HotelExecutive.com Hotel Business Review — Hotel Business in Ukraine: Trends and Prospects

Hotel Business in Ukraine: Trends and Prospects

By Nikolay Mayger, CEO, Mayger Consulting Company

Mr. Nikolay Mayger

The hotel business is one of the most promising and successful business areas in Ukraine. Orientation toward European service standards and vigorous transition to such standards make up the distinctive feature of this sector. Similarly to any other economic activities, the hotel business aims at increasing its income and looks for tools and efficient ways to achieve the desired financial results.

Last year Ukraine became much more popular with tourists and holiday makers. 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.

In accordance with the data of the State Committee on Statistics, there are 1,218 hotel businesses in Ukraine but together with sanatoriums, rest homes, vacation houses, etc. this number exceeds 3,200. Artificially of March 2006, 930 hotels had been certified. Today accommodation services in the country are provided by 30 one-star, 43 two-star, 66 three-star, 22 four-star and only 2 five-star hotels. The highest ratings were awarded to the Premier-Palace in Kiev and the Donbass-Palace in Donetsk which are members of the Association of Great Hotels of the World. The latter appeared thanks to investments of the System Capital Management which would like to spread the hotel network in future.

In Kiev there are 117 operational hotels today of different types of ownership and reporting to different agencies. They include 23 big hotels with more than 100 rooms, 60 smaller hotels with up to 100 rooms and some hostel type houses. In total the Kiev hotels have 8.7 thousand rooms with 15.6 thousand beds. This provides accommodation for about 1 million people a year, a third of them are foreign citizens. For the last two years about 400 new rooms have been put in commission in big and medium hotels, e.g. in the second extension of the Premier Palace and the Radisson SAS hotels. Approximately the same number of rooms have been built in new minor hotels of different comfort levels including Verkhovyna, Vse+Razom, Gintama, Zhaivir, Odissey, Pallada-2002, Sokol, Adria Travel. Among these there is a four-star hotel, a three-star hotel, six two-star hotels and five hotels have not been rated yet as to their comfort level.

As a whole, in Ukraine there are two hotel beds per 1,000 inhabitants, in Kiev - 6, while in Moscow - 9, in Paris - 38 and the average index for Europe is 14-18. The conclusion on shortage of hotels in this country naturally suggests itself. According to different studies, Kiev needs additional 12-15 thousand hotel rooms. Only 3% of 8,700 rooms in the capital city hotels meet international standards. At the same time the prices of the hotel services in Kiev are from $60 to $400 now with a stable tendency to rise.

In general, foreign capital representatives consider the Ukrainian market of hotel services as complicated but promising for investors and pay more attention to implementation of projects in other regions of the country. In regions the land sites are much cheaper now than they will be in future and land privatization issues as well as many other problems are easier to solve. The Crimea and the cities of Kharkov, Donetsk, Dnepropetrovsk and Odessa are the most attractive now for hotel projects.

The tourist industry as an independent sector of economy is only springing up in Ukraine. In general the investment flow-in forecasts are optimistic but a lot of decisions will depend on the policy of the State on the market. In order to realize the hotel potential of Ukraine the State must take into consideration the example of such developed countries as Spain, Switzerland, Austria, France, Belgium which made a significant part of their welfare from tourism, and should:

provide the tourists with comfortable and safe conditions for visiting Ukraine;
undertake an effective mass tourism development policy;
reduce the hotel duty;
take measures to improve and restore sightseeing attractions;
alter the land-use legislation;
alter the rules of issuing licenses to companies from related branches in order to attract investments into developing new tourist objects

In the process of establishment the hotel market of Ukraine has encountered a number of problems. One of them is a weak interior competition caused by the lack of free means and high tax rates which makes it difficult to ensure economic stability, maximize profits and increase competitive capability of hosting companies on the hotel services market. Another one is the absence of powerful international hotel networks. The low competitive ability index of hotel services is formed by a price level and services quality. Because of high tax rates (hotel duties) the hotels have to keep high prices. The hotel duty levels are different for different hotel categories in Ukraine. The prices are specified by conditions of competition, state and interaction of the demand and supply.

In Poland, after hotels were privatized and market reforms were carried out, the number of hotel rooms has increased by 50% in the result of establishing new companies, especially within the hotel networks. Extension of the latter increases productivity due to improvement of the branch structure and strengthening competitive positions on the market. Taking the Polish experience into account, it's possible to forecast that the labor efficiency in the Ukrainian hotel services sector will considerably rise if the branch structure is changed (high category hotels within networks and small family hotels should appear on the market). The increasing number of foreign tourists will no doubt prefer well known brands to local hotels.

Currently the Ukrainian hotel market is dynamically developing. Real estate businessmen prefer to invest into small and medium hotels for 200-400 rooms able to provide elite class accommodations. For example, the Soyuz Contract Investment (Kiev) acting as a project owner ordered a hotel to be built in 21,Naberezno-Khreshchatitskaya Street. The project might be rated as four- or five-star hotel and join the international Hilton network. The project is invested by the FUD company (First Ukrainian Development). A four-star hotel on water is also going to be built in Kiev. This construction project is being implemented by the Kherson State Pallada Plant for the Navigator company. The hotel, 138 meters long and 16 meters wide, will have more than 400 rooms and will be put in commission in August 2006. Some time ago a new hotel of the international network Radisson SAS Hotels & Resorts was opened in Kiev in 22,Yaroslaviv Val Street. The new Radisson SAS hotel is located among embassy quarters in one of the most picturesque areas of the central part of Kiev not far from the Khreshchatik Street. It has 10 levels. The 1st and 2nd ones contain a parking and service facilities. A 20-25 million Euro five-star hotel is also going to arise in Ivano-Frankovsk.

The presence of major international hotel networks on the Ukrainian market has considerably increased. Previously such major world networks as Hilton, Mariott, Sheraton, Radisson, Kempinski or Accor used to pay no attention to Ukraine preferring to invest into building hotels in Turkey and Egypt. Now the situation is different. Hilton and Radisson SAS Hotels & Resorts pioneered the way to the Ukrainian market. According to experts, this might make other hotel networks to be more active in Ukraine. The French hotel network Accor might also come to this country next year after 5 years of studying the market.

According to researches, everywhere investors have become more active in the hotel segment of commercial real estate, and first of all this is true for the hotel market of Ukraine. A number of reasons contribute to positive changes and the following of them are believed to be the most important:

the existing hotels are not able to meet the current demand;
the demand for world level departments is permanently growing;
the segments of the real estate market with the minimum repayment rates are already fed up;
the capital of investment companies has increased;
Ukrainian economy is relatively stable;
foreign policy of the country has changed;
the EU borders are coming closer and Ukraine is being gradually integrated into the European and world community;
the investment and business climate inside Ukraine has improved;
business is getting more active inside the country;
the frequency of business visits from abroad is growing;
the tourist attractiveness of Ukraine has increased.

The rules of compulsory certification of hotel services will be updated soon and the alterations are being prepared now. The new certification rules will definitely contribute to the development of the hotel business as well as to improvement of accommodation services. And this in its turn is destined for ensuring stability and prosperity of the hotel business in Ukraine.

According to Christoph Harle, executive vice-president of the Jones Lang LaSalle Hotels (Munich), the hotel market of Ukraine will enjoy high investors' interest for at least 15 months which will be followed by implementation of particular projects by foreign companies. Some of the projects have already been launched. In particular, many major international networks, such as "Radisson", "Intercontinental Hotel Group", "????tt", "?ilton" are doing business in Ukraine now. A number of Russian companies have also displayed their interest in the hotel market of Ukraine including National Reserve Corporation (NRC), Itera, IFD Capital. Most of the corporations are mastering the top segment of the market, i.e. VIP class hotels.

At the same time there is a demand in Ukraine, especially in big cities including Kiev, for the segment of less expensive hotels offering small but nice rooms and acceptable services. It's a fact that an average 'Ukrainian traveler' tends to save on hotel accommodations. But taking into account that home business is getting more and more active, three-star hotels in the regions can become attractive even for foreign investors.

The number of international operators interested in managing already existing objects is also increasing. An international operator enables a hotel to integrate into international networks, ensures high brand awareness, provides an access to international booking systems. In this case operators often ask Ukrainian owners to ensure guarantees that their objects would not be sold within some period of time.

The lack of hotels can be partially filled by restoring and updating the available objects. An objective analysis of the existing hotel infrastructure shows that the old system of hotels might be capable of meeting the demand for temporary accommodations. It's only necessary to bring the earlier built hotels, unfinished objects, departmental houses and hostels to acceptable decoration and functional levels. In 2005 $250 million were invested into restoration of hotels in Kiev. Three-star hotels Slavutich(520 beds), Tourist(650 beds) and Bratislava(550 beds) on the left bank of the Dnipro river have been successfully reconstructed and modernized for a couple of years. For example, the Bratislava hotel plans to invest its own means into turning three-bed rooms into higher comfort rooms, replacing passenger lifts and water pipelines and building an independent heating centre.

The Tourist is the biggest three-star hotel in Kiev. Due to increased demand for single rooms the management plans to turn two-bed rooms into one-bed rooms at its own expense.

The Ukrainian hotel market has attractive prospects and is one of the most promising in Eastern Europe. The number of existing hotels in Ukraine is far from being enough to satisfy the demands of the country with high investment attractiveness, rich history and diversified tourist opportunities. The hotel business in Ukraine is a promising challenge for at least four reasons:

Firstly, business activity in the country is increasing which inevitably causes extension of so-called 'business traveling' both inside the country and from abroad.

Secondly, according to world practices, higher incomes (population's incomes are increasing now in Ukraine) make people travel more and subsequently stay more in hotels.

Thirdly, having declared its intention to integrate into European structures Ukraine is becoming more attractive for Europeans (in this particular case for European tourists).

And finally the fourth, the hotel duties are expected to be reduced and unified. Thus, the compulsory payments by hotels to the budget are going to decrease.

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