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. Last Updated: 07/27/2016

Gambling Zone Far From Being a Sure Bet

Attempting to predict the future of the domestic real estate sector may seem more like roulette than a sure bet, and just how laws establishing special gambling zones around the country will affect the development of the hotel industry is dividing analysts and industry experts.

Under legislation signed into law by President Putin at the end of December, gambling will be restricted to four specially designated zones around the country from July 2009.

Speculation that the zones are set to see a hotel boom as international operators move in were boosted by recent reports in the Russian media that one casino giant was eyeing a massive hotel complex development in one of the zones, on the border between the Rostov and Krasnodar regions.

"Some leading casino groups may show interest in operating casinos in these regions, though they will exclusively target the casino clientele from around the world, not just Russian clients," said Stephane Meyrat, associate director in the valuation and consulting department at Colliers International.

Some industry watchers are cautious about the region's potential to draw the interest of large hotel developers, however.

"A single casino in the middle of the steppe is unlikely to become a magnet for international hotel chains, but if it grows into something bigger the project has a potential to emerge as one of the most popular entertainment locations in Russia," said Marina Usenko, senior vice president at Jones Lang LaSalle Hotels.

"If the massive gambling zone development plans come to fruition, it can stimulate development of hospitality industry in this part of Russia, but international experience suggests it will be a rather lengthy process," Usenko said.

An exasperated Michael Boettcher, the British CEO of Storm International casino group, condemned the selection of the zones and said any investment in them lacked logic.

"They are ridiculous regions, chosen without any forethought or feasibility study or understanding of what gambling is about," Boettcher said. Storm International had no intention of moving into the gambling zones, Boettcher said.

With doubts over whether the gambling law will ever come into effect and questions over the adequacy of local infrastructure and transport links, gaming industry spokesmen have moved to scotch rumors of potential investment.

Neil Murphy, director for development at South African gaming giant Sun International, dismissed media reports that the company was considering a multibillion-dollar development on the Black Sea coast as "utterly incorrect and false."

"At the invitation of the administrations of Krasnodar and Rostov [regions] we have visited the area to advise them," he said.

Explaining the intricacies of the situation, Murphy said that before any investment is pumped into the future gaming zones, the government must get certain issues in order.

"What does it want to get out of the casinos -- tax, tourism, hotels, events, social programs? It has to be clear and demonstrate that their policy is for the benefit of the people," Murphy said.

Murphy said the region would only be able to support two or three international-standard casino resorts.

Such complexes would "include international standard five-star hotels, multipurpose venues for sport, concert and cultural events" in addition to conference and entertainment facilities.

"Ambitions for multiple casinos are unrealistic as the potential customer is limited in quantity and their ability to spend," he said.

"Any talk of a 'Russian Las Vegas' is simply unrealistic," he said.

Boettcher agreed that talk of any development was premature and said he thought any investment was illogical.

"You cannot possibility develop a casino industry without having the infrastructure, including the necessary legislation," he said.

Anyone looking to set up a major complex in the area would be seriously risking his investment, Boettcher said.

"The phrase 'white elephant' springs to mind," Boettcher said. "Maybe they need a tax write-off as nobody's going there."

"It's like building the Royal Albert Hall in Cornwall," he said.

Meyrat explained one alternative to purpose-built gaming complexes, with hotel chains sharing their premises with casinos.

"Most if not all international hotel chains such as Starwood, Intercontinental, Hilton and Accor do not run the casinos themselves, but rent out a predetermined amount of floor space to a selected casino operator," he said.

"There is already a strong impetus for the construction of hotels in this zone, though mostly for business and tourism," Meyrat said.

If the government is serious about stimulating hotel and tourist growth in the area, more money has to be spent on infrastructure and some sort of state tourism subsidy handed out, Sun International's Murphy said.

"Notwithstanding the bulk services that would be required -- water, sewerage, power and telecommunications -- there will need to be mass transit airports with subsidized air travel from Moscow and St. Petersburg," he said.

Industry insiders are still skeptical, however, that the rules will ever come into force, Murphy said.

"If what I am told is to be believed by persons close to the existing casino industry, the closure of their industry may well be delayed," he said.

Prior to the new legislation, Sun International had been planning a $5 billion Parklands complex near Moscow. With work stalled, Murphy said the company had not given up interest in favor of the gaming zones.

"Currently, the project is being reconfigured and we are actively monitoring the evolving legislation," he said.