Small businesses, building mini-hotels, have long been leaders in the hotel industry in developed countries, but their presence on the Russian market today cannot be valuated due to a lack of statistics. Nevertheless, mini-hotels are rapidly emerging in conjunction with the actively developing business tourism sector in cities located in the Urals region, generating steady income for their owners. Additionally, experts note that demand is predominantly based on a serious shortage of hotel rooms in this region.

Lively Hotels

Although hotels with 100 rooms or less throughout the world, and with 50 rooms or less in Russia, are generally termed “small,” the Urals region has its own classification system. Indeed, mini-hotels typically have no more than 20 rooms, while chains of private apartments leased out daily and short-term often fall into this category. Hoteliers consider rooms in regular apartment blocks the prototypes of modern mini-hotels in the Urals. The first types of these rooms on the Russian hotel market appeared in Sochi, the Krasnodar Territory, and St. Petersburg at the beginning of perestroika.

The wave of mini-hotels reached the Urals considerably later, about three to four years ago, when small businesses naturally took advantage of the dearth of hotel rooms in the area. For example, according to data provided by Yekaterinburg’s retail market committee, there are 44 hotels with 5,573 beds in total now operating in the city, with the average annual occupancy rate exceeding the generally accepted rates (50% worldwide), reaching 60%.

Other cities in the Urals are also experiencing an acute shortage of hotel rooms. According to Kirill Kopylov, director for the chain of apartments offered by Sluzhba, small businesses have taken advantage of the situation by offering visitors their services and rooms in mini-hotels. On the one hand, this is one of the most profitable and least risky businesses in the area. Marina Smirnova, deputy director of the commercial real estate valuation department at Colliers International, says that under the best circumstances, a small hotel can turn a profit in a year or two, while, in the worst case scenario, real estate is constantly increasing in value in Russia’s regions and can always be sold for a good profit.

On the other hand, entrepreneurs investing in mini-hotels do not need licenses or special approval to open hotels. Indeed, registering as a private business and receiving a safe hotel services certificate, if one so chooses, and operating the business is sufficient. Specifically for these reasons, according to Colliers International’s estimates, the Russian hotel market has grown annually by 15%-20% over the past ten years in the form of small hotels. Possibly only Yekaterinburg’s City Hall is trying to monitor and control this business in the Urals region, holding meetings with hoteliers and inspecting hotels, justifying its actions based on the increasing number of business tourists coming to the city. Other cities have adopted a laissez-faire attitude toward this business.

Alexander Filippov, head of the tourism department of the central administration for physical culture and tourism in the Chelyabinsk Region, says that the authorities so far have not become involved in this business which has developed spontaneously according to its own rules; therefore, it is opaque for the most part. “Only now, in connection with the increase in the number of business tourists and tangible dearth of rooms, have we begun to prepare a registry for hotels, as per our own initiative. I hope that this list will be ready by the end of the year,” says Filippov.

At the same time, according to Filippov’s estimates, around 30% of all the hotel rooms in Chelyabinsk today are in mini-hotels. The government officials in the Urals’ other cities cite similar figures.

Hotel Managers

As the hotel market experts in the Perm Analytical Center note in their study, mini-hotels are not authentic hotels in the traditional sense of the word. They are located predominantly in regular residential buildings on one or several floors and are generally limited to an average of 10 rooms, while offering virtually no additional services.

According to Oksana Trofimova-Nidental, director of the Urals hotel operator Visit-Urals.ru, some of these hotels in the Urals are located in official buildings. “Typically, there are five to ten hotel rooms located in industrial zones and sport complexes built in the Soviet era. Enterprises which continually accommodate business travelers also support similar mini-hotels. Frequently, these hotels accommodate outside guests,” explains Trofimova-Nidental. The second group comprises private hotels owned by small businesspeople. These hotels may actually be full-fledged mini-hotels, or they could be apartment chains with flats re-equipped as hotel rooms, in a separate building or in various parts of the city.

Most owners of small hotels do not have any previous experience in the hotel industry, with many entering the sector completely by chance, and for most of them, this is a sort of non-core asset generating a stable secondary income and providing peace of mind for tomorrow. Mini-hotel owners demonstrate that operating a small hotel does not require special training and knowledge of marketing and management, being much like simply renting out one’s apartment. According to Konstantin Sobolev, director of the Oasis mini-hotel in Yekaterinburg, several factors are of utmost importance – the price (for the most part, this depends on the competition), which should more or less correspond to demand; hospitality; always having fresh linens; promoting the hotel; and selection of clients.

Furthermore, Kopylov is certain that “charisma and entrepreneurship are what drive this business, not only at the initial stages, but throughout rapid growth.”

As hoteliers in the Urals note, small hotels, with only a very cursory selection of services, such as a room, food and toilet accessories, are categorized as business-trip hotels and meant for those tourists who have no time to combine business talks with a sauna or a fitness club.

According to Elena Nardelli, acting general director of the Heliopark-Smolino hotel in Chelyabinsk, guests staying in mini-hotels require a room for one or two days. Those who are visiting the city for a longer period choose a large hotel with various amenities and a wide selection of services. Experts note than mini-hotels also seem to be preferred by those seeking romantic getaways.

Albert Salikhov, director of development at Gulliver, a business tourism and hotel-room booking agency in various Russian cities, says that the typical guest in an Urals’ mini-hotel has an upper middle-class income and is ready to pay $150-$200 per night. Additionally, the guest wants to be isolated from the outside world, and it is not his first time in a respective city.

Rate of Return

The maximum daily revenues generated in the mid-level segment are only 35,000 rubles. However, it is very difficult to keep every room in a mini-hotel occupied seven days a week with exclusively business travelers.

The typical occupancy rate in mini-hotels, as Sobolev notes, is 60%-85%, or 20-25 days per month, while these figures vary depending on the season, given that the hotel industry is very dependent on peaks and declines in business and tourist activity. Off-season is from May to the end of August, as well as for the entire month of January, while peak season, when the occupancy rate reaches 100%, is from the second half of September to the beginning of November, as well as in March and April. Sobolev stresses that, “An apartment that earns me 40,000 rubles per month during peak season only generates 8,000 per month in the off-season.” The occupancy rate during the height of the off-season is 15%-20%.

Irina Pupkevich, director of the Persona mini-hotel, agrees with Sobolev: “The dead season in the mini-hotel sector is from the beginning of the summer to about the middle of August, as business managers go on vacation and holidays, so the number of business trips significantly decreases. This results in the occupancy rate decreasing by 50%-60%. The second part of the problem is that many business travelers plan their visit for the workweek, so Persona and other mini-hotels are vacant during the weekends. However, during the business season, Chelyabinsk’s mini-hotels are 100% occupied.” According to the owners of the Urals’ mini-hotels, they generate profits of 50% and up, while investment is recouped in one to one-and-a-half years, when a hotel is properly promoted only for six to eight months.

Taking into consideration the dearth of economy-class hotel rooms in the Urals region, mini-hotels are aiming specifically at this price segment. Evgeny Shvets, manager of the small hotel Mirage, says that until June of this year, rooms generally cost 1,500-3,000 rubles per night (3 of 15); however, management increased the number of economy-class rooms to 18, charging 1,500 rubles per night. The average minimum cost for a single room in mini-hotel throughout the Urals’ cities is 800 rubles, while the average maximum price is 3,000 rubles; however, as a result of the acute shortage of hotels, prices increase sharply during peak season.

Where’s the Competition?

As a direct result of the huge shortage of hotel rooms, there is no stiff competition among the hotel industry players in the Urals so far, and there are enough guests for everyone, from large hotels to hotels in official buildings, short-term apartments and mini-hotels. As the operators confirm, during the peak season, when there are exhibitions, conventions, and conferences, every room is in high demand.

Trofimova-Nidental notes that the situation in Yekaterinburg with hotels appears better than in the neighboring cities. Indeed, new hotels are constantly opening in the so-called capital of the Urals, with 22 having opened their doors to guests in the past two years alone and another nine slated for opening by 2009. Nevertheless, the issue of the dearth of hotel rooms remains topical. Trofimova-Nidental states that the situation with hotel rooms in Tyumen, Perm, Ufa and Chelyabinsk, unlike in Yekaterinburg, remains very poor. “This niche is simply barren, and any hotel at any time, irrespective of its rating and services, is in high demand.”

The Tyumen region’s situation is dire, where 23 facilities offer hotel services, including four categorized as dormitories, while only two hotels, according to market players, offer quality services – the President and Tyumen Quality hotels, respectively. The others are Soviet-era style hotels and require full refurbishing.

Prospects and Possibilities

The hotel industry representatives in Perm, Tyumen and Ufa unequivocally confirm that their cities require hotel rooms and that any facility built to fill the void will be in demand. Subsequently, once competition has begun to heat up, the strongest players will survive, while the others will fall by the wayside.

Trofimova-Nidental believes that the prospects for developing mini-hotels depend directly on the policies of the municipal authorities in terms of tourism. “For example, the officials in Yekaterinburg are trying to develop convention tourism, which will mean that large hotels with many rooms will be the most popular, as they will very likely host large groups of business tourists and offer corporate services, such as halls for conferences, etc. There is also a large influx of business tourists in Chelyabinsk, Tyumen and Perm; therefore, large hotels will also very likely be in high demand,” believes Trofinova-Nidental.

According to Trofimova-Nidental, mini-hotels are in highest demand in cities where sightseeing and cultural tourism is developing dynamically. Ilona Antipova, general director of the Otel Ltd. joint venture (the Victoria business hotel in Chelyabinsk), cites another nuance: “The ranks of mini-hotels will swell with facilities presenting an original concept and services. The prices charged by players operating in the same segment today do not differ by more than 30-50 rubles, so clients already choose hotels based on quality rather than price, and this trend will continue. Therefore, each mini-hotel should carve out its own niche.”