Hospitality: Shaking off Soviet legacy

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Kiev, with about 3m people, is the largest European city between Berlin and Moscow, but it has only two internationally branded hotels, a Hyatt and a Radisson SAS, a sign of how far the Ukrainian capital lags other cities in the region.

The main reason has not been a lack of interest on the part of foreign companies, which have been circling Kiev ever since the collapse of the Soviet Union, rather it is the result of enormous bureaucratic resistance that has made pushing through any hotel project a Sisyphean task. Coupled with that was a reluctance of developers to devote time, energy and money to hotel projects because of the heady returns that could be made selling residential apartments.

“It was a bit off the beaten track, but even in the early 1990s international operators were trying to get into Ukraine – I first went there in ’93,” says Darren Blanchard, director of business development for Russia and the former Soviet Union for Rezidor, the Belgian hotel group that owns the Kiev Radisson, which opened in 2005. “The Radisson project started about 10 years ago. There were a lot of projects trying to get off the ground at the time but it was so difficult to get anything done in Kiev that many other developers gave up.”

Since then, Hyatt has opened a five-star hotel in the historic heart of the city, a project that took more than a decade to complete. Other hotel operators in line to open properties include Intercontinental Hotels Group, Hilton, and France’s Accor, which plans a luxury Sofitel for the capital for 2010. The dearth of western hotels in the city has opened a niche for local businesses to build properties such as Kiev’s Opera Hotel, owned by SCM Group, controlled by Rinat Akhmetov, one of Ukraine’s wealthiest men, and the Premier Palace, for many years the city’s leading hotel, part of a local chain.

“We plan to invest between $50m to $200m in our hospitality business in the next three years,” writes Nikolay Nesterenko, CEO of Esta Holding, the managing company of SCM’s real estate holding.

Because there are so few quality hotels, those already opened are able to command prices upward of €450 ($693) a night and have occupancy rates of close to 70 per cent. That kind of money is starting to make hotels an increasingly attractive investment.

“We had built apartments and offices and then decided to go into hotels,” says Andrey Manzheley, managing director of Yaroslaviv Val, one of Ukraine’s leading real estate developers, which is building two hotels, one to be managed by InterContinental and the other by Fairmont.

Even with new projects in the pipeline, there is likely to be a shortage of quality hotels in the Ukrainian capital, and in the country at large, for the foreseeable future.

“There is a need for all classes of hotels in Ukraine,” says Nikolay Mayger, a Ukrainian consultant.

Overall, there are about 1,300 hotels in the country, but only seven of them are top-quality five-star rated and about 20 have four stars. The vast majority are decrepit throwbacks that still remember the Soviet Union’s unique approach to the hospitality industry.

“They are substandard and expensive,” says Yuri Nartov, managing director for Ukraine at Colliers International, the real estate company. “They are basically a legacy of Soviet times.”

Local businesses are building modern, but often quite small hotels of varying quality across the country.

They will soon be challenged by international groups, which are planning a big expansion. Rezidor is the most ambitious, hoping to build about 25 hotels.

For now, most of the interest is focused on catering for business travellers in Ukraine’s largest cities, particularly industrial centres in the east of the country such as Donetsk.

“The money in the first instance is to be made off commercial travellers,” says Mr Blanchard. “To build today specifically for the tourist market in Ukraine, except perhaps for Crimea is a little bit brave.”

The tourism business is still undeveloped, with the exception of the Crimea in the Black Sea, which was a premier Soviet destination.

“We have a lot of spas and resorts that are cheap and Soviet-style, but Turkey is the same price and the standards are a lot better,” says Mr Mayger, explaining why many Ukrainians prefer to holiday abroad.

Most of the luxury hotels now on the market see a heavy drop-off over the weekend, as business travellers leave.

“I’ve been in Kiev many times on Friday nights and I’ve been almost alone in the hotel,” says Michael Cooper, in charge of development for Russia and Ukraine at InterContinental Hotels Group.

Ukrainian authorities hope that hosting the European football championships in 2012 will make the country a better-known tourist destination. Although the tournament is not enough to justify investing in a hotel in Ukraine, the government’s commitment to build 67,000 hotel rooms will make it easier for investors to secure approval for projects.

“There is a new political impetus behind hotel development,” says Mr Cooper.

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