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Moscow and St. Petersburg Hotel Markets. 2015 Results and 2016 Forecasts

Moscow, 10 February, 2016 – Tatiana Veller, Head of JLL’ Hotels & Hospitality Group, Russia & CIS comments on 2015 results  for quality hotels on Moscow and St. Petersburg markets, and prospects for 2016:

“Russian hotel market in the past year saw a number of changes: a complete switch to ruble cash flows (both for income and expenses), demand shift to high-volume price-sensitive markets, a significantly increased number of guests from Russian regions – including businessmen and tourists, shift of foreign demand sources from West to East, robust occupancy growth and challenges growing dollar-denominated rates market-wide.

Operational indicators

Quality hotels in Moscow and St. Petersburg across all segments have accommodated many more guests in 2015 than the previous year. The average market occupancy in Moscow grew by 4.2% (or 2.7 pp. in absolute terms), reaching 67.5%, while in St. Petersburg it grew by impressive 12.8% (7.3 pp. in absolute terms), reaching a solid 64.3% year-round. Revenue per available room (RevPAR) increased greatly in ruble terms on both markets, with St. Petersburg beating RevPAR records with a 26.3% growth, compared to 2014 (Moscow recorded a more modest gain of 7%).

The two markets witnessed an average daily rate growth (ADR) in rubles: in Moscow cross-segment ADR grew by 2% - to RUB 8,000, and in St. Petersburg by almost 9% - to RUB 6,200, with the key driver of growth being the higher level segments (luxury, upper upscale, upscale).. Year-round ADR in St. Petersburg luxury segment was sitting at RUB 13,000, Moscow finished 2015 with and approximately RUB 15,000 rate. Both cities displayed double-digit growth compared to 2014 – by 14% in Moscow, by 19% in St. Petersburg. The lower segments created volume, meaning were driving the occupancy

We do not expect a lot of new supply in luxury segment to enter either of the two markets (only Jumeirah hotel with 76 keys is scheduled to open in St. Petersburg by the end of 2016), which will allow the existing market players to benefit from demand growth and gradually strengthen their rates.

Supply2

Out of 5,200 rooms scheduled for opening on Russian market in 2015, only 3,700 were actually introduced to the market. The reasons are mainly economic: debt money is either expensive or unavailable; outlook even for the nearest future is unclear. In such conditions many developers feel uncertain regarding the return on invested funds, and aren’t ready to take a risk of pursuing new projects. Furthermore, many players consider that bringing additional room stock to the market is not the wisest thing to do in such turbulent conditions.

In 2015 Moscow welcomed 757 new branded hotel rooms: Ibis Dynamo, Hampton by Hilton Strogino, Marriott New Arbat. St. Petersburg did not have any new branded openings.

2016 outlook in terms of new supply looks better: about 2,600 branded rooms are in the pipeline for Moscow and St. Petersburg, with a prevailing majority – about 2,200 – expected in Moscow. Half of the announced projects are in the Midscale segment. This, partially, can be attributed to preparation for the 2018 World Cup and attempts to accommodate the new demand patterns which are shifting towards mass market.

Some notable projects that are expected this year are: a triple-brand by Accor and Patero Development (Novotel, Ibis, Adagio) near Kievskiy railway station (701 rooms), a first internationally managed hotel near Vnukovo airport – Four Points by Sheraton, Russia’s first Jumeirah in St. Petersburg, the first hotel to bring accommodation facilities to ExpoForum in St. Petersburg – Hampton by Hilton, as well as Russia’s first Wyndham hotel in St. Petersburg.

Investment climate

2015 year on the hotel market was marked by new wave of buyer appetite. Key reason is: hotels became relatively cheap in hard currency terms, when valued on the basis of their ruble cash flows. Previously, with stable ruble, hotel markets in both cities had a rather high entry barrier – asset valuations were extremely healthy as operational performance was strong.

The interest towards hotel assets from key real estate market players is further stimulated by growth in domestic tourism and increased inbound tourist flow from the high volume markets. Hotels are traditionally viewed by conservative investors worldwide (pension funds etc.) as a means of hedging investment risks – they are an asset with high resistance to volatility, and steadier cash flows in the face of changing economic background, compared to other segments of real estate.

The factor that still holds transactions market back is the waiting pattern assumed by many current hotel owners, which has yet to change – this is especially true for those with dollar-denominated loans taken out to finance construction. This is a psychological barrier which the market will obviously have to overcome soon – starting to think of hotel asset values in rubles as a completely ruble cash flow business, and that should trigger the start of transactions.

The geography of investors has also undergone some changes, although their main attribute is still the same: hotel market attracts investors with a mid- to long-term planning horizon. Many institutional players from Asia (China, Singapore, Hong Kong) have established their interest in the market as well as some Middle Eastern funds. Moreover, Russian investors with strong financial positions are actively pursuing opportunities to grow their portfolios.

Noteworthy is also the brand new investor interest in Soviet era hotels, mainly in Moscow. In the environment of growing demand for inexpensive accommodation, and tough competition for a guest, these can become a compelling solution for quick entry into the market through renovation, rebranding and repositioning of the existing building in a prime location.

Upcoming year

For year 2016 we can with a degree of certainty forecast the following:

• Local demand will be a dominating source of revenue for most hotels, including the business demand which was always a prevailing segment for Moscow;
• Tourists from high volume Asian destinations will dominate the inbound demand;
• With continuous effort by the government to promote domestic tourism, popularity of Russian destinations for weekend getaways and longer vacations will grow;
• The number of accommodated guests (occupancy) in major business and leisure destinations will grow;
• The rates in dollar terms should start to show signs of stabilization;
• Investors will still hesitate to launch new projects until the clearer signs of recovery are apparent.

In the nearest future hotels of all segments should see possibility to start building the rates back up, on the back of strong demand, also stimulated by further attempts at localization of the economy. Stabilizing of geopolitical situation in the world and rebuilding of Russia’s external image would help increase the number of foreign guests and partially recover the western demand with higher spending ability. If the national currency is strengthened, which will result in gradual growth of hotel asset value in hard currency terms, the transaction market should start to move.”