Sanctions, exchange rates hurt Russian hotels
 
Sanctions, exchange rates hurt Russian hotels
06 APRIL 2015 6:40 AM
Hotel demand is on the downslide in Russia, where sanctions and currency devaluations are driving up the cost to do business. 
REPORT FROM RUSSIA—Sanctions, political strife and currency devaluations are hurting hotel demand in Russia, according to sources. However, sources warned from calling the situation a crisis just yet. 
 
For example, in Moscow and St. Petersburg the flow of tourists dropped 10% in 2014, according to the Russian Federal Tourism Agency. The forecast for 2015 calls for a further decrease of between 10% and 15%. This could force investors to abandon projects in Russia’s two largest cities. 
 
In 2014, Moscow saw a decrease in revenue per available room of 11%, led by a 9% drop in occupancy and a 2% decline in average daily rate in ruble terms, according to David Jenkins, national director, executive VP, Hotels & Hospitality Group, JLL Russia & CIS.
 
“This is better than we had anticipated following the Crimean annexation and the subsequent sanctions,” he said. “As the year went on, we have started to see larger issues coming through the ruble devaluation and general economic issues—linked to high inflation and so on.”
 
According to STR Global, sister company of Hotel News Now, RevPAR in Russia decreased 13.6% to 2,549.76 Russian rubles ($44.82) in February. ADR was down 6% to 5,112.82 rubles ($89.88), while occupancy declined 8.1% to 49.9%.
 
Moscow, meanwhile, saw RevPAR drop 5.8%, ADR decrease 0.1% and occupancy fall 5.7% (all in ruble terms), according to STR Global. St. Petersburg’s RevPAR was up 7.9%, while ADR increased 11.1% in ruble terms. Occupancy, however, was down 2.8%.
 
What’s causing strife
The hotel industry’s problems in Russia started in August 2014, according to Alexis Delaroff, Accor’s COO for Russia and CIS. That’s when many foreign tourist groups that previously provided steady flow of visitors during the holiday season refused to travel to Russia. Delaroff said the mutual sanctions of Russia and Western counties affected business contacts, and the number of business tourists from the European countries dropped. 
 
“If the first six months of 2014, the tariffs and occupancy indicators were in line with expectations, and even ahead of them, but in the second half of 2014 we saw a slight decrease in occupancy. The most significant decrease of occupancy experienced hotels in the upper-price segment, despite the fall of tariffs here,” said Vladimir Poddubko, head of hospitality department of Corporation AND, which owns several hotels in Moscow, including the InterContinental  Moscow Tverskaya. 
 
The situation in Russia has forced hotels to apply aggressive pricing, according to a press service for Azimut Hotels. In the mid-range sector, prices for hotel services in Russia decreased 8% to 10%. At the same time, the Russian ruble since the beginning of 2014 collapsed twice against the dollar and euro, which cut the volume of revenue of country’s hotels in hard currencies. 
 
One source said the situation is a benefit mostly for the hotels of the lower-price segments, as their occupancy rate is keeping at the level of 2013 or even rising. 
 
“As we manage hotels of 3- to 4-stars such as Greenwood, we didn’t see the downturn here. But the depth of booking here is very low. Customers order rooms just before entering,” said Vadim Prasov, managing partner of Alliance Hotel Management and VP of the Russian Federation of Restaurateurs and Hoteliers.
 
But it might be too early to speak about the trends of 2015 and how deep the crisis could go. 
 
“Clearly there have been fewer visitors to Moscow, but in fact only 9% fewer. It is still too early in to this year to feel any trend. We would typically like to see how (the first quarter) performed as January and February alone are never anyway the strongest months,” Jenkins said. 
 
“Sanctions are driving up prices. Hotels are struggling in terms of controlling operating expenses, hitting into owner’s profitability. Unless hotels can increase the ADR, we will see them continue to shed profitability,” he added.
 
This situation already forced a number of investors to cancel or revise their projects. In February 2015, VTB Development, postponed at least for the year the construction of a 4-star hotel within the project Neva Hall in the center of St. Petersburg. Earlier it was expected the project would be launched in 2016. Starwood Hotels & Resorts Worldwide, which planned to open in St. Petersburg an Aloft hotel, also has postponed the project indefinitely. 
 
Irina Anisimova , representative of the Neva Hall project, said the main reason for this step was the fall of the demand for hotel services in Russia. She added that the company is considering the redesign of the project to an apartment-hotel or office building. 
 
Jenkins said the situation so far should not be considered a crisis. 
 
“We don’t see the hotels in Moscow as being in crisis, fundamentally. The main issue as we see it comes in the regions where most business is local, and there is little opportunity for hotels to increase prices, making such hotels far less profitable in hard currency terms. This is especially problematic if owners have hard currency debt. 
 
“At the same time, the hotel operators will be seeing their own fees shrink in hard currency,” he said.
 

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