According to a survey of hotel operators by RBTH, Russia is struggling with a lack of quality economy-class hotels. Although this shortage varies from city to city, many tourists are reportedly left to book stays in run-down Soviet era establishments or in mini-hotels of 20 to 40 rooms.
Vadim Prassov, VP of the Russian Federation of Restaurant and Hotel Operators, said in a statement that mini-hotels are able to compensate for up to 70 percent of the lack of good quality economy class hotels.
However, for larger hotels, the situation depends on the policies of the local authorities and if they offer incentives to investors.
DD of CBRE's hotel industry department Stanislav Ivachkevitch explained that those interested in opening economy class hotels in Moscow suffer the most. New hotels in Moscow can't rely on good locations or any form of incentives. Therefore, only 20 of the 200 economy hotels in Russia are of good quality.
This can be attributed to the increased cost from the outset of undertaking such a project. According to Prassov, it costs the same amount to open a two-star and a five-star hotel due to construction site expenses. Gaining certification for the hotel, connecting utilities and designing the hotel all take time and the monopolistic organizations in control of these services impose excessive fees.
In the provinces, for example, it costs up to $354,803 to connect a new hotel to the electrical grid. Meanwhile, connecting the heating can cost about $1.4 million. Prassov estimates these fees could equal up to 20 percent of the necessary investment for the construction of a hotel.
The expert explained that it would be "much more profitable to build a five-star hotel since the price which can be charged per night is three times higher-resulting in a much quicker return on investment."
Tamara Bouïolva, VP of public relations for the association representing St. Petersburg's small hotels, said in a statement that right now it takes 10 years for investors to see a return on economy hotel investment. "In the case of large economy hotels (more than 50 rooms), located in the megacities, where land in the center and surrounding areas is expensive, construction at the city's center is not an economically viable option,” she explained.
According to the experts surveyed by RBTH, the hotel industry will require State support in order to solve this issue. Support can be in the form of subsidies for construction, preferential credit rates, simplified certification procedures or preferential rates for building's connection to various necessary utilities.
Hilton charges ahead in Russia
Despite these issues, Hilton has forged ahead with its pipeline in Russia. According to Tatiana Veller, head of JLL Hotels & Hospitality Group, Russia & CIS, Hilton claimed the lead in new hotel openings in Russia in 2016.
By the end of 2016, Hilton counted 21 operating hotels across the country and signed another 29 to open in the next three to five years. Three hotels opened in the first half of 2016 and the Hampton by Hilton Volgograd City Center opened in December 2016. Notable openings in 2017 include the Hilton Garden Inn Moscow Krasnoselskaya, the Hilton St. Petersburg ExpoForum, the DoubleTree by Hilton Moscow Vnukovo Airport, and two additional Hilton Garden Inns in Novorossiysk and Orenburg.