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. Last Updated: 07/27/2016

From No-Star to 5-Star, Moscow Needs Hotels

Moscow is in dire need of building new hotels and renovating existing space, and righting the situation may even require returning to desperate, Soviet-style measures: What Moscow needs now, industry experts say, is a good five-year plan.

"The five-year plan would be a good thing to have today in order to build more hotels," said Timothy Fenwick, the general director of the Moscow office of commercial realtors Global ABMP-Jones Lang Wootton.

In Moscow, a city of roughly 12 million people, there are about 12 quality Western-style hotels for the international traveler, whereas in Brussels, a city of 1 million people, there are twice as many, Fenwick said.

He said building one to two new international-standard hotels each year for the next 10 years would be "justifiable" because the demand is much greater than the supply.

Indeed, there are projects in the works that may help fill the gap: Two new top-tier hotels will come on line by next summer, and several three-star hotels are planned. The demand for three-star hotels appears to be especially acute, but they may be longer in the waiting, as lower profit margins in cheaper hotels mean investors are slower to commit to these projects.

"This is a huge market for hotels," said Ravil Yulgushev, the vice president of Moskva, a joint-stock company with the Moscow city government that studies issues concerning the hotel and tourism industry.

According to Yulgushev, there are a total of 200 hotels in the city. Of those, he said, 25 or 26 are currently under reconstruction. Also included in those 200 hotels, according to industry observers, are privatized buildings, such as factory dormitories or portions of industrial complexes, that rent rooms out to the public.

Two new Western-standard international hotels slated to open next summer are the Marriott Grand Hotel on Tverskaya Ulitsa near Truimfalnaya Ploshchad, and a second hotel behind the State Duma building.

Marriott, which has teamed up with the city government construction concern Mospromstroi to make its first venture in Russia, will manage a 392-room, five-star hotel in the upper price range -- similar to the Metropol and Penta Renaissance hotels.

The other, a joint venture between Mospromstroi and a group of private Swiss investors, will feature 250 rooms and also offer a similar price range of $250 to $300 per night.

The developers declined to name the costs of the two projects.

The Marriott, which is scheduled to open in time for Moscow's 850th anniversary next summer, is also negotiating with the city to take over and rebuild the Intourist Hotel near the Kremlin with an estimated price tag of $100 million, said Wendell Ward, who is in charge of Marriott's Moscow operations.

"We consider Russia to be one of the strongest markets in the world," Ward said. "Our expectations are that this market will continue to develop."

These two international-class hotels come on the heels of the National Hotel, which re-opened last year after a lengthy renovation, and the Tverskaya Hotel, which also opened last year.

"A city with 10 to 12 million people assures that there is a tremendous demand for [new hotels], but the economy has to develop," said Jack Ward, general manager of the Tverskaya Hotel. "For your international traveler, eight international hotels is not a lot."

Most of Tverskaya's customers are business travelers who check in on Sunday evening and are gone by the following weekend, said Jack Ward. Hotel sources said this is a common trend for Moscow's international hotels, for whom business travelers make up to 90 percent of their business.

But travel agencies and some hotel industry experts said that what Moscow really needs is more hotels that will draw lower-budget travelers.

"There is no need to build more hotels, there is a need to build cheaper hotels," said Rohit Grover, a manager at the Prakhash Guesthouse in southern Moscow, where room rates start at $30.

Jan Passoff of IRO Travel said most tourist groups who come to Moscow check into northern Moscow's Cosmos Hotel -- which generates 50 percent of its income from tourist groups -- or the centrally located Intourist, where the prices are still steep and service questionable. There is ample room on the market for many more quality rooms to meet tourists' demands, he said.

In fact, the market for relatively well-to-do group travelers is virtually untapped, said Lars Gundbergsen, a manager with Arthur Anderson, who follows the hotel industry.

Gundbergsen pointed to the early success of the high-end North Crown Hotel in St. Petersburg, where members of package tours will be able to stay at a discounted rate. Although it has not yet opened its doors following a recent renovation, he said, the North Crown has already pre-booked 50 percent of its rooms for the first three years to older, wealthy Westerners.

According to Moskva's Yulgushev, plans are already in the works to build more affordable hotels. The Moscow city government intends to create a full network of three-star hotels, with room rates in the $40 to $60 range, he said.

Moscow Mayor Yury Luzhkov has been promoting hotel joint ventures by structuring financial packages and offering tax holidays to encourage overseas investment in the hotel market. American hotel franchise developer Choice recently won a tender from the city government to build four three-star hotels in Moscow, said Yulgushev.

But with so many three-star hotels on the drawing board, why haven't these hotels appeared yet? "It's just much sexier to build a five-star hotel than a three-star hotel," Fenwick said.

And more profitable. According to Ward of Tverskaya Hotel, investors cannot afford to build cheaper hotels now because they need a quick return on their investment.

With rooms in Moscow's top hotels running $250 to $300 a night, three-star hotels can't hope to measure up to the city's five-star venues in terms of revenues. Moscow is the fourth most expensive city in the world for hotels, following Paris, Geneva and London, said Fenwick.

A Russian developer from Mospromstroi, who asked not to be identified, said many of the city's hotel projects lack money because investors are still wary of the Russian market.

The city government has plans to allocate some money for hotel construction, but most of it will come from the private sector, Yulgushev said.

The city government is also currently discussing plans to build a new five-star, 300-room hotel near the American Embassy on the site of a demolished building near the compound. This could open by the end of the century, Fenwick said.