At last week’s 19th International Hotel Investment Forum, investment experts from two countries discussed the state of branded hotels and how midscale brands are gaining traction in secondary markets.
Andrey Yakunin runs VIY Management, a private equity and real estate investment company that facilitates foreign investment in Russia. “The investment climate in Russia is currently not at its best,” Yakunin acknowledged. “It is complicated by the way the commodities markets have played out, and the general investor sentiment is not emerging-markets positive, as well.” Still, in spite of these issues and domestic concerns, no major brands have announced plans to withdraw or scale down in the country. “On the contrary, they're pointing out that in the current environment, with a very tight money supply, there is an interesting opportunity where any new supply is either frozen in its tracks or will take quite a while to enter the market,” he said. “So focusing on operating efficiency and getting the numbers right from the existing properties can actually translate into a semi-advantageous market position, and it will take longer for the competition to come in and start cannibalizing your market share.”
At the moment, Yakunin said, most of Russia’s branded supply is still coming out of Moscow, with St. Petersburg as a “hefty” second. “However, as Moscow was picking up as a business destination, we had an absolutely skewed supply coming in, dominated at the top, five-star level, with almost no quality in three-stars or down the chain moving in,” he said, noting that it took 15 years for the first Holiday Inn Express to open.
VIY is opening Park Inns throughout Russia’s regional cities, he continued, and was the first company to build a Holiday Inn Express in a major Russian city as well. “Our friends in the industry were very big on trying to roll out Garden Inns and Hampton Inns,” he said. Outside of Moscow, transient and business travelers are more price-sensitive. “You have to deliver a product that can be marketed at competitive rates, and also can deliver good value, because the recognition of the international brands in the regional markets was not so high.”
Andreas Löcher, head of hotel investment at Union Investment, praised the country’s strong economy as an incentive for investment. “There is a lot of demand in the market and a lot of demand in branded product, which have been under-delivered in the past.
Löcher estimates that 90 percent of Union Investment’s portfolio is “strong brands,” and said that the company rarely invests in unbranded property. Berlin is the one market that can see safe investment in unbranded hotels, he said. “It can’t be in a secondary market.”
Yields have been coming down “tremendously” over the last 24 months in the leading German cities, Löcher said, adding that Union would still like to invest in strong secondary cities for real core investments, “where you can really count with the substantial and long-term returns.” Some of these markets have very few branded hotels, he added, but have plenty of smaller properties that could be acquired and renovated into a branded property.
“A brand is very valuable and contributes to RevPAR growth,” he said. Still, at the end of the day, the bottom line is what matters, and some brand fees may simply be too high for certain markets.