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. Last Updated: 07/27/2016

City Hall to Help Hotel Developers

Moscow City Hall has announced a series of financial concessions to boost hotel building in the capital in a sign that the city is finally getting serious about tackling its dearth of hotel rooms.

Mayor Yury Luzhkov has signed a decree offering hotel developers significant discounts for buying or leasing land as well as subsidies to ease the high cost of borrowing, Deputy Mayor Iosif Ordzhonikidze said Thursday, Interfax reported.

The move could help make hospitality a more attractive proposition for investors turned off by the slow returns offered in the sector, analysts said. Their reluctance to stump up their money has helped leave Moscow with about seven times fewer modern hotel rooms than London and some of the highest room prices in the world.

Luzhkov's decree says city authorities will pay up to three-quarters of the interest on credit taken to build a hotel, Ordzhonikidze said.

High interest payments over the long period required to build and make money on a hotel are one of the major impediments to development, analysts said.

At least one major hotel project in Moscow is at risk of folding due to the high cost of financing, said Marina Usenko, vice president of Jones Lang LeSalle Hotels.

The decree also gives significant discounts on the price of land for hotel projects. Developers who lease the land will pay only 1 percent of the rent during construction and the first three years of operation. Developers purchasing land will be offered a 50 percent discount, although in practice there are almost no sites available for sale. Ordzhonikidze said city authorities would not expect any stake in the hotel in return.

He did not provide details of exactly who would be eligible for the concessions, saying only that details of the decree "on the stimulation of the development of the hotel business in the capital" would be released soon.

The most significant measure is the compensation for part of the interest payments, said Damir Kaftaranov, general director of City Hotel, which is currently building two hotels in the capital.

He said financial institutions are currently reluctant to give credit for hotel projects due to the long time it takes for them to make a return on the investment, he said. The offer should help companies get credit, although its effect would depend on how much the city would actually pay, he added.

The offer to reduce rental payments to 1 percent is "progressive," Kaftaranov said, but this would not represent a major reduction in the cost of a project.

The moves could go some way to counterbalance the fact that hotel projects earn back the money invested only after around seven to eight years, compared to three or four for offices, said Stephane Meyrat, associate director for hotels at Colliers International.

"This is why hotels have been left in a corner and ignored for so long," he said. "Developers get discouraged very quickly."

He urged caution, however, saying it would take six months or so to judge how serious a move the decree really is.

While city authorities have repeatedly made ambitious predictions about the number of rooms to be built in the city in the next decade, there have been few concrete proposals to make up for serious difficulties faced by developers. Other major problems include a lack of attractive sites and tortuous bureaucratic procedures.

"There has been a lot of hot air with no action. This is a clear sign that they are concerned and are trying to do something," Meyrat said.

"It's significant in terms of the message it sends out," Usenko said. "It's a positive message to investors."