Hotels fail to attract investors

The Ukrainian authorities have promised to support planned investment in hotel construction ahead of the Euro 2012 soccer tournament. But experts at a recent conference in Kyiv say that the market is not attractive to investors right now owing to declining occupancy rates, the high cost of borrowing money and an ‘irresponsible’ approach from international chains. It is forecast that this situation will not change for three to five years.

Euro-2012, which will take place in four Ukrainian towns – Kyiv, Donetsk, Lviv and Kharkiv, is fast approaching. But the required infrastructure projects such as stadiums, highways, roads, airports and hotels are not ready. According to the UEFA’s requirements, Ukraine should provide the official delegation with rooms in 3, 4 and 5 star hotels - which are currently being built. rnThere are plans to build 33 hotels (6.342 thousand rooms) in Kyiv, of which eight are 5 star hotels (2.188 thousand rooms), seventeen 4 star projects (2.828 thousand rooms), seven 3 star (1.271 thousand rooms) and one 2 star unit (55 rooms). The first of these will be coming into operation this year, including Fairmont Hotel Kiev (5 star), Visak (4 star), Holiday Inn (4 star), Staro (4 star), Royal (4 star). Next year the Hilton (5 star) and Sky Towers Hotel (5 star) will accept their first guests.

Kharkiv (in eastern Ukraine), one of the cities hosting the European football championship, is to get 31 hotels, of which 49% are 3 star projects. Local developers are planning to open no less than four hotels in two years including Town (5 star), Europe (5 star), Kiev (5 star) and Chichikov (4 star). rnDonetsk (also in eastern Ukraine) is building 19 hotels (2.5 thousand rooms) for the tournament. In 2010 and 2011 two 5 star projects – Victory, Capital and Floria will come into operation as will three 4 star hotels - Yusovskaya, Tehnoscrap, Central.

Lviv (in the west of Ukraine) is one of the most difficult cities to develop new projects, because it is forbidden to build in the historic central part of this town (exceptions are rare) and the suburbs are not a good location for a hotel. For this reason investors prefer to open new hotels outside the town. The local authority says that the owners of five hotels are currently refurbishing their properties. Hotels are predominantly built and financed by the local development companies, which is why the local authority is keen to attract them to their market.

 The deputy Prime Minister for Euro-2012, Boris Kolesnikov, told reporters that rnthe Ukrainian Parliament has adopted a bill in its first reading which will provide 10 years exemption from income taxes for all 3, 4 and 5 star hotels put in operation by the 1st of April 2012. For this government initiative to be implemented, deputies must vote for the bill for a second time and after that the President of Ukraine, Viktor Yanukovich should sign it. The Ukraine authority has promised to adopt laws which would simplify the procedure of getting all the permissions to rent or buy the land needed. For example, currently hotel developments require some 600 permissions which often take two to three years to acquire compared to two to three months in most European Union countries.

 The local authorities are well aware that this obstacle needs to be overcome. The mayor of Kharkiv, Gennadiy Kernes, told UBI that it had helped investors to open hotels in its town. “We try to get all the permissions within two weeks,” said Kernes. Kolesnikov adds that the government plans to repay part of some companies’ interest rate on credit used to build hotels for the April 2012. He did not say how many companies they would help, nor elaborate on the procedure for choosing them, but did add that Hr 50 m (US$6.25 m) has been set aside for the project this year. Another authority initiative is the opening of a new establishment operated under the principle of ‘one window’ whereby an investor who wants to build a hotel delivers their plans to this special organisation and they get their response – positive or negative, in two to three months. rnInvestors wait for stabilisation.

To date the Ukrainian authorities’ initiatives have failed to attract many investors. The main problem is the reduced business activity in the country, so the hotels’ occupancy rates have fallen from 7% to 80% in 2008 down to 40% to 45% this year. The president of Kharkiv Company Avantazh, Anatoliy Denisenko, said that he had several sites in Kharkiv with all necessary permissions required to commence work, but no new hotels are being built due to the lack of potential customers.

One of the reasons for low occupancy is the high prices charged by Ukrainian hotels which are often two or even three times greater than equivalents in Western Europe. As a result, many businessmen prefer to rent accommodation in the central part of the town, which can be 40 to 50% cheaper than taking a room in a hotel. Vladimir Gorashenko, general director of ‘Double W’ (working with ‘Radisson SAS), explains that the majority of hotel customers in Ukraine are visiting for business. “We are ready to reduce prices for the weekend, but there is a lack of tourists. Ukraine’s authorities should advertise our country and make the air ticket prices lower and attract more low-cost airlines,” said Gorashenko.

Another problem facing the Ukrainian hotel market is a lack of investment. While building costs vary significantly according to location, size, standard and a range of other criteria, in general a company should invest around US$80k to US$20k per room. Local companies will typically pay 20 to 22% interest on a loan which makes it difficult to achieve a return on the investment. The payback period for hotel projects has increased from five to seven years to between eight and ten years which is not considered attractive for most investors.

A further disadvantage of the hotel sector in Ukraine is the lengthy negotiation process between the local company owning the property and the international companies which manage the hotel, e.g. Hilton, Accor Group etc. Before construction starts on a hotel project its owner tends to sign a contract with an operator, whereby specialists from the international chain take an active part in the building process and finishing work (including selection and design of fixtures and fittings). For this service, operators receive some 5% of the hotel’s turnover but they do not guarantee any financial success for the business. If the hotel’s owner is dissatisfied with the international company it’s very difficult to find another partner, because each chain will have introduced its own standards in build, finish, design and process.