At the time they were being built, Soviet-era hotels amazed people with their largesse and grandiosity; however, at the start of the 21st century, they have begun to astound in a different way, with their decrepit rooms and obsolete infrastructure. The issue is being dealt with singularly in Moscow, with the Intourist Hotel having been razed in 2002, followed by the Hotel Moskva in 2003, and the final dismantling of the mammoth Hotel Rossia this year. However the situation is completely different in St. Petersburg and the Northwest Region, where international and Russian hotel operators take a different approach to the matter, preferring to shed as little blood as possible by investing in reconstruction, without fully redesigning the old hotels.

Guests Head to the Flagships

Rezidor Hotel Group is one of the largest international hotel chains which has fallen head over heels for Soviet-era hotels in St. Petersburg, having purchased already the Pulkovskaya and Pribaltiiskaya hotels, respectively. Rezidor Hotel Group has its headquarters in Brussels and currently has in its portfolio 302 hotels (more than 62,000 rooms) in operation or under construction in 47 countries. The Group’s major brands include Radisson SAS Hotels & Resorts, Regent International Hotels, Park Inn and Country Inns & Suites, while, in Russia, where the company has been in operation for the past 15 years, it already has 15 hotels.

Rezidor has operated Pulkovskaya in St. Petersburg since 4 May 2006 and the Pribaltiiskaya since January 1, 2007. The Park Inn mid-priced brand was chosen for these facilities, and since the beginning, the Group has had the five-star Radisson SAS Royal, bringing the total to more than 2,000 rooms in the city. Norwegian Wenaas Group owns all three hotels.

Given the shortage of hotels in the city, Pulkovskaya and Pribaltiiskaya both look rather attractive in their class. The four-star Pulkovskaya, following rebranding, has the official name of Park Inn Pulkovskaya. The hotel was built in 1981 and is located in close proximity to St. Petersburg’s two airports, Pulkovo I & II (for international airlines, a ten-minute drive by car. There are 840 rooms in the hotel with 1,600 beds. The latest full-scale reconstruction was finished in 2004, but the new management company is continuing refurbishing work up to today.

The Pribaltiiskaya Park Inn is also a four-star hotel today and was built in 1079, having 1,140 rooms. “We are very glad that Wenaas Group chose us as the operator for the city’s largest hotel. Pribaltiiskaya is a very valuable asset for the Park Inn brand, and this hotel has a lot of potential to organize and host conventions and conferences. Our experienced management company could assist in fulfilling its full international potential,” says Michel Stalport, regional vice president for Rezidor Hotel Group.

Another international hotel chain which has entered the city’s market is Le Meridien, having signed in 2006 an agreement to operate the Northern Crown hotel, located on the Karpovka River embankment. This hotel cannot simply be labeled a Soviet-era structure, as construction on it started in 1988, concluding at the end of 1995. Eurofinance Mosnarbank acquired in 2004 the incomplete building from St. Petersburg Bank.

Starwood Hotels & Resorts, Inc, a subdivision of Le Meridien and owner or operator of more than 850 hotels – under the names of St. Regis, The Luxury Collection, Sheraton, Westin, Four Points, Le Meridien and AloftSM – in 95 countries, was appointed to manage the facility. According to specialists, finishing the construction and launching the Northern Crown will cost the owners an estimated $15 million, while additional 75 rooms would be $7.5 million. The full-scale modernization is slated for completion in 2008, so, overall, Le Meridien, St. Petersburg, will have 322 rooms, two restaurants and a 1,300-sqm sport and health center with an indoor swimming pool. In addition, the hotel will have a 2,100-sqm conference center and unique river-transport service.

Chains a la russe

Russian operators have not fallen asleep at the wheel and are gathering strength to take part in the distribution of old hotels. Indeed, an obvious example is Azimuth Management Group which has been very active in this real estate segment, having officially announced in the autumn of 2006 the launch of a business-tourist chain of hotels. Accordingly, there are Azimuth hotels today in St. Petersburg, Samara, Ufa Kostroma, Astrakhan, two in Vladivostok, and Murmansk. Azimuth owns seven properties, and there is one (Astrakhan) for which the company has a long-term lease. Azimuth Management Group is the subsidiary of the Moscow-based Nerl investment corporation, founded in 1993. The idea to create a set of hotels was born in 2003, and the first Azimuth hotel opened in Samara a year later.

The company’s main feature is that its facilities, in excess of 125,000 sqm, are former Soviet hotels which require large-scale reconstruction and solid rebranding. “Reconstruction is only one variant in developing Azimuth Hotel Chain, as constructing from the ground up is also in our plans. Purchasing existing rooms and reconstructing them is the surest way to create a chain; therefore, we began our development specifically in this area,” says Sergei Lysenkov, director of Azimuth Management Group. The company’s turnover, as of the end of last year, exceeded one billion rubles, with overall investment in reconstructing rooms exceeding $8 billion in 2007. The Group’s largest facility is the Sovietskaya hotel acquired in the autumn of 2005.

“The biggest headache we have had so far is dealing with old utilities and equipment, and, whereas a worn room can be refurbished quickly, utilities are significantly more difficult. Imagine pipes which have not been changed in 40 years, the boiler is on its last legs, the elevators are on the verge of being condemned, the computer network is from the 1990s, the kitchen equipment still bears the ‘USSR’ stamp, the washing machines are Soviet issue, and the hotel’s management program is Excel at best. Well, we are completely changing all utilities and are installing a gas boiler in the Azimuth Hotel, St. Petersburg. Just imagine changing all the pipes in 1,000 rooms,” says Lysenkov.

The former Rossiya and Vyborgskaya hotels do not carry the name of an overarching brand and are currently owned by private parties, but they are joined by a common management company, Turris, founded in July 2004. These large hotels were entrusted to Turris, following which the company has successfully managed the Baltiets and Burevestnik holiday resorts, with 700 rooms, in the Kurortny district. Additionally, Turris in December 2005 took over full management of the 413-room Rossiya, and has been managing the 345-room Vyborgskaya since June 2006. Both of these hotels are three-star facilities. In total Turris today manages around 1,400 rooms (more than 2,300 beds) of various categories.

“There are many complications which arise when managing old Soviet hotels, as the buildings generally have obsolete or worn utilities, such as the technical network, communications and television, as well as problems with the furnishings and fit-out of the buildings. Initially, we had problems with the lack of an automated control system (ACS) department and low quality standards of service rendered, as well as with under-qualified hotel staff. There were also problems with marketing and advertising,” says Sergei Bazarevsky, head of marketing and development at Turris.

Both the Rossiya and Vyborgskaya hotels, built at the beginning of the 1960s, for the past year-and-a-half ,have undergone full-scale reconstruction. Vyborgskaya has had 78 rooms refurbished this year alone, as well as having the production facilities and restaurant hall improved. Rossiya, prior to 2007, underwent a complete reconstruction of its rooms, halls and Golden Apple restaurant, and also had a ventilated facade and Wi-Fi installed, although the hotel’s star rating did not improve afterward.

Other Cities Lag

Although St. Petersburg’s Soviet-era hotel segment is being rapidly improved, the same does not hold true for the other cities in the Northwest Region. Particularly, Oleg Zdradovsky, general director at Paul’s Yard, Kaliningrad, comments on the situation as follows: “The old post-war rooms as well as those from the 1960s and 1970s do not meet modern standards and international norms for doing business in the hotel industry. These hotels cannot be acquired by operators in this condition, so they are used by our local companies, falling into the category of three-star hotels and lower. They operate slowly, with a 45%-50% occupancy rate, and the Kaliningrad market is comprised of around 80% of such facilities.”

Typically the Soviet-era hotels here are used by those who have obtained them via privatization, and specialists believe that holding negotiations for these facilities with chain management companies would be in vain. The main problem is that the buildings simply do not meet technical standard. According to several market players, it is simpler and less expensive to raze the old hotels and rebuild from the ground up. For example, the afore-said Rezidor Hotel Group in 2009 will complete construction on a new hotel, Radisson Kaliningrad. There are other examples, too, such as the Azimuth chain obtaining the Arctic hotel. According to Lysenkov, the hotel’s condition at the time of purchasing was, “putting it lightly, horrible.” Today, the hotel is closed and reconstruction is slated for completion in 2010.

Don’t Break, Don’t Build

“It works out that old Soviet-era hotel rooms overall are not in high demand among international operators, who are interested in four-star and higher facilities. The Russian chains are willing to work with most varying types,” says Andrei Kosarev, director of the strategic consulting department at Knight Frank, St. Petersburg. According to him, large international operators, as a rule, are not willing to invest in Soviet-era facilities.

“Americans, for example, do not like dusty facilities, while Europeans prefer newly built facilities. They have a lot of hotels in the old style. In Europe, there are more preserved buildings, and hotels often are created within the ‘old walls’ located in the historical sections of the cities and within suburban historical buildings,” comments Alexei Shaskolsky, director of the real estate valuation department at the Institute for Enterprise Issues (IEI)

“As of today, chain operators are extremely demanding, so we do not see very many deals throughout Russia, as they would like to acquire properties for operation, not investment, and this is the problem. According to their management conditions, an owner receives little, while the expenses for maintaining the rather high standards are steep,” believes Zdradovsky.

According to market players, prior to investing funds in reconstructing old hotels, an investor must assess a locations appropriateness, conduct full due diligence on the documents, as well as the size of a respective facility. Overall, return on investment for these facilities depends on many factors, such as the location, room numbers, rating of said hotel, investment required, etc. Recoupment periods of seven to eight years are preferred in the three-star segment, while, generally, economy hotels generate a quicker recoupment. Five-star hotels generally require 10 years to generate a return on investment.

Specialists assess the prospects of the former Soviet-era hotels differently, but one matter is clear: their future depends on installing a standard level of service and investment directed at renovating rooms and utility networks. Some believe that the prevailing criteria for a facility’s location are close proximity to the city center and main transport lines, which could help a hotel survive. For the most part, the chain companies entering the Soviet-era hotel market in the Northwest Region prefer to obtain the required level of quality by retaining and reconstructing rather than conducting serious reconstruction or razing a facility. This especially concerns St. Petersburg, where Moscow’s experience in razing Soviet-era hotels has yet to be applied.