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OCTOBER 2012 PRICE 350 RUSSIA, THE CIS AND GEORGIA HOTEL VALUATION INDEX 2012 Tatiana Veller Managing Director Alexey Korobkin Senior Consultant Margarita Lobova Junior Consultant HVS Moscow
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OCTOBER 2012 PRICE 350 RUSSIA, THE CIS AND GEORGIA HOTEL VALUATION INDEX 2012 Tatiana Veller Managing Director Alexey Korobkin Senior Consultant Margarita Lobova Junior Consultant HVS Moscow Office Gilyarovskogo Street 4/5, Office 301, Moscow , Russia See reverse for details cbna This license lets others remix, tweak, and build upon your work non-commercially, as long as they credit you and license their new creations under the identical terms. Others can download and redistribute your work just like the by-nc-nd license, but they can also translate, make remixes, and produce new stories based on your work. All new work based on yours will carry the same license, so any derivatives will also be non-commercial in nature. This issue includes: Hotel values continue to recover Investment climate Five-year forecast Market snapshots Focus on the 2018 FIFA World Cup The hotel markets of Russia, the CIS & Georgia continue their recovery and exhibit a second consecutive year of growth. In this publication, HVS provides a guide though the peaks and troughs of the various markets, giving operators, investors and owners a clearer view of the region from a valuation perspective. Introduction Over the last months, hotel markets in Russia, the CIS & Georgia have been recovering, with operating results improving from the crash of 2008/09. The initial fast pace of recovery in the first six months of 2011 has since slowed down, as the continuing crisis in Europe affected travel and spending patterns. Nonetheless, values in the region were still able to grow by 8% on average in 2011 and are forecast to grow by 3% in The region outperformed the European average in 2011, but will likely fall behind in Stable new supply over the last two years allowed values to grow, but HVS forecasts pressures on operational performance in the short term as increased new supply outweighs demand. In the medium to long term, most markets will be able to absorb this new stock of hotel rooms and continue to increase per room values. HVS forecasts hotel values in Russia, the CIS & Georgia to grow at a compound annual rate of 5.7% between 2013 and Travel in the Region Despite expensive air travel and complex visa procedures (in some countries), international arrivals to Russia, the CIS & Georgia grew on average by 10% from 2010 to 2011, which is a slight improvement on the previous year. According to Euromonitor forecasts, the average growth rate in 2012 will be slightly lower (8%), which may partly depend on strength of the recovery in global travel in 2011 that added to the growth percentages. Since 2006, Georgia has been the leader in compound annual growth rates for international tourist arrivals; however, we should consider that the base figure in 2006 was relatively low. Russia and Kazakhstan top the table in absolute numbers, with increases of more than 2 million arrivals in five years. In the medium term, Georgia is set to continue its fast pace of growth at a compound annual rate of 7% between 2012 and 2016, with all the other countries expecting a similar growth of 5-6%. Ukraine is the only exception and is forecast to see a drop of 1% in international arrivals from 2012 to In the reviewed markets, there are significant differences in the proportion of air arrivals to the total number of visitors. Air arrivals are important to overall demand levels in any hotel market, as a hotel s target customer is normally of a certain income level. From all modes of arrivals, it is air arrivals that tend to use hotels more. As shown in Chart 2, Kazakhstan and Ukraine air arrivals represent less than 10% of the total number of travellers visiting the country, and this trend can be seen throughout the whole historical and forecast period with insignificant growth towards the end of the period under review. This can be explained by the origin of the travellers; among the top five feeder markets for Kazakhstan are neighbouring Kyrgyzstan, Uzbekistan and Tajikistan, low-income populations that prefer less expensive means of travel. As for the Ukrainian air arrival trends, the majority of travellers come from Russia, Moldova, Poland and Belarus where rail and road accessibility to Ukraine is effective and many catchment areas are within a 1,000 km radius. The country with the highest percentage of air arrivals is Armenia owing to the fact that the majority of travellers are representatives of the CHART 1: HISTORICAL AND FORECAST INTERNATIONAL ARRIVALS (000S) 30,000 25,000 20,000 15,000 10,000 5,000 0 Kazakhstan Ukraine Russia 3,500 Armenia 3,000 Georgia Azerbaijan 2,500 2,000 1,500 1, Source: Euromonitor RUSSIA, THE CIS AND GEORGIA HOTEL VALUATION INDEX 2012 PAGE 2 CHART 2: AIR ARRIVALS AS A PERCENTAGE OF TOTAL ARRIVALS (000S) 30% 90% Kazakhstan Armenia Ukraine 80% Georgia 25% Russia 70% Azerbaijan 20% 60% 50% 15% 40% 10% 30% 20% 5% 10% 0% 0% Source: Euromonitor Armenian Diaspora from all over the world, covering significant distances to visit the country. With the growth of the oil and gas industry in Azerbaijan and related business travel into the country, we can see that the fraction of air arrivals is increasing significantly throughout the period under review, reaching 38% in 2016, which is equivalent to a 10% compound annual growth rate from 2012 to 2016 (leading the table together with Georgia). Russia and Georgia are forecast to see moderate increases in air arrivals as a percentage of total arrivals; however, owing to a low base, Georgia is exhibiting the highest compound annual growth rate (10%) from 2012 to The majority of visitors from neighbouring countries prefer to use other means of travel, owing to well-developed railway systems or road networks allowing better accessibility to remote parts of the country (especially those areas without airports nearby). The high cost of air fares also partly contributes to this trend. Ukraine is the only country which shows a negative CAGR from 2012 to 2016, but this is more dependent on the fact that 2012 saw an unprecedented increase in air travel owing to the Euro 2012 football tournament (Euromonitor forecasts more than a 50% increase). GDP statistics are a good indicator of the state of local economies in the region. Compared to the high GDP growth rates witnessed in the region during the peak pre-crisis years, the shortterm forecast is more moderate. According to Euromonitor forecasts, the average GDP growth rate in the region will be 4%, with no country exceeding 6.5% per annum. The forecast growth rates continue to outperform the European countries, but struggle to match those of China or India. Currently, Ukraine is forecast to exhibit the lowest GDP growth in the region and, compared to the forecast published in the previous edition of the Hotel Valuation Index (HVI), this year s figures are more pessimistic. The forecast growth rates for 2012 dropped from 4.6% to 1.8% according to the recent data from Euromonitor, with a potential improvement to 3.5% only by Russia s GDP growth rate forecast is also more pessimistic compared to last year, with a 4% growth rate forecast by the end of 2012 versus 4.5% in the last publication, while 2013 is forecast at 3.8%. On the other hand, Georgia and Kazakhstan are forecast to exhibit the strongest GDP growth rates in the region. CHART 3: HISTORICAL AND FORECAST GDP GROWTH 30% 25% 20% 15% 10% 5% 0% 5% 10% 15% 20% Ukraine Armenia Georgia Russia Kazakhstan Azerbaijan F 2013F 2014F 2015F 2016F Source: Euromonitor RUSSIA, THE CIS AND GEORGIA HOTEL VALUATION INDEX 2012 PAGE 3 Investment Climate KREMLIN, MOSCOW The investment climate is a combination of economic, legal, regulatory, political and other factors that ultimately determine the level of investment risk and its effective use. The favourable investment climate is generally characterised by political stability, a legislative framework, moderate taxes and various investor benefits. In this edition of the HVI, HVS discusses some of the main aspects of investment climate in the reviewed countries. Russia According to the World Investment Prospect Survey in 2010, Russia was among the top ten countries deemed most attractive for foreign direct investment. Most of the Russian economic growth witnessed during the past decade (with the exception of the worldwide economic crisis) was due to revenues from the commodity markets. Despite the abundance of natural resources, Russia s GDP growth in 2011 was 4.3%, which is still behind economies such as China (9%) and India (7%). Such a slow pace of growth can be partly explained by factors such as deficit of innovation, lack of infrastructure development and bureaucracy. According to the World Economic Forum rankings, the Russian Federation is highlighted by the excessive regime control along with its undeveloped and opaque internal structure. Being ranked 120 th among 183 economies worldwide on ease of doing business by the World Bank and IFC ( Doing Business in Russia 2012 report), signals that Russia has yet to achieve significant targets to attract more foreign investment. In spite of some of the challenges described above, Russia offers various investment prospects. The government recognises the importance of foreign investment in the future growth of the country s economy. Over the past decade, progress has been made in creating a SAINT BASIL S CATHEDRAL, MOSCOW more competitive and transparent investment environment. Russia s accession to the WTO is considered to be an important factor in attracting more foreign investment into the country. Other plans towards promotion of the Russian market include implementing policy reforms that would make the economic environment more favourable and investor friendly. Some of the areas which are being targeted are privatisation, corruption, simplifying regulations, strengthening the legal system and decreasing bureaucracy. Ukraine During the worldwide economic crisis, Ukraine was one of the most affected countries, which was reflected by a 15% drop in GDP growth. Recovery has been noticeable, albeit at a slower pace. In 2012, the World Bank and IFC ranked Ukraine 152 nd among 183 economies on the ease of doing business, which is a drop from 149 th place in Such a trend does not encourage the global business community to invest in Ukraine s economy, which is reflected in the slowing growth rate of FDI over the last few years. In order to recover from the current economic situation, the authorities have developed a special reform programme, which mainly concentrates on privatisation, the fiscal system and government regulations. Despite some of the above-mentioned barriers, investors still manage to seize the right opportunities by finding the right local partners, willing to collaborate and navigate the complex legislation and bureaucracy. In 2011, the Free Trade Agreement between the European Union and Ukraine was signed, which should positively affect the business environment and improve transparency. Georgia Among the countries reviewed in this report, Georgia is ranked top in terms of ease of doing business. Georgia is 16 th out of the 183 economies covered by the Doing Business report 2012 (World Bank and IFC). Since 2003, Georgia has been trying to establish a market economy in the country; however, there were some issues RUSSIA, THE CIS AND GEORGIA HOTEL VALUATION INDEX 2012 PAGE 4 CHART 4: TRANSPARENCY INTERNATIONAL CORRUPTION PERCEPTIONS INDEX Ranking Georgia Kazakhstan Armenia Azerbaijan Russian Federation Ukraine that slowed down the process and affected Georgia s image. The conflict with Russia in 2008 and the global economic downturn challenged investor confidence and affected levels of FDI and GDP growth. Nonetheless, in 2011 Georgia demonstrated its improving investment climate to the global business community when two of the major American credit agencies (Fitch and S&P) increased the county s credit ratings. Yet there are more targets to achieve in order to gain investors trust; some of these include concerns related to the undeveloped infrastructure and security issues in the country. However, some of the main issues which are frequently encountered in, say, the CIS countries, such as corruption and biasness of the judicial system, have been drastically improved in Georgia and reached minimum levels compared to the rest of the region. Azerbaijan Azerbaijan s economy is heavily dependent on the energy sector and for the past decade has attracted high levels of foreign investment in this field. However, the government is investing a significant amount of time and effort in diversifying the economy of Azerbaijan. Visible progress has been achieved in sectors such as tourism, IT and communication, and agriculture, which led to a 10% increase in the non-energy contribution to GDP in As Azerbaijan is being observed for accession to the WTO, it implemented a number of significant changes from 2007 to As a result, the World Bank named Azerbaijan among the top ten reformers worldwide. Despite these reforms and efforts to become a member of the WTO, the country is currently ranked 66 th in ease of doing business across 183 economies worldwide. Even though many improvements have already taken place, issues such as bureaucracy and regulations still limit the country s potential in achieving an investor-friendly climate. Armenia Among the countries reviewed in this publication, Armenia was one of the most affected by the economic crisis of 2009, with foreign direct investment decreasing by almost 30%. Only in 2011 did FDI demonstrate the first signs of improvement. Currently ranked 55 th in World Bank s ease of doing business report, Armenia has moved up six positions since Despite the above-mentioned signs of progress towards a more transparent and favourable investment climate, some challenges that slow down the country s development still exist. High levels of corruption and bureaucracy are reflected in Armenia s 129 th place among 182 countries reviewed in the Transparency International Corruption Perception Index Kazakhstan Kazakhstan is another country among those reviewed whose economy is dependent on the energy sector, and most of the foreign investment is in this field. The US Department of Commerce and the European Union agreed in the early 2000s that Kazakhstan s economy can be called a market economy. The country ranked 47 th among 183 economies reviewed by the World Bank and IFC on the ease of doing business in For comparison, the country ranked 58 th in the same report in Currently, one of the biggest priorities for Kazakhstan s government is diversification of the economy to create a more favourable investment environment. Government actions are focused on improving visa procedures, investment legislation, reducing bureaucracy and many others. Despite the number of improvements achieved by Kazakhstan in the past few years, corruption will continue to impede business performance. In 2011, Kazakhstan announced its plan to join the Organization of Economic Cooperation and Development, which should positively affect the investment climate in the short to medium term. RUSSIA, THE CIS AND GEORGIA HOTEL VALUATION INDEX 2012 PAGE 5 CHART 5: HISTORICAL VALUES PER ROOM RUSSIA, THE CIS AND GEORGIA ( ) Moscow Upscale/Luxury 498, , , , , ,000 European Average 274, , , , , ,000 St Petersburg Upscale/Luxury 358, , , , , ,000 Kiev 427, , , , , ,000 Moscow Mid Market/Budget 294, , , , , ,000 Almaty 418, , , , , ,000 Tbilisi 273, , , , , ,000 Astana 329, , , , , ,000 Average Russia, the CIS and Georgia 265, , , , , ,000 Baku 292, , , , , ,000 Yerevan 134, ,000 85,000 86,000 97, ,000 Kazan 119, , ,000 86,000 98, ,000 St Petersburg Mid Market/Budget 139, ,000 81,000 83,000 94, ,000 Samara 156, ,000 88,000 91,000 98, ,000 Yekaterinburg 143, , ,000 82,000 89, ,000 Rostov on Don 126, ,000 96,000 79,000 87,000 95,000 Source: HVS The cities covered in the report are: Moscow, St Petersburg, Yekaterinburg, Rostovon-Don, Samara and Kazan (Russia); Kiev (Ukraine); Baku (Azerbaijan); Astana and Almaty (Kazakhstan); Tbilisi (Georgia); and Yerevan (Armenia). Analysing the Numbers As in previous issues of the Russia, the CIS & Georgia HVI, we continue to analyse the average hotel values per room for a number of key cities in the region. HVS has tracked the values across the region since 2007, as outlined in Chart 5, with the corresponding growth rates in Chart 6. Moscow and St Petersburg continue to be the only two markets where we make a distinction between the upscale/luxury and midmarket/budget segments. This further underlines the fact that the rest of the cities in this publication do not yet have hotel markets that are large enough across segments to support such a distinction. It comes as no surprise that the Moscow upscale/luxury segment continues to top the tables in value per room (ranked as of 2012). Despite pressure on average rates in the city and a more price-sensitive clientele, demand has increased. The result of this translates into RevPAR growth and a further increase in the value per room ( 397,000 in 2012). St Petersburg s upscale/luxury segment experienced a similar trend with pressures on average rate, but RevPAR was still able to grow courtesy of increases in occupancy. The increase in values per room is moderate, but still positive and keeps St Petersburg s upscale/luxury segment near the top of the values table at 240,000 per room. It is important to note that the operating results across these two segments were slightly lower at the end of 2011 than initially expected and this led to a minor correction in the values per room for ,000 per room and continues to increase in the wake of the worldwide economic crisis. Operating results in Kiev at the end of 2011 were better than originally expected owing to delays in hotel openings and growing investor appetite, but have since suffered a decrease in value on account of oversupply following the Euro 2012 football tournament. Nevertheless, Kiev remains in fourth place with an average per room value of 227,000. The remaining positions in the table are largely unchanged, with the CIS capitals (such as Astana, Baku and Yerevan) populating the middle of Chart 5 and the Russian regional markets (Kazan, Samara, Yekaterinburg and Rostov-on-Don) at the bottom. One of the main changes in the table comes from the strong performance of the Tbilisi hotel market, allowing it to move up three places and record a per room value of approximately 177,000. When looking at Chart 6 and the annual changes in value, we can see that 2011 was the year of recovery for all of the markets (with the exception of Baku). Renewed business activity and overall CHURCH OF THE SAVIOR ON BLOOD, ST PETERSBURG The European average (that is, Western and Eastern Europe combined, as per our sister publication the European Hotel Valuation Index) moved up to second place in 2012 with a value of RUSSIA, THE CIS AND GEORGIA HOTEL VALUATION INDEX 2012 PAGE 6 CHART 6: WINNERS AND LOSERS Growth/Decline Yekaterinburg +3% 28% 23% +9% +16% Yerevan 25% 15% +1% +13% +15% Tbilisi 22% 27% 2% +1% +14% European Average 11% 13% +1% +2% +13% St Petersburg Mid Market/Budget 1% 41% +2% +13% +13% Rostov on Don +6% 28% 18% +10% +9% Kazan +9% 22% 16% +14% +9% Moscow Mid Market/Budget 1% 30% 1% +3% +6% Samara 7% 39% +3% +8% +6% Average Russia, the CIS and Georgia 10% 33% 4% +8% +3% Astana 32% 20% 15% +9% +3% Moscow Upscale/Luxury +6% 38% +8% +9% +3% St Petersburg Upscale/Luxury +5% 44% +4% +5% +3% Almaty 30% 35% 20% +14% +2% Kiev 12% 48% +4% +22% 8% Baku 16% 16% 2% 1% 18% Source: HVS demand growth (coupled with average rate increases) ensured value growth across the region. In 2012, hotel markets in the region continued the recovery process, with all markets except Kiev and Baku exhibiting positive growth. For Yerevan and St Petersburg s mid-market/budget segment, average hotel values continued to increase by more than 10% per annum. Tbilisi d
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