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According to the estimations of HCD Group specialists, the current situation of the Moscow hotel market can be summed up by performance improvement in all segments. Overall the market enjoys guestroom tariff stability and a return to performance levels achieved in 1998 As a result, the market is more robust than two years ago. General room occupancy levels increased in 2002, notably in the summer months, whereby demand for hotel accommodation has caught up with limited hotel supply in the four and five star category, as these segments have reported very little room supply growth. The economic recovery to pre-crisis levels has enabled the main players to reduce their discounting policy, thus optimising room yield and the profitability of revenues streaming from room operations.

In fact, most participants have seized the improved economic climate in the latter half of 2002 to increase their published and commercial tariffs. Moreover, the steady growth in hotel demand has not only benefited hotels with small room supply, located in the city centre (Moscow Central Administrative District) but also has impacted positively on the performance of larger hotels (in excess of 250 rooms) located in the Moscow periphery.

In the aftermath of the monetary crisis in 1998, the Moscow city hotels were searching for various ways to stimulate hotel demand, including the use of more aggressive tariff discounts. As a whole, this tendency continues to influence the behavioural patterns of hotels in Moscow. The occupancy rate of top segment hotels between November 2001 and 2002 has remained at the 64%. Average room rates during the same period have risen by 3.5%, and total hotel revenue by almost 7% in the same period.

The critical mass of hotel demand in Moscow lies in the 2 and 3 star category, which is due to the fact that these low hotel prices are within reach of the current local consumer spending power. Not surprisingly, according to our in-house statistics, the hotels positioned in the 1 and 2 star category in general achieved average room occupancy levels neighbouring 80%, with an average room rate slightly above $18 US (excusive of VAT) in November 2002.

Mid-tier hotels (3 star) recorded average room rates around US$ 60, though demand in terms of average room occupancy is lower than in budget hotels, roughly around 65 and 70 per cent. We can also comment, that top segment hotels (i.e. 4 & 5 star hotels) trade at similar average room occupancy levels. The main performance indicators of hotels of mid-tier and budget segments fluctuated only in terms of room rate. Occupancy has practically remained unchanged, but average room rate has risen considerably since last year (from November 2001 to November 2002) by 13% for hotels positioned in the 1 and 2 star categories, and by 23% cent for 3 star hotels. In our statistics, we have based our prices in US dollars and excluded inflation. Hotels in the mid-tier and budget categories have recovered lost ground by redefining their rate policy, thus increasing room yield. Nevertheless, inflation and local competition have evened out the extent to which individual hotels can increase their room tariffs.

In terms of future hotel growth, the market can absorb mostly first class hotels (four star) in the city centre and two to three top segment (five star) hotels. With regard to the evolution of the mid-tier segment, the expansion in Moscow can only be achieved outside of the Garden Ring. Indeed, only top segment hotels, which command high rates, can generate yields high enough to meet investor expectation. In addition, high development costs and scarcity of available plots for hotel real estate are obstacles, which undermine the financial viability of three star development in the Moscow city centre.

The centre of Moscow will continue to raise the level of existing hotel room supply at the detriment of hotels built in the Soviet Era suffering from physical and functional obsolescence and requiring heavy investment volumes. In its General Plan, the Moscow City Government committee for urban planning has called for the creation of 19.500 hotel rooms by 2010, of which 40 % (or 7.800 rooms) will be allocated to the development in 2 and 3 star segments. Besides urban planning programme, other factors influencing the quality standards of mid-tier hotels in Moscow include the guest demand profile. New construction techniques, larger room dimensions, more rigorous hygiene criteria and better trained service will combine to produce an overall better mid-tier product, which better targets local business demand.