than meager for a city of 1.5 million that claims the status of "capital of Siberia." But why? After all, over the past decade more than 40 hotel projects have been announced in Novosibirsk, although the majority of them sank into oblivion at the development stage.

The problem lies in the fact that the city periodically experiences a deficit of hotel rooms, but at other times the hotels remain empty, experts said.

"Novosibirsk's hotel market does have a bottleneck — five or six weeks max, during Siberian Fair events. The rest of the time, the hotels are empty," said Sergei Dyachkov, managing partner of DSO Consulting.

In fact, Novosibirsk is hardly a tourist Mecca. More than 90 percent of Novosibirsk hotels clients are travelers on business trips.

"There's nothing special to see in Novosibirsk," Dyachkov said. "The city isn't a tourist gem. It's a place for business trips. The average stay at a Novosibirsk hotel is 2 1/2 days."

"There's not enough hotels for those who come to see relatives, visit hospitals, apply to universities or just come on vacation — for regular folks who don't have 4,000 to 6,000 rubles [$130 to $200] to spend on a room for the night. Right now, they have to stay at apartments or with relatives," Tatyana Kazakova, director of the Sibakademstroi-Nedvizhimost analytical center, said via e-mail. "There are also not enough hotels of the highest class for the potential clients that occasionally visit. The construction of such a hotel requires big investments and high operating costs, and occupancy would be intermittent."

Status Symbols

Novosibirsk is the center of industry, science, culture and trade in Siberia. It is where the business activity of the entire Siberian region is concentrated, which is why the demand for hotels from representatives of the business segment in Novosibirsk is fairly high.

"Considering this, the town has few quality hotels that offer accommodations and services in line with international standards," Yekaterina Yanut, a manager of assurance and advisory services at Ernst & Young, said via e-mail. "It's this fact in particular that generates interest among investors to invest in the hotel ­segment."

The realization of the majority of hotel projects began between 2006 and 2008. Before that time, "market niches in other segments were near-saturated, and long-term-minded investors sought new opportunities to become the first ones on new markets where demand clearly exceeded supply," Yanut said.

Hotels continue to appear, partly because some regard them status symbols. Practically every leading local businessman considers it his duty to build a hotel in the city, or at least to announce that he intends to, said Oleg Toropkin, general director of the River Park hotel.

"Just like any self-respecting sheikh in the United Arab Emirates cannot imagine himself without his own hotel, Novosibisk's businessmen have difficulty being content without realizing their own hotel project," Toropkin said in an interview with the newspaper Kontinent Sibir.

For instance, at the very peak of the Russian commercial real estate market, in early 2008, Novosibirsk businessman Alexander Boiko announced the construction of a five-star hotel in the Siberian capital. He rented a 0.18-hectare plot in the very center of Novosibirsk and developed a project for an eight-story hotel with 100 to 120 rooms and a total area of about 12,000 square meters.

Boiko, who owns the contracting company Siberian Hotels, believed that construction would cost him 500 million rubles ($17 million), which he hoped to earn back within five years. He promised to open the hotel complex as early as 2010, but then the financial crisis prompted significant adjustments to the investor's plans.

Now the construction of the hotel is moving in baby steps. At the beginning of this year, only the carcass of the building was in place.

"It's difficult to work with our domestic designers and builders," Boiko said, explaining the reasons for the delays in construction in an interview with the website NGS. "They currently aren't able to work in a way that observes deadlines, to keep their word and be responsible for doing so. This is why you have to do a lot of stuff on your own."

However, the company's financial problems may also play a role. Boiko was relying mainly on borrowed money for the project, and with the onset of the financial crisis, bank loans got significantly more expensive. In order to finish construction, the businessman tried to sell his Greenwich business center. After he couldn't sell that, he sold his gas station chain.

Over the course of construction, the overall project has been changed. Now there's talk not of a five-star hotel, but of a four-star one with 10 more floors and 175 rooms. It's likely the hotel won't open its doors to visitors any earlier than 2013.

The hotel will be managed by a world-renowned operator, "one of the top three," Boiko promised. Earlier, he said negotiations were under way with Interstate Hotels & Resorts, operator of the Holiday Inn and Marriott hotels in Moscow.

The Trans-Blok corporation, which belongs to Novosibirsk businessman Voldemar Basalayev, is building a hotel with an expected 20 apartments in downtown Novosibirsk. The ordering company planned to finish the project in May 2011, but they, too, erred in determining the time period. The new deadline for completing the hotel is May 2012.

Hotel Tragedies

Federal and international operators are also seriously interested in the Novosibirsk market. But, with the exception of Hilton, other global hotel brands do not have a presence here. This is likely part of the attraction for many would-be developers. They strive to build in Novosibirsk, but the rough Siberian city does not meet everyone with open arms.

Development of infra- structure will drive demand for rooms. Novosibirsk is expe- riencing a deficit of international hotels.

Kurt Ritter, Rezidor Hotel Group

Last April, the Rezidor Hotel Group announced its intention to build a hotel in Novosibirsk. It plans to erect the Park Inn Novosibirsk by 2014 in close partnership with a "regional hotel chain." The hotel is expected to have 150 rooms.

"Development of the city's infrastructure will drive demand for hotel rooms," said Rezidor Hotel Group president Kurt Ritter. "However, despite this, Novosibirsk is experiencing a deficit of international brand-name hotels. We see huge perspectives for business development here and are looking forward to the opening of Park Inn Novosibirsk, which will become one of the key business hotels in the city."

In 2010, the Albergo holding (part of Estonia's Pro Kapital Grupp) began building the four-star Domina Hotel Novosibirsk, which is projected to have an area of 17,100 square meters and 218 rooms, next door to the Azimut Hotel Sibir. The contractor had planned to finish its construction at the end of 2011, but the build period has been dragged out.

A new hotel is also under construction on the western bank of the Ob River, which has always been a bedroom community in comparison to the city's business center on eastern bank. No large hotels exist on the left bank, although there should have been one: In 1968, the construction of the 20-story Tourist hotel, which was to have a maximum capacity of 800 people, started on Karl Marx Square. The main construction was finished in the early 1980s, and then the project ceased. The "candle" on Karl Marx Square was left as a monument to Soviet standardized construction.

Today, a three-star hotel with 150 rooms is being built on the western bank. The hotel will be put into operation in late 2012 and become a part of the Gorsky multipurpose complex, although the owners of the complex have not been disclosed.

The amount of investment in the construction of the hotel is also under wraps, although it's known that in early 2011 the Omsk branch of the west Siberian arm of Sberbank Russia approved a 240 million ruble ($8 million) loan for the completion of the construction on the hotel complex. The Azimut Hotels Company, which owns and operates the Azimut Hotel Sibir (formerly the hotel Sibir), will manage the hotel.

The location of the future hotel isn't bad: Although it's situated in a residential part of town, it's within walking distance of the metro. Nonetheless, it won't be able to count on maximum occupancy, said DSO Consulting's Dyachkov.

"The maximum that the hotel can expect is 40 to 45 percent occupancy," he said.

Clients of three-star hotels are usually employees of small and midsized businesses who are on tight budgets and take note of even small differences in price, he added. For such clientele, the city's hotel market is already full, and the demand for hotel services will not significantly increase before the end of 2012, he said.

From investors' point of view, possibly the most tragic hotel project in Novosibirsk was the Holiday Inn. Moscow-based developer Clover Group conceptualized the project and planned to invest $40 million to $45 million in the 214-room hotel. In 2004, the mayor's office allotted the company its desired land plot on Narymsky Square in the city center. Buildings were demolished and trees and shrubbery removed in the area slated for construction.

Then environmentalists, state prosecutors and the public at large began to meddle in the developer's plans. Novosibirsk residents condemned the decision by local authorities to allot the hotel a portion of already scarce parkland, and they took to the streets in protest.

The opposition attracted the attention of the Prosecutor's Office, and the developer was forced to halt construction of the Holiday Inn by court order. On the website of Clover Group, however, a statement appeared saying construction of the first segment of the Clover Citycenter business park (which includes the Holiday Inn) began in the second quarter of last year. Completion is expected in 2014.

"It's highly doubtful that the investors who announced the hotel construction project on Narymsky Square will begin to build the hotel in the near future," said Toropkin of River Park Hotel. "The project has clearly lost its immediacy. I think they should by thankful to the residents of Novosibirsk, to the defenders of the square, whose opposition toward the construction did not enable the organizers to enter into building the hotel on the eve of the financial crisis."

Irregular Flow of Customers

In the opinion of analysts, Novosibirsk's hotel market is not only approaching saturation but has passed this threshold.

During periods when there are large events, the occupancy grows. The rest of the time, hotels' occupan- cies are pretty low.

Tatyana Kazakova, Sibakademstroi-Nedvishimost

"The absolute maximum for Novosibirsk is two four-star hotels," Dyachkov said. "Today, there are already three in town, and several more are being built. With the commissioning of even one more, overproduction would be unavoidable."

The construction of new hotels will lead to a price war, and the prices of hospitality services will inevitably fall, just as they did during the first wave of the financial crisis. According to Toropkin, they fell then by at least 25 percent.

"This was a result of the unbalanced actions by the main market players," he said.

Beside turnover and profits, reputations can suffer, as well. In the case of a reduction in price for hospitality services, the target audience's image of hoteliers could change for the worse, experts said.

In addition, predatory pricing will inevitably affect projects' buyback periods. Today, buyback periods are about 15 years, and business profitability is 7 percent to 8 percent annually. The appearance of new hotels in Novosibirsk could lead to a collapse, however.

"It would be about the same as it is now in Yekaterinburg, where six serious hotels entered the market over the course of a year and a half, and now their occupancy rates are 16 to 20 percent," Boiko said. "The same thing could happen to us."

According to Boiko, the city needs the 1,000-person capacity of the planned three- and four-star hotels. Not all at once, but rather with an interval of two years.

Estimations of the occupancy rates of Novosibirsk hotels differ. Hotel managers said their hotels are 60 percent to 65 percent full on average, but experts tended to disagree.

"The average indicators of hotel occupancy don't exceed 50 to 55 percent, whereas on a civilized market, the construction of new hotels is reasonably if hotels are 65 to 75 percent full on average," said Tsyganova of GVA Sawyer.

Analyst Kazakova said the main problem that Novosibirsk hotels face is the absence of a regular flow of customers.

"The current hotel occupancy is irregular," she said. "During periods when there are large events, the number grows. Also, the occupancy of luxe rooms rises during wedding season. The rest of the time, hotels' occupancies are pretty low."

Dyachkov said the occupancy rate at Novosibirsk hotels has historically been about 40 percent, reaching 42 percent in good years and 38 percent in bad years.

"Last September, the director of the Doubletree by Hilton was fired because the hotel's occupancy rate was only 39 percent, whereas they had counted on an occupancy of 60 to 70 percent," he said.

Nevertheless, the hotel business will continue to develop actively in Novosibirsk, Tsyganova said.

"The influx of travelers to Novosibirsk is increasing, partly thanks to … entrepreneurs from nearby regions," she said. "For this reason, the number of hotels on the market will increase not only in the upper-price category but also in the middle-price category. The hotel real estate market in Novosibirsk has kept its potential, and the crisis only moved its active development back a few years."