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. Last Updated: 07/27/2016

Embattled Tycoon to Invest $800M in Sochi

Telman Ismailov, the tycoon who fell from favor after building a $1.5 billion hotel in Turkey, will invest $800 million into two Sochi hotels, Olimpstroi said Thursday.

The price tag is double what Ismailov had been expected to invest in the construction of hotels in the host city of the 2014 Winter Games, and analysts called the deal loss-making.

But what Ismailov might lose on the properties, he apparently hopes to make up with the Russian authorities, who closed his Cherkizovsky Market in Moscow last June after Prime Minister Vladimir Putin complained of smuggling.

Observers have linked the crackdown on Cherkizovsky, Europe's biggest market, to government anger that Ismailov had built the luxury hotel in Turkey instead of investing the money at home.

Olimpstroi, the state corporation overseeing construction for the Sochi games, said Thursday that Ismailov's AST Group had signed an agreement to develop 4,000 rooms and that the two sides were negotiating the hotels' design and concept.

AST will construct a 150-room, five-star hotel on the Black Sea shore in a new project that will be added to the Olympic program, Olimpstroi said.

The remaining 3,850 will be of three- and four-star quality and be part of the 5,500-room Sodruzhestvo hotel complex, which is currently listed in the official program without an investor, Olimpstroi said.

Sodruzhestvo, which will cover 24.9 hectares, will be the closest hotel to the main Olympic venues and will be located about 700 meters from the beach, according to Olimpstroi's map.

The sum of $800 million is a standard price for developing 4,000 four-star rooms, but the investment is dubious, analysts said.

"Even with beach access, such a hotel would take 10 years to break even," said Konstantin Romanov, a partner with Knight Frank.

Building a similar hotel in Turkey would make more sense because labor would be cheaper and the tourist season lasts 4 1/2 months, six weeks longer than in Sochi, he said.

The proposed site for the hotel in the Imeretinskaya lowland area could add to construction costs because of its difficult geology, but a large project like Sodruzhestvo has some room for cost-cutting, said Olga Shirokova, director of the consulting department at Blackwood.

“The Olympics are not enough to make this project profitable," she said, adding that it might make sense to build it in such a way to convert it to housing.

Four thousand hotel rooms can be converted into about 1,000 apartments, she said. Demand for such housing will depend on the cost, but "converting four-star hotel rooms into affordable housing is not optimal," she said.
Apartments in the Sochi area can fetch up to 80,000 rubles ($2,600) per square meter, but there is little demand, Romanov said.
"Local demand is practically zero, and demand for vacation homes among residents of other regions is very low," he said.

A secretary in Ismailov's office said nobody was available to comment Thursday.

But Ismailov might have more on his mind than the economics of the Sochi hotels. The businessman drew gasps and frowns last May when he opened Mardan Palace, a five-star wonder on the Antalian coast that is the most expensive hotel in Europe. The 560-room hotel is named after Ismailov's father and filled with extravagancies like gondola rides in a pool full of sparkling water.

Ismailov's fall from grace was swift after he gave such a blatant display of wealth during the economic crisis. Putin complained in early June that the seizure of $2 billion in contraband goods sold at Cherkizovsky Market had not resulted in convictions and, taking the hint, the authorities closed the market at the end of the month.

After Ismailov made Turkey his temporary home, Putin said in December that investors like Ismailov should focus on Russia, "for example in building hotels in Sochi."

Now, barely six month later, Ismailov's fortunes appear to be improving again. RBC Daily reported last week that Ismailov had purchased 36 hectares southwest of Moscow, not far from the Mega-Tyoply Stan shopping center, and was likely to recreate Cherkizovsky Market there.

The International Olympic Committee needs 24,400 hotel rooms ranging from three to five stars for tourists, officials, journalists, athletes and other Olympic guests. In addition, 38,000 rooms are needed for tourists, Olimpstroi said.

Binding investment agreements have been signed for three hotels in Imeretinskaya, including Sodruzhestvo, according to a program that Olimpstroi provided to The Moscow Times. Investors also have been found to build eight hotels with a total of 5,400 rooms in the area, although no deals have been signed yet. No investors have been found for two four-star hotels with 1,120 rooms.