International Finance Corporation (IFC) buys part of Heliopark Group. The first public transaction involving a Russian hotel management company may increase the interest of foreign investors in the promising market.

Text: Ekaterina Trofimova

“IFC has a great understanding of business and extensive experience in investing in hotel brands,” Alexander Gusakov, president and owner of Heliopark Group, praises the investor. For the second largest Russian hotel chain, the company in the IFC portfolio is indeed quite good - Marriott, Hilton, Hyatt, Conrad and other well-known global brands.

A division of the World Bank plans to enter the capital of the company, spending $25-27 million. The parties do not disclose what share of Heliopark Group shares the investor will receive as a result, but admit that it will not exceed 25%.

In addition to injecting capital into the company, IFC will provide Heliopark Group with a loan of $50 million and will help attract a syndicated loan of $63 million. Thus, in total, Heliopark Group will receive $138-140 million. This money will be used for the construction of new hotels - 18-20 properties by 2010 . According to Gusakov, almost half of them will be built with funds from third-party investors, and Heliopark Group will act as a management company. Today, the company's network includes 13 hotels, of which six are owned and the remaining seven are managed.

The attractiveness of the hotel business for investors is based literally on an empty place, or rather, on the ground. “It will be possible to talk about any saturation of the market only if the current number of rooms in Russian hotels increases fivefold,” predicts Gusakov. “But over the next five years this is unlikely to happen.” In Moscow, for example, there are 219 hotels, while in London there are 1,700, and in Paris 1,500. Three or four new hotels open in the Russian capital every year. But at the same time, old buildings are closed for reconstruction, or even completely demolished. “Intourist”, “Moscow”, “Minsk”, “Russia” have already sunk into oblivion.

According to Colliers International, in 2007 the average occupancy of hotels in all segments of the Moscow market was 74.1%, which practically repeats the result of last year. At the same time, the average sales price increased (for example, in the segment of four-five star hotels - by 15.5%), which indicates an excess of demand over supply. The shortage of places is felt even more acutely in the segment of tourist class hotels. “You can live in Moscow for another ten years before serious competition without cutting prices,” says Vitaly Shpakov, member of the board of directors of Marco Polo Hotel Management. According to him, today a domestic hotel provides a profitability of 20% or more.

However, despite this, the payback period for hotels is not comparable with that of residential real estate. Construction of a hotel in Moscow, according to Shpakov, will cost approximately $100 million. And it will take five to seven years to return the investment. It is not surprising that interest in this market so far is mainly shown by large corporations who are ready to play for the long haul. Thus, the Russian Hotels company, controlled by Oleg Deripaska, VAO Intourist, fueled by money from AFK Sistema, and Inteko, are building their hotel chains.

But until recently, foreign investors were in no hurry to grab a piece of such a seemingly tasty pie. An important obstacle for the “Varangians” are the economic risks associated with gaps in Russian legislation. Thus, in our country, lending secured by real estate is poorly developed, since it is extremely difficult to actually take away the property of a debtor who neglects loan payments.

In addition, the capitalization of Russian hotel enterprises is not yet high enough to attract foreign moneybags. “I think Russian companies will become of interest to Western strategic investors when they reach a value of $100 million,” believes Alexander Gusakov. By the way, the total value of his company’s assets (including hotels under management) was estimated at $200 million.

Heliopark Group itself today considers its priority area not its own construction, but the management of other people's hotels. “We separate the ownership and management of hotels,” says Gusakov. “This is what allowed us to sell our Heliopark Country hotel in 2006 to a professional real estate owner, London & Regional Properties, who specializes in making a profit from owning assets, and remain a management company.”

The company thought about changing priorities at the right time. Competition among management companies in the Russian market is still low. Of course, most hotel owners dream of seeing a sign of a famous world brand above their establishment. But they still prefer to develop capital cities. In addition, services from famous brands are not cheap. For example, just to bring a hotel into compliance with the unified standards of the Holiday Inn chain, you will have to pay $1 million. So Russian players still have time to win a good name for themselves. And their main advantage is more modest requests. If a Western operator takes at least 25% of a hotel’s profit, then a domestic operator takes within 20%. But the “managerial” market is not developing as quickly as its participants would like. “The owners are afraid that the Russian company will deceive them: underestimate profit figures, steal the property,” explains Alexander Shpakov. “Therefore, at first the owner tries to manage it himself, and only after realizing how difficult it is, is he ready to communicate normally.”

556 hotels - approximately one for every 18-19 thousand residents - should be in the capital by the end of 2010, according to the Moscow government decree of April 2007. If these plans are implemented, the hotel fund will receive over 100 thousand new places, 70% of which will be in the three-star category. True, Moscow will still be far from Western standards: in London there is one hotel for every 5 thousand residents.

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