Hotels Invest In Moscow Despite Uncertainty

<B> Hotels Invest In Moscow Despite Uncertainty</B>

By Maria P. Vallejo

<I>Moscow</I> - Despite its economic and financial turmoil, Moscow remains a strong draw for international corporations and an investment market for hotel companies determined to get their foot in the door.

The unsteady financial and political situation gripping the nation is helping buoy occupancy rates at Moscow's four- and five-star hotels as investors, consultants and politicians from North America and Europe continue to arrive in Russia's capital to check and maintain their existing investments and search for new opportunities.

"When you've got a country in trouble, you've got consultants. There is some demand for that group," said hospitality analyst Ted Mandigo, president of Chicago-based T.R. Mandigo. "The situation will start to stabilize, and the people with their feet on the ground will start to build their markets."

European and North American hoteliers are opening and operating upscale and luxury properties that attract high-end travelers and remain strong compared with locally owned competitors. Some of these hotels are garnering average occupancy rates in the 70s during peak week nights.

When Russia opened its doors to capitalism, a burgeoning hotel market encouraged investment--but difficulties obtaining permits from both the local and national governments resulted in postponed or canceled deals, leaving Moscow with limited supply.

"There was a shortage of properties in Moscow," Mandigo said. "Since there was not a significant increase of transient room supply, the rates can go up and support existing properties. The development process was so long that we did not get the supply of rooms when they were needed."

Now, some hotel companies are investing in more than one Moscow property, believing the city will become a more mainstream business destination.

Marriott International has developed a three-hotel Moscow collection, which includes the Marriott Grand, Tverskaya and Moscow Marriott Royal hotels.

The properties are expected to capture primarily international business travelers because intra-Russian travel remains scarce. Overseas business travelers account for more than 80 percent of the Grand's customers, but enough of them come to maintain occupancy rates between 70 and 80 percent on weekdays, according to Marc Hillebrant, director of marketing for Marriott's Moscow Collection.

The Tverskaya opened the city's first extended-stay suites in September 1998, and has attracted large banking companies that are sending corporate travelers to assess Russia's financial markets. But even with the new room conversions, Tverskaya's occupancy runs between 60 and 65 percent during week nights. Prior to the crisis, it received 95 percent or higher occupancy rates.

The Royal, the highest tiered hotel of the three Moscow Collection properties, is projecting occupancies in the mid 60s, said hotel manager Greg DePasquale. The company has reduced its expectations by about 8 percentage points since the financial crisis began.

But travel buyers still should not fool themselves into believing significant rate reductions and discounts are awaiting them. Some Moscow hoteliers said rate slashing will only harm the local hospitality industry and exacerbate the financial problems. Still, they are willing to negotiate for services and amenities.

"There's a good tendency to keep the rates up," Hillebrant said. "There's flexibility on upgrading and other things, but there will be no price dumping."

While still running high occupancies, the Grand is feeling the crunch of the unsteady economy. In the past, it reached occupancy rates in the 90s. Given the drop in occupancy, Moscow's Marriott hotels will negotiate for better business services and increased amenities.

The Baltschug Kempinski also has experienced drops in occupancy of 10 to 12 percentage points and now is running in the low 60s. Despite this decrease, Kempinski was able to maintain its rates by offering upgrades, early checkin and checkout, and other services under its companywide Business Concierge plan.

"We obviously are flexible in our rates based on demand and supply," said Graham Leslie, Kempinski's senior vice president of sales and marketing in New York. "It's very hard to see how long this particular cycle will last. We do not see a large growth on rates, and the rates will remain fairly static."

Meanwhile, other hotel companies continue to eye the Moscow market. Hilton International is planning to open a five-star hotel near Red Square. The new construction project will break ground this fall with the aid of a $5 million Hilton International investment and additional funding from outside partners.

"There is no doubt the hotels in Moscow are extremely busy," said Clive Hillier, Hilton's vice president of corporate development in London. "There is great activity with the current turmoil and executives coming to Moscow. The four- and five-star markets are still very active.