Commercial Real Estate

St. Petersburg has a lot of landmark destinations to offer its guests: the Hermitage, Peterhof, drawbridges, white nights, etc. Nevertheless, tourism is still lagging in the northern Russian capital, and both the city administration and tourism managers are struggling to remove a number of hurdles barring the tourist boom, the most major of which is the lack of hotel rooms.
However, as business tourism in the city gathers momentum, the future of the city’s lodging industry on the whole seems quite bright. Much will depend, of course, on how soon the available hotels will be able to offer a sensible ratio between price and quality.

General situation

In many countries, hospitality properties take more time to pick up than other segments because of their lower yields. Yet for some cities, tourism is one of strategic development priorities. St. Petersburg resplendent history and closeness to Europe is one of such places. The Russian hospitality market has just taken off but the race to invest in accommodation properties is already in full swing. By the number of acquisitions, Petersburg has even shot ahead of Moscow, as the year 2006 saw remarkable transactions completed by European investors, including:

• British London & Regional Properties bought an unfinished hotel on Vasilyevsky Island from Petersburgbased LenSpetsSMU. On termination of construction works, the hotel will be managed by Sokos Hotels owned by Finnish S Group;

• Norwegian Wenaas Group acquired Pulkovskaya and Pribaltiiskaya hotels, having commissioned The Rezidor Hotel Group with their management. Both hotels were rebranded into Park Inn.

Transnational hoteliers are also building up their operations. In addition to the already existing brands, such as Kempinski, Radisson SAS (Rezidor), Corinthia, Renaissance (Marriott International’s brand), residents and tourists will soon see the signs of Best Western, Courtyard by Marriott, Le Meridien, Domina Hotels & Resorts, etc.
In summer 2006, the St. Petersburg government amended the program of hospitality infrastructure development adopted in 2004. Now, depending on the function of a new property, the government may absolve some of mandatory taxes in order to make hospitality projects more attractive to investors. Market experts hail these administrative moves; however, don’t pin excessive hopes on such measures, as the market growth rates can hardly be influenced by government regulations.

Supply
Although the hotel taxonomy adopted in 2005 is not binding, St. Petersburgbased hoteliers are trying to bring their accommodation services into conformity with the international class system. Furthermore, burgeoning business activity draws the increasing number of business tourists, and the quality of hotel rooms and accommodation services are very important for wooing this category of guests. Yet the quality of services can be starkly different within the same class in spite of universal striving for perfection. This is particularly true for threestar hotels, which can include both modern hotels that comply with strictest world standards and the ugly fleapits remains from the Soviet hotel era.
Pursuant to the statistical report of the Investments and Strategic Projects Committee of the city administration, 336 hospitality properties with the total of 18,606 rooms functioned in St. Petersburg as of the end of 2006. Yet market analysts differ in their estimations of hotels coming under the middle and higher classes.

• According to GVA Sawyer, 45 properties with the aggregate stock of 9,927 rooms fall under quality upscale hotels, 24 of them being threestar hotels having the total of 5,078 rooms;
• As reported by Colliers International, 72 hotels (12,446 rooms) fall under middle and high classes, 51 of them being threestar hotels (7,928 rooms);

While St. Petersburg claims the title of Russian tourist capital and the yearly number of guests is comparable to similar figures for many other European tourist magnets, the city has only 4.5 rooms per 1,000 residents, which is significantly less than in most European capitals (see Chart 1).
The northern capital’s accommodation stock swelled by 500 rooms in 2006, nearly half of them falling under the middle threestar segment and only one representing the upscale segment (Kempinski Moika 22 opened in February 2006). Such dynamics gives hope that the growing deficit of middleclass hotels will soon be stopped.
Mini hotels are also a major feature on St. Petersburg hospitality landscape. However, the number of minihotels is unknown, as many of them have no public registration or are part of the housing stock. In experts’ estimation, about 300 such hotels with between 2 and 40 rooms now function in the city. The given segment enjoys great demand, successfully competing with middle­segment hotels under the general supply shortage.
Likewise, the rapid development of country hotels also answers the strategic goal of turning St. Petersburg into the national tourist center. Aquamarine, an example of a recently opened country hotel, has a SPA complex, while Petro Sport Hotel offers horseback riding, fitness, swimming pools and tennis courts. Suburban hotels are not only meant for numerous guests of the northern capital but also for local residents and companies who generally use them for personnel training, seminars and recreation.
As reported by Becar Realty Group, 12 big hotels due to open in 2007 will enlarge St. Petersburg’s aggregate accommodation stock by 2,305 rooms. According to analytic estimations of GVA Sawyer, construction on 110 lodging properties is now underway in the city and its nearest historical suburbs, of which 72 could be ranked among quality middleclass and upscale hotels. Presumably the total of 8,500 rooms will be commissioned: up to 1,000 suites fall to the share of fivestar hotels (11 properties), over 2,600 rooms (22 properties) will have a fourstar label and 4,900 rooms (39 properties) will represent the threestar segment.

Demand
According to the Investments and Strategic Projects Committee, 4.5 million guests visited St. Petersburg in 2006. Almost half of this amount (2.18 million) is comprised of foreign tourists, whose number increased by 10% since 2005. Interestingly enough, the foreign tourist flow thickened for the first time in three recent years, whereas the number of Russian tourists is steadily rising by 1015% per annum.
The seasonal fluctuations in tourism also poses serious problems to the St. Petersburg hospitality industry. While most hotels are overcrowded in times of traditional white nights, many of them are empty in autumn and winter months. This is one of the reasons behind high hotel rates. To make up for months of stagnation, landlords send prices up during the high season. To draw winter tourists, the St. Petersburg Committee for Tourism and Foreign Relations developed, in partnership with the Russian Tourism Union, the White Days program allowing for reasonable accommodation prices and a robust cultural agenda. Business tourists are less sensitive to the seasonal factor and price fluctuations, and so the growing business activity is the best way to improve allseasonal hotel occupancy. This is doubly true for upscale worldclass hotels.
As reported by London Consulting & Management Company, the average annual occupancy rate is 50.5%, which is well in line with average European figures, while in June, many of St. Petersburg hotels are 100% filled.
As estimated by GVA Sawyer, slightly more than 30% of all tourists come for business reason, yet the majority of guests visit the city for recreational purposes and sightseeing (both individual tourists and groups). Hence, the shortage of middle and economicclass hotels significantly curbs the tourist flow.

Rates
The tourism in St. Petersburg is further hindered by the fact that the city is one of the world’s most expensive tourist destinations. Restaurants, museums, tours and guides may easily purge the wallets of ordinary entertainmentseeking tourists. Yet accommodation bills account for the lion’s share of the tourist budget. Visitors have to shell out 2030% more cash than in other European tourist capitals for similar services, and the quality is usually lower. In expert estimation, the annual growth rate of accommodation prices is 1015%. Average daily accommodation charges are presented in Table 4, but it should be kept in mind that in summertime prices soar by 3040% against the dormant wintertime. De luxe suites and apartments are generally twice or thrice as expensive as standard rooms and may cost more than $1,000 for an overnight stay at upscale hotels during the high season.
According to analysts at Colliers International, investments needed to develop one sqm of lodging space range from $1,300 to $1,800 for the middle segment and from $2,000 to $2,500 for upscale hotels. The payback times, as estimated by London Consulting & Management Company, are 78 years for threestar hotels and 810 years for upscale hotels.
As reported by Colliers International, the most typical management contract terms fix the operator’s remuneration at three percent of gross earnings generated by a hotel, plus a bonus in the amount of 10 percent of the gross operating margin or the revenue prior to major tax deductions.

Trends

• Relocation of some industrial properties clears large grounds subject to complex development, including hotels.

• Mixeduse complexes with an integrated hospitality function are gathering momentum. They shorten hotel payback times, which are known to be the longest as compared to other commercial properties;

• Hotels meant for business tourists will most likely be developed in sprawling community and business areas;

• Apartmenthotels also targeting business tourists on a long stay are rising near business centers.

Projection
Despite the present shortage of quality supply, accommodation fees are unlikely to grow too fast as their level is already higher than in competitive tourist magnets. The influx of foreign guests in 2006 and a steadily growing number of inland tourists give hope that the efforts of the city administration will be crowned with success and the city will obtain the status of Russian tourist capital. Investors are ever more readily contemplating hotels as investment properties and quite a few transnational hoteliers are planning to enter the St. Petersburg hospitality market. As large announced properties are completed, many of which fall under the most popular middle segment, the demand for modern hotels will be met within several years.