City Hall Seeks to Encourage Mid-Range Hotels

City Hall Seeks to Encourage Mid-Range Hotels

Published: October 31, 2012 (Issue # 1733)


Mid-range hotels like the Rachmaninov (above) are in short supply in the city, which is dominated by 4- and 5-star lodgings.

As City Hall focuses its efforts on bringing inexpensive hotels to the city, developers say that in order to attract investors, some kind of financial incentive is necessary.

A new framework for developing hotel infrastructure in the city from 2013 through 2018 has been devised. The plan has been drafted to focus the efforts of developers toward the sector of affordable hotels.

Around St. Isaac’s Square alone, there are about 10 four- and five-star hotels, while the development of two- and three-star hotels in St. Petersburg is an objective necessity, said Nikolai Nagach, the general director of the three-star Baltiya hotel.

“Expensive hotels mainly host elderly foreigners and business travelers, but the volume of these categories of traveler stopped growing long ago,” he said.

According to data from Jones Lang LaSalle Hotels (JLL Hotels), the average price for a room in a luxury hotel in the city is 11,850 rubles ($378).

The number of hotel guests in the city is increasing thanks to Chinese visitors, young people and business travellers from the Russian regions, for whom price is important, said Nagach.

“Steep prices for rooms do not allow us to increase the volume of tourists at the expense of people with average incomes; the demand for economy-class hotels and hostels is not being met,” said Yevgeniya Tuchkova of Colliers International St. Petersburg.

According to information from Alexei Musakin, director of Cronwell Management, the cheapest hotels (two-star) currently offer rooms from 2,500 rubles ($80) per night. However, the rates for three- and four-star hotels have dropped compared to 2011 from 6,850 rubles ($218) to 6,300 rubles ($200) and from 3,150 rubles to 3,100 rubles, respectively, according to data from JLL Hotels.

Oleg Lyskov, acting chairman of the city’s Committee for Investments and Strategic Projects (KISP), said that up until now the municipal government has supported the development of this industry as a whole, but the market itself has been identifying which trends attract investment. Developers’ interests have shifted in favor of high-end hotels, but the lower-priced sector, a lack of which exists in St. Petersburg, “remains untapped,” the official stated.

The new framework is currently being approved by the municipal government. It proposes designating buildings hotel status, and extending project deadlines from 3.5 to five years if the property is purchased at a city auction, said Lyskov. The authorities will not be creating a property directory of those buildings earmarked for hotels. Investors will be able to propose specific properties and will be given a chance to acquire them from the city with permission to turn them into hotels, said Lyskov. However, it will be specified in the investment contract that for the duration of 15 years the building must be used as a hotel, Lyskov clarified. This is a reasonable time period; most hotels are built to operate as such for longer, said Nagach.

However, having granted the premises without a formal tender, the authorities will find it hard to control what happens next: The developer could build, for example, a complex of guest apartments and sell them off to various proprietors, said Musakin. Stimulating the sector of low-cost hotels makes financial sense, for example, by providing government safeguards on loans, he added. According to Musakin, it is worth adopting the European practice in which developers building a three-star hotel using loans obtained with government support sign a contract with the town council on pricing; in the event that the contract is broken, the interest on the loans is recalculated at market rates.

A hotel’s profitability consists not only of the revenue earned from hotel guests, but also from restaurants, business and fitness centers and other hotel facilities. Among three-star hotels, the proportion of profit from other facilities is less than among five-star hotels, but their operating expenses are lower, said Tuchkova. As a result, three-star hotels provide the investor with an 18-20-percent annual return, which for five-star hotels is an almost impossible rate.

If we measure profitability not by percentages but by money, then thanks to more expensive rooms, 5-10-percent occupancy at five-star hotels is equal to 20-percent occupancy at three-star hotels, said Nagach. The period of recoupment for three- and four-star hotels is approximately eight to 12 years, with the fastest return being on hostels at five to seven years.

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