Mr. Nikolay Mayger Due to its geographical location and climate Ukraine enjoys good chances to turn into one of the largest tourist centres of Europe. The latest political events in the Orange Revolution country as well as the Eurovision-2005 Music Competition turned Ukraine into the attraction for many holiday makers. The amount of tourists visiting Ukraine considerably increased last year. According to official statistics, the number of visitors to Ukraine in the first half of 2005 grew by 16% compared to a similar period of 2004. The amount of foreign tourists who visited Ukraine during the mentioned period of 2005 reached 6,6 million – same as during the whole 2000. Increasing of the number of tourists would always result in increasing the demand for hotel services. Rise of activity in the segment of business tourism exposed once again a critical shortage of economy class as well as 3-star and 4-star hotels in our country. A research in this field found that the highest demand is for single standard (economy) rooms. According to the National Tourist Administration of Ukraine currently there are two hotel beds per 1,000 inhabitants which means that attractive and vacant niches on the market of hotel services are still available. (For comparison, this index in Moscow is 9, in Paris – 38, in Europe 14-18 hotel beds).
The competition on the Ukrainian market of hotel services is quite low today with the exception of the 3-star segment which involves the largest portion of hotels in Ukraine and enjoys the most of the payable demand. Foreign hotel operators’ activities increase the competition on the hotel services market. Arrival of foreign operators made some local hotel businessmen revise their image and the quality of the accommodation services provided. The data of the National Tourist Administration of Ukraine show that 892 hotels in the country have passed the compulsory certification procedure. But only 161 hotels of them have confirmed compliance of the range of provided hotel services and their quality with the number of the stars in their names and the room prices. Currently accommodation services in the country are provided by 30 1-star hotels, 43 2-star hotels, 65 3-star hotels, 21 4-star hotels and only 2 5-star hotels namely Premier-Palace in Kiev and Donbass-Palace in Donetsk both being members of the Great Hotels of the World Association.
Studies of the prices for accommodation services in the hotels of Ukraine gave evidence that the prices offered by the hotels today are slightly exaggerated. Prices in the hotels of Ukraine vary from $5-10 a day in hotel-type hostels to $300-400 in high-star hotels. So far the shortage of hotel rooms contributes to keeping accommodation prices at high levels. In spite of recent price equalization of Ukrainian and foreign customers, the expected reducing of prices has not occurred. And vice versa, the price level has risen closer to the European standards making sometimes the services unacceptable for Ukrainian visitors.
As to ordinary users, they definitely prefer the ‘medium-minus’ 2-star segment. This kind of hotel service is widely promoted in the world by the hostel movement. In Ukraine this direction is being developed by the Ukrainian Youth Hostel Association. Today the hostel sector in our country works according to the following scheme – the Association contracts student hostels which operate as hotels during vacations. Six hostels for individual visitors and groups are already operating in Ukraine: International Hostel Apartment ‘Yaroslav’ and International Hostel ‘Kiev’ in Kiev, International Hostel ‘Na Arkhipenka’, International Hostel ‘Perlyna’ and Seasonal Hostel ‘Bank Academy’in Lviv and Sevastopol International Hostel ‘Balaklava’ in the Crimea. Two hostels are providing service for groups exclusively. They are the ‘Karavan’ hostel for groups in Kiev and the ‘Modus’ hostel in Cherkassy. On 1 September 2005 another hostel of the Ukrainian Youth Hostel Association, the 20-bed ‘Afena’ was opened in Lviv.
Proceeding from the current dynamics of youth tourism development one can undoubtedly forecast arising of more hostel-type hotels. According to our calculations the average cost recovery period for establishing a hostel-type hotel is 3-4 years. It doesn’t seem to be very long for hostels of improved conveniences with expected yearly income of $1mln. The investment volume will depend on the state of an old building and reconstruction needs of a new one. According to our experts, the investment volume for constructing a new hostel building might be $1.5-3mln depending on the quality of the rooms. Reconstruction of an existing hotel will cost a little bit less. Foreign experience in this field demonstrates that engagement rate of hostels within major tourist routes makes 90% round a year.
For a long time international hotel networks have been interested in the Ukrainian market reasonably considered as a virgin land for hotel operators until recently. For the latest 10 years many transnational operators have attempted to promote their brands to the Ukrainian market. Their projects were not lucky to have been realized mainly because of bureaucratic problems. Nevertheless, this interest still exists and might even have increased since the government cancelled visa procedures for EU citizens and thanks to other economic changes. Many hotel groups like ‘Accor’, ‘Hilton’, Marriott’, ‘Six Continents’, ‘Hyatt’ as well as the Baltic hotel network ‘Rival Hotels’ and Spanish hotel network ‘NH’ have recently announced their close interest in Ukraine.
The elite hotel sector is also being spread in Ukraine. Small 200-400-room hotels are being constructed. Recently a new hotel of the international hotel network ‘Radisson SAS Kiev’ has been opened in Kiev. The investment volume into construction of the ‘Radisson SAS Kiev’ hotel reached 49mln euros. The investors and share holders of the hotel include Raiffeisen Property Management (60%), European Development and Reconstruction Bank (30%) and Residor SAS (10%). This high level hotel project is far from being the only one of its class. The Soyuzcontract Investment Company is going to build another five-star hotel by 2009.
Currently the company is negotiating the hotel management transfer with the Hilton international network. The estimated cost of the project is $120mln. The Soyuzcontract Investment plans to recover the investment within 12-14 years. Another five-star hotel which will cost 20-25mln euros is planned to be built in Ivano-Frankivsk.
From the analysis of capital investments into the hotel infrastructure it is possible to conclude that most investors prefer building hotels forgetting the infrastructure as a whole. The infrastructure problems are partially dealt with by the hotel operator who sells the franchise setting its own demands.
Many hotel operators have worked on the Ukrainian hotel market but only few of them have completed their projects. It looks quite funny to follow the kaleidoscope of foreign hotel groups. For example, the Intercontinental-Kiev Hotel. In 2001 the Turkish owner leaves the project referring to financial problems. Then in April 2004 the hotel is renamed to St.Sofia, in September 2004 - to Sofia-Sharaton.
Since October 2005 the hotel has been bearing the name St.Sofia Hyatt Regency Kiev. And the hotel is still being constructed. The Industrial Union of Donbass (IUD) is currently the investor of the project.
The IUD estimates to recover the cost of this project within 7-10 years.
The Ukrainian hotel market has been developing in spite of the existing economic problems. In 2004 about 800mln UAH were officially invested into the hotel sector. It’s twice more than in 2003.
Investments into the hotel sector are considered to be strategic ones. In the West the average investment recovery period for a hotel is 8-10 years, but in Ukraine, according to our experts, this index can be 5-7 years.
Some foreign hotel groups have already managed to get their first experience of working on the Ukrainian hotel market. The Kempinski Hotels, a European hotel group, was entering the market purposefully, entered it and then suddenly left the market quietly. Having constructed a 5-star hotel in Odessa in 2001 which was immediately included into the service list of the network, the group soon abandoned it without any fuss. It removed its name from the hotel and the hotel had to cancel one star because of being unable to meet the necessary standards. Nevertheless, in spite of this case, the German operator who has been managing about 45 hotels in Europe, Asia, South America and the Middle East has decided to return again to the Ukrainian market. This time the operator’s investment attention was attracted by Yalta. In 2005 the Kempinski group declared it was starting preparatory works for implementation of a new 5-star project.
The fact that some of the hotel operators left the Ukrainian hotel market is caused to some extend by the imperfect legislative basis. For example, the Ukrainian government has never returned to solving the problem of canceling the taxes in the hotel construction industry (including land taxes, customs duties for importing necessary equipment etc.) though it had promised to. At the same time the question of reviving the hotel fee cancelled only a year ago, has been brought up again, though only 5% instead of previous 20% have been proposed. In case the fee is implemented the prices on the market might increase by approximately at least 15%. Naturally, this will trigger a chain response – the demand will fall and the level of profitability will reduce. Hotel businessmen say that in this case their losses are estimated to reach $50mln.
Researches display that a would-be investor should be stimulated as only few of investors dare to make their decision in favour of the hotel business. The reason could be a long investment recovery period. In case with 4-star and 5-star projects the object recovery period may reach or even exceed 10 years depending on the quantity of accommodation places proposed. Accordingly, 3-star projects may need 5-6 years to be repaid. Another reason making a negative impact on the active development of the hotel sector includes the absence of complex planning and realizing of investment projects, the lack of business planning as well as the shortage of market investigations.
Shortage of hotel capacities in Ukraine is obvious. Due to the absence of local hotel operators every dollar invested into the hotel sector in Ukraine will bring quasi rent in the nearest future, project recovery periods being much shorter than the average ones worldwide. Investors’ interests today are due to be concentrated on major projects with good future prospects for the sector development.
According to our experts, construction of mini hotels, separate complexes with well-developed infrastructure (entertainment centres, etc.) as well as hostel-type hotels is currently the most promising investment attraction. A congress-hotel class project for VIP guests is needed in Kiev. The demand for such a hotel was acknowledged during the Eurovision-2005 spring music competition. The capital-city also needs five-star hotels. Hotels of this class in particular are filled today to the highest rate while the average engagement of the lower class hotels in the capital is about 52%.
In general, the Ukrainian hotel business can be estimated as a complicated but promising market for investors. Building hotels of different classes in such regions of the country as the Crimea, the Black Sea coast and the Carpathian Mountains will be particular profitable field for foreign businessmen to invest.
Nikolay Mayger is the founder and the president of Mayger Consulting Company, a Ukraine-based firm established in 2000 by highly skilled team of business and finance experts. The company is a member of the International investment forum "Ukraine-Germany", as well as the founder of the audit company "Ukrugaudit" Ltd. He serves as a member of the Ukrainian Union of industrialists and businessmen, and represents the Ukrainian Business Assistance Network and the Federation of employers of Ukraine. Mayger Consulting Company is an affiliate of the Fin Group. Mr Mayer serves as the Chief of the supervisory board of Commercial Bank, and is President of the Regional Agency of the Ukrainian National Committee of International Chamber of Commerce. He can be contacted at +380-482-343-333 or commerce@maygerconsulting.com
