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. Last Updated: 07/27/2016

Menatep to Set Up $300M Hotel Chain

A bank affiliated to oil giant Yukos and a British hotel developer have teamed up with Marriott to invest $300 million in the creation of a national chain of 40 to 50 mid-market and economy hotels over the next decade.

Group Menatep subsidiary Trust and Investment Bank will manage the project, with an initial investment of $30 million to $40 million being provided by GM Investment & Co., another subsidiary of the group.

The deal comes hot on the heels of a comparable deal announced last week in which Delta Capital Management, two Scandinavian funds and Rezidor SAS, the operator of Radisson hotels, intend to develop a similar-sized national chain of three-star hotels under the Country Inn brand.

Accor, operator of two Novotel hotels in Moscow, also plans to develop a chain of its Ibis-brand hotels in partnership with Gals Sistema, the real estate arm of financial holding Sistema.

The new chain has yet to be named, but its executives said such details would be resolved during the project's rapid implementation.

"The involvement of industry experts ... combined with Trust and Investment Bank's financial expertise and knowledge of the Russian market will result in a swift and efficient roll-out of the program," Dmitry Konov, managing director of corporate finance for Trust and Investment Bank, said in a statement.

GM Investment intends to retain a large stake in the project, but is considering involving other investors, the statement said.

"In the first phase we are looking at five hotels in the next 10 to 15 months," Robert Shetler-Jones, a director of British-run developer Sabre Projects, said Tuesday.

The hotels are likely to have 150 to 250 rooms, depending on the city and the class, costing $70 to $80 per room per night, he said, adding that higher class hotels could cost $100 to $110 per night. These prices are similar to those for Soviet-era hotels, but the quality will be better, he said.

Shetler-Jones said he expected construction costs to be $1,000 to $1,500 per square meter in Moscow and from $700 to $900 per square meter elsewhere.

Most international franchises do not own their own hotels, but merely provide branding and training.

Three Marriott-branded hotels in Moscow are run by operator Interstate, while Marriott itself owns 49 percent of the Renaissance Moscow Hotel.

Shetler-Jones said although his group does not yet have any sites, discussions are advanced and preparations for the project have been underway for two years.

He declined to say what stakes each partner holds in the project, or if it will have exclusive rights to Marriott brands.

Neither Marriott or Group Menatep could be reached for comment Tuesday.

Scott Antel, partner with Ernst & Young's hospitality consulting group, said Tuesday that the demand for budget-hotel projects had long been evident.

But development of the market had been slowed, he said, "either by the developer's ego overriding his business sense -- five star [hotels] are more sexy, with more show-off appeal -- or the lack of available outside financing."

While Menatep has no experience in the hotel business, it found reliable and experienced partners in Sabre and Marriott who know this market well, he said, adding that the market is far from saturated and that there should be room for more mid-range chains in Moscow and the rest of Russia.

Stephane Meyrat, a senior consultant at the Hotel Consulting and Development Group, advised caution with regard to the launch, noting that four major chains had announced ambitious construction plans that immediately lost momentum and have so far come to nothing.

"Moreover, many companies succeed in opening one hotel and then envisage creating a chain," he said in a faxed statement.

Moscow and St. Petersburg are good places to launch chains, but the provinces still present a serious challenge for mid-tier hotels due to the financial risk attributed to weak demand in terms of room-night volume and spending power, he added.

"The hotel market is still a risky venture for most, and as such it is judicious to proceed with great caution and capilitalize on a few profitable projects, rather than walking on thin ice with ambitious, yet unachievable plans," Meyrat said.