1. Proposed Valuation Services
In conjunction with market and feasibility studies, HCD Group can also assist potential investors, lenders and operators in providing a market value estimate of the hotel business, with view of its sale. The scope of each assignment and the resulting report is tailored to meet the client's individual specifications. The typical product is a comprehensive feasibility study and appraisal that includes an opinion of value.
HCD Group are progressively gaining the respect of real estate professionals by providing objective and thoroughly documented hotel appraisals and consulting services in Russia and CIS. In the area of hotel property valuations, HCD Group can offer the following consulting services:
- Feasibility and investment appraisals;
- Valuation and analysis of specific properties;
- Loan valuations including full market study or feasibility analyses;
- Property inspections and valuation updates for banks and private investors;
- Operational reviews and profit improvement studies;
- Management contract advice;
- Equity and working capital requirement estimates;
- Net operating income projections with varying financial criteria for investment planning;
- Evaluation to determine best use for potential hotel sites;
- Evaluation of management company or chain affiliation alternatives;
- Management contract reviews or negotiations;
- Property inspections to evaluate physical conditions cost estimates for improvements.
HCD Group commences their analysis by examining the site, inspecting the improvements, and analyzing the site surrounds. HCD Group then evaluate the competitive hotel facilities and determine their market orientation. Our appointed team researches and quantifies demand for transient accommodations. The operations estimate is processed into income and expense projections based on the subject property's anticipated competitive position. The resulting net income after deduction of operating expenses is used to estimate the value in use of the personal property contained in the hotel.
In assessing the market value of the property, HCD Group considers the income potential of the hotel operations, but also the physical condition and the degree of deterioration of the building, classification, affiliation, and other factors influencing the physical condition of the building. Additional considerations affecting the appraisal process include the marketing policy of the management team, positioning and channeling sales strategy.
2. Hotel Investment Overview
On account of its particular evolution, the hotel market in Moscow is divided into two categories of real estate. In the first category the hotel properties belong to the city or national government. In the second, recent privatization laws enable existing real estate to be auctioned off to private investors. In the first category, the municipal government attempted to launch several partial privatization schemes by means of joint stock companies with the intent to raise the required capital to renovate its tired properties. The process of finding investors keen on funding hotel real estate in Moscow is slow and problematic. In the second category, however, the construction of new and privately owned hotels outside the Moscow Garden Ring with less legal constraints in terms of ownership has given way to a related shift in valuation focus. Moscow is still in dire need of three star hotels, a blatant deficiency, which has become one of the capital's major handicaps in expanding its tourism infrastructure. Beyond this, the municipality hopes to add 7,000 to 10,000 rooms in the three and four star segment by 2005 and must attract long term investors to co-finance all these projects if they are to be realised. In line with growth trends related to the evolution of office and retail space in Moscow, hotels are now becoming more attractive long-term investment choices due to the strong corporate demand for hotel accommodation in the city as well as the competitive wage structures. In the course of the last ten years, the real estate investment focus has a progressively shifted from considering hotels solely as a physical plant to an income generating realty.
Financing capital costs is a major challenge, but may be becoming increasingly feasible in coming years. The Russian banking system is still difficult in extending long-term loans to potential developers and entrepreneurs seeking debt financing to launch hotel projects in Russia. The aftermath of the 1998 monetary crisis coupled with a generally perceived unstable economic market has discouraged local banks from offering long term financing to hotel projects. Besides the high degree of volatility associated with the national economy, lending institutions still require collateral that can be easily liquidated should there be default in the loan reimbursement. For this reason, residential, office and retail real estate, which enjoy greater liquidity, are perceived to be more tradable collateral than hotels. Nevertheless, current possibilities for the financing of hotel real estate in Russia include syndications of international private investors and loans.
There are sufficient grounds for optimism now that Russia is growing economically and showing signs of increased political stability and advancing reform. Many potential operators, developers and investors are likely to be more interested in investing in viable Russian hotel projects. Recent indications also show that much Russian money invested overseas may now be invested back into Russia through outside investment via offshore banking centers such as Cyprus.
Proceeding from experience of the HCD Group experts, cost of sale per square meter of the hotel area in Moscow lies in the following ranges:
||Sales Price 1 m2
||Hotel Space **
|Moscow districts outside the “Sadovoy Koltso” (Garden Ring)
|City Center (Garden Ring)
|* Compiled from data found in the Russian journal «Ведомости»
** Source HCD Group
The sales comparison approach often provides highly supportable value estimates for homogeneous properties such as vacant land and residential properties when the adjustments are few and relatively simple to compute. In appraising hotel real estate value in Russia using the sales comparison approach, the adjustment process is often difficult to quantify and can lead to high degrees of distortion. Nevertheless, the indicative sales value can be used to bracket a value derived by the income stream valuation approach.
3. Hotel Investment Perspectives in Moscow
There are approximately 16.000 rooms in hotels built before 1992 under the Soviet regime. Budget conscious business travelers and tourists from provincial Russia and CIS as well as some western business people stayi in them, but most foreign travelers used to Western accommodation standards would not consider them acceptable. Soviet hotels were developed around Soviet group tourism, in which people traveled in groups and trade unions partially covered their travel expenses. Hotels were fitted to host large numbers of tourists who were not particularly selective in services provided and had no voice in selecting accommodations.
With the advent of the market economy, hotel business became more competitive, leaving existing hotels subject to functional obsolescence and critical physical deterioration. The average occupancy rate in Russia for such hotels is around 50 percent. Yet today, these hotels constitute 60 per cent of the Moscow accommodations. Many of these hotels are in quest of considerable investment volumes for complete renovations and upgrades to remain profitable. The objects below are a sample of hotels in Moscow, which are either for sale or have been sold in recent years:
||Indicative Sales Value
||$200 Million (51% stock ownership)
||$17 Million (100% stock ownership)
|Nevsky Palace (Saint Petersburg) **
||$130 Million (90% stock ownership)
|Source: HCD Group
*The Belgrade was sold to a private investor for the price indicated above in 1999
**Nevsky Palace was acquired and managed by the Maltese hotel company "Corinthia Hotel International" in February 2002. The published transaction volume for the sale is as indicated above.
The sales comparison approach is useful when an adequate number of similar properties have recently been sold. The greater the difference among properties, the more difficulty there is in using this method. As shown above, the Russian hotel market records very few transactions. The trading value of a hotel asset fluctuates according to the level of investment required for its renovation, and in some instances, the property's accumulated debt as was the case for the Golden Ring Hotel.
The Moscow City government has attempted to stimulate funding for some of its hotel assets by estimating the investment volume required for the reconstruction of their physical plant. Instead of assessing the full replacement value of the asset, the calculation is based on the preservation of the existing shell, with the necessary modifications required for the repositioning and proper operation of the buildings. The following table lists several government-owned hotel buildings, which require large volumes investment for reconstruction:
|Cost Sample for Reconstruction Scheme of Hotel Objects Belonging to the Moscow City Government
||Number of Rooms
(In Mio. USD)
|Source: Committee for Foreign Economic Relations of the Moscow City Government
The main obstacle to getting these projects fully implemented rests upon adequate financing of the renovations together with interested hotel operating groups on managing the new hotels. In virtually all cases, the Moscow City government does not wish to relinquish these properties through full pledged privatisation schemes but has opted for a solution whereby the real estate is leased to outside investors for a period of 49 years. This method optimises the use of the real estate, whilst assuring the City of Moscow a guaranteed return on its assets. Still, the ownership structure of these objects within the government is in most cases unclear. Though under these objects are gradually sold off as joint-stock ventures, the Moscow City maintains a majority of the ownership shares, so as to maintain exclusive control of the management of the venture. This problem has deterred the interest of several private investors eager to gain representation in Moscow.
In addition, the city government intends to lighten its balance sheet by auctioning off its shares in several hotel assets via privatization schemes. The following table presents several hotel objects belonging to the Moscow municipality and the percentage of ownership, which the local government intends to privatize.
|Registry of Hotel Objects For Sale by the Moscow City Government
||Gross Floor Area
||Number of Rooms Minimum Nominal
|| % of Ownership Stock for Sale by the Moscow City Gov’t
||4 544 m²
||6 000 000
||15 273 m²
||42 338 m²
||13 268 m²
||156 000 m²
||41 500 000
||38 893,9 m²
||3 570 000
| Source: Moscow City Government Ordinance No. 99-PP dated 05.02.02
The local auctioning of hotel assets has not generated the anticipated investor precipitation towards purchasing of the outstanding shares. The physical condition of some of the buildings coupled with the absence of guaranteed dividend returns has slowed down the transfer of ownership. Moreover, the joint-stock venture structures are combined in such a way that the minority shareholders seldom have any rights in influencing the operations of the hotel. Such problems has discouraged investors keen on developing mid-class hotels in the Moscow city centre and given them good reason to seek other viable hotel real estate opportunities in privately owned assets outside the Garden Ring. Considerations supporting this strategic investment plight to the periphery include strong corporate demand for inexpensive, quality accommodation, lower construction costs and greater availability of vacant plots suited for hotel development. The latter is creating opportunities for the development and operation of three star hotels and extended stay full service apartments or aparthotels. On-going development of the up-town infrastructure and improvement of connections between the city periphery and city-centre will promote many more inexpensive locations for hotel facilities.
The current problem with the growth of mid-class category lies principally in the financing of the construction of these objects. According to investigations conducted by Hotel Consulting & Development Group research, construction costs for a international 3* hotel are estimated to range between $ 50,000 to $80,000 per room, whereas a hotel in the upper luxury class requires $100,000-$150,000 per room, with a higher initial rate of return. Since the payback period of such projects is long (a minimum of 8 to 10 years in a volatile market), hotel projects in the upper segments of market have been perceived to be financially more attractive investment ventures in the short to medium term.