The ubiquitous bent for the erection of departmental hotels revealed itself some 20-30 years ago when every solid organization or corporation aspired to have its own hotel. It was more a matter of prestige than necessity. But are these sorts of departmental hotels in demand today and, if so, what sort of future awaits them?

Survival of the Fittest

According to data provided by experts at Colliers International, departmental hotels had accounted at least for 60-70% of the market before perestroika. Some enterprises such as Likhachev Works had even three hospitality properties at their disposal. “All hospitality facilities were on the government balance, albeit divided into two groups: departmental, which were catering to the Soviet tourists, and the rest,” says Andrei Konsovsky, coordinator of hospitality projects at Hotel Technologies LLC. The departmental hotel may incorporate ventures with any ownership type, but it is normally a self-contained enterprise since its key distinction is that it is an asset belonging to some specific institution, a government agency, a corporation, or even an airport. Accommodation facilities attached to foreign embassies can also be ranked among departmental hotels as they are also on the balance sheet of government organizations and used solely to lodge government officials and official guests of the embassy.

Accordingly, the mission of departmental hotels is to provide accommodation to those persons in whom a given department is interested: the employyees of its subsidiaries based in other cities or the company’s contracting parties. For all that, the parent enterprise keeping a hotel as an asset on its official balance sheet is regularly called upon to ensure its operation, upkeep and repair. The departmental hotel is not a profit-making venture. Therefore it has a passive sales policy and refuses to let in outside guests. “It should be noted that the Code of RSFSR which had been valid before March 1, 2005, dealt with the availability of the departmental residential stock, i.e. the housing owned by the government and run by ministries, committees, departments or their subordinate establishments. The RF Housing Code does not mention any such residential stock, so it would be incorrect to talk about the legal status of such a term as ‘departmental hotel,’” clarifies Mr. Konsovsky.

After the break-up of the USSR different fates befell Moscow’s many departmental hotels. As reported by Colliers Int., the most well-known departmental hotels under the jurisdiction of Goskomsport were handed over to the Moscow government in 1992-94. Some of them were privatized in the early nineties and in this way funds were raised for the renovation and modernization of those hotels. This is what happened to Baltschug, Metropol and Savoy. Others went into private hands later on, and today only Hotel National is 100% owned by the city of Moscow.

The Sevastopol and Druzhba hotels on the balance of Goskomintourist were re-profiled into offices and shops. The departmental hotels Dom Okhotnika (Hunter’s Home) and Dom Rybolova (Fisherman’s Home) on Golovinskoe Shosse and CSKA on Peschanaya Street were closed down completely. Most departmental hospitality properties still operate today, naturally, but on a competitive market basis.

One example is the hotel attached to the Uzbek Academy of Sciences at Zelenodolskaya St., which was first renamed as the Asia and then as the Mosuzotel. Sputnik, Intourist, and other hotels of this level went out of the departmental jurisdiction after 1991. Those hotels were technologically reequipped and now offer a very competitive hospitality product. Currently the share of departmental hotels has shrunk to 20-25% in terms of the number of properties, though a different proportion can be found on some regional markets. “There the era of departmental hotels is at its high point. This has to do with the shortage and sometimes the complete lack of hotels and the low quality of available services,” says Mikhail Kozlov, in charge of hospitality business at Mospromstroy. “A short time ago one of our foreign colleagues complained that he could not find a more or less decent room in the hotel of a small town in the Nizhny Novgorod region where a factory is being built, which means foreign and Russian experts will have to keep going there on the permanent basis. This is why the company holding this factory decided to redeem and rebuild this old urban hotel for its own needs,” reports Mr. Kozlov.

Thus departmental properties account for 100% of the hospitality market in the town of Zheleznodorozhny of the Kursk region: there is only one hotel there, owned by Mikhailovsky GOK (an ore mining and processing enterprise.) In Moscow departmental properties develop along various lines. Some change their status and enter the market, such as Proton, the former departmental hotel of Khrunichev Works, retaining the owner. Others change both their status and owner and also enter the market. Of course, many accommodation facilities ceased their existence after the collapse of the USSR, but on the whole their share is still quite appreciable in Russia.

Overcoming the Crisis

In recent years the departmental hotels of Gazprom on Nametkin Street (4 stars, 72 rooms,) Peter the Great (Lukoil,) Alrosa, Zolotoe Koltso, and Park Hotel (Presidential Administration,) have all been modernized. Their strategy is different: some settle only their own staffers (Gazprom) while others cater to public officials from the Presidential Administration (Zolotoe Koltso and President Hotel on Arbat.) Typical of the latter type is the reservation of certain quotas for public officials. The remaining rooms are sold on the market and advertised via the Internet and also using other methods. Accordingly these hotels compete on market terms with other properties. Only those departmental hotels which belong to strong public or private business structures maintain a high level of services. The most well-known is President Hotel, former Oktyabrskaya Hotel, built in 1982 by Mospromstroy. The customer was the Sector of Capital Development at the administrative department of CPSU Central Committee. Now the hotel is owned by the presidential administrative department. The hotels of Lukoil and Gazprom were rated at four stars. The Alrosa Hotel at Kazachiy Lane is positioned as a five-star facility. The rest mentioned in brackets above also fall under the four-star category. Yet most properties fall short even of three-star standards. The examples include the hotel held by the Academy of Pedagogical Sciences at 1a Kerchenskaya St. (1*,) Moskvich (2*,) Mosfilm (2-3*,) and Kapotnya (1-2* prior to modernization.)

Most of the departmental hotels have long been facing the urgent need to improve the existing management systems, to raise the quality of services, to finance the programs of major repair and reconstruction, the active promotion of services to the market, and personnel training in the fine arts of hospitality services.

In the opinion of Andrei Konsovsky, the level of labor motivation and material incentives is insufficient in the managerial systems of departmental hotels. The degree of personnel involvement in management is low, the culture of attending to guests is present to a certain extent but seldom elevated to a corporate level, and personnel training is unsystematic.

“But in recent years it has dawned upon the owners of various companies that hotels become a rather profitable asset. Accordingly, hotel development is a step towards the diversification of business portfolios,” points outs Mr. Konsovsky.

But Marina Smirnova disagrees. “A departmental hotel is a heavy burden indeed. Adding a hospitality property to the balance sheet actually means an increase in the property tax up to several hundred thousand USD. In addition, a company assumes the personnel, upkeep, and operating expenditures,” says Ms. Smirnova. On the other hand, a departmental property usually generates insignificant revenue given that employees are accommodated at discount prices. So only a large and prosperous concern having a developed network of subsidiaries all over the country can afford to keep its own departmental hotel.” But according to Colliers International, keeping any form of property as an asset will affect a company’s tax burden, and brings with it a number of operation costs, making this a viable option only for the larger companies.

Is it Profitable to Buy and Refit?

At first glance it pays to acquire a large departmental hotel and refashion in into a business hotel, especially when talking about a centrally located hotel, such as those hotels situated on Chistoprudny Blvd., Skatertny Lane, or Sretensky Blvd. On the other hand, the selling price on such centrally located properties can be very high, even provided that a hotel is good only for demolition. It will be difficult to recoup such a project if the hospitality function is conserved.

But if the purchase was made immediately after the crisis when hotel prices were extremely low, the profitability of such a deal is unquestionable. According to Colliers International, A short time ago, attempts were made to put up Sevastopol Hotel for sale but ‘the price of the issue’ precluded the deal. The last similar example with the old lodging stock is the sale of apart-hotel Yuzhnyi for $50 million, before perestroika Yuzhnyi was in possession of the Moscow Executive Committee. Each particular case deserves special consideration. The hotel name and position on the market, clientele, infrastructure, land cost, and location. “Ultimately, these hotels have less and less potential on our market,” says Marina Ucenko, senior vice president of Jones Lang LaSalle.

On the whole, departmental properties on the Russian hospitality market are characterized by the lowest yields and greatest diversity of service quality and financial stability. The main restriction for the given type of management systems is their detachment from the market and the common competitive environment, because the reservation channel warranted by higher bodies provides for an acceptable level of proceeds and financial stability.

The given category of hotels is notable for the most outdated room stock, so the acquisition of such a hotel must be looked upon through the prism of the subsequent property renovation, warn the experts. Any renovation is coupled with considerable financial outlay.

“Tackling reconstruction on the Leningradskaya Hotel, the future four-star hotel Hilton Moskva Leningradskaya, we couldn’t even imagine the total amount of work. The main problem was the building’s status as a historical monument, which meant restoration challenges and the impossibility of any large-scale alterations,” says Kozlov. “Our company doesn’t presently hold any departmental hotels in the classical sense. Mospromstroy manages three Marriott and two Holiday Inn hotels. Because Mospromstroy, like all other Moscow-based construction companies, attracts foreign labor, we decided to keep fourteen hostels on the company’s balance which will later be refashioned into apart-hotels. Incidentally Mospromstroy is the only Moscow construction company with its own hostels,” says Mr. Kozlov.

Flight to the Government Structures

Factoring in the international experience, we may say that departmental hotels in Europe and America are an exception rather than a rule. There are some exceptions, of course, such as the English laboratory of physics, Duresbury, which has a departmental hotel. This can be explained by the company’s specific profile, though: the complex is built in a particularly solitary place and is only used by scientists from different parts of the world who stay there as they come to work at the laboratory.

Russian experts assume that in the future only those departmental hotels will remain on the market which can cater to the needs of big Russian corporations. In the opinion of Mr. Kozlov, the departmental hotels have a future only in the government sector. “Private companies prefer to keep away from non-core assets, for very few know how to cope with hospitality business and deal with competition on the part of multinational hotel chains,” opines Kozlov. Marina Usenko agrees with him. “In fact it’s much more profitable for these countries just to purchase or rent ordinary residential real estate. This forward will inevitably disappear,” she says.