Strategy for Hotel Investment in Ukraine

There are no doubts that hotel sphere of Ukraine is highly attractive. But only the investment based on reliable state of the market information, reliable market forecast, well thought-out plan and correctly chosen strategy for investment will have the highest efficiency. Today any company which considers investing in business in Ukraine considers the high-profitability and other bonuses of the swiftly growing Ukrainian economy on one hand and possible risks on the other. It is obvious that risk is the hardest factor to estimate for foreign investor. Underestimated and unforeseen risks can make investment plan which seems highly effective to become unprofitable. Overestimated and fictitious risks can bury the most promising investment plan in the archives of a company.

The efficiency of investment in Ukrainian hotel sphere is mainly defined by the subsequent running of the hotel which in its turn basically depends on the selection of hotel management. Investor has to choose one out of three possible ways to manage the hotel: hiring professional hotel chief manager, bringing in hotel Management Company (or franchise) and self-dependent management. In any particular case investor has to choose his own strategy depending on knowledge of risks in Ukrainian hotel sphere for every variant of management.

At the present day if investor chooses bringing in the hotel Management Company as the determinant for investment strategy he needs to provide compliance of the hotel building (selection of building contractor in particular) and management staff (in case of franchise) with the required standarts of services the hotel has to provide by the terms of hotel Management Company. Instructive example of insufficiently considered investment project based on bringing in hotel Management Company is investment in building 4-star hotel “Odessa” (Odesa). In 2001 at the moment when building of the hotel has been completely finished and the hotel was ready for starting its operation as 5-star hotel and part of Kempinski Hotels it became clear that poor quality of construction work did not meet the requirements of Kempinski Hotel service standards. As the result the hotel has been renamed and degraded as 4-star hotel. The world-famous hotel Management Companies were not in rush for entering Ukrainian hotel sphere after such negative experience of Kempinski Hotels. In this situation of having low-competitive franchise market Ukrainian hotels have started to establish their own hotel groups with creation of hotel Management Company. As the result the hotel group “Premier Hotels” has been established in 2003. Today it consists of 6 hotels in different areas in Ukraine (including one 5-star hotel and three 4-star hotels). Though first Ukrainian hotel group is still on its way to conquer the market it clearly reveals the tendency – number of hotel groups operating in Ukraine will grow for both Ukrainian and international hotel groups. At present Hilton Hotels, Hyatt International and also Kempisnski Hotels (in spite of previous negative experience) plan to enter Ukrainian hotel sphere and each has its own project to complete during 2006-2009 period. In the beginning of 2006 Radisson SAS Hotels & Resorts has already opened the hotel Radisson SAS Hotel Kyiv (Kyiv). There are also smaller hotel groups like Rixos that already do successful business in Ukraine. Turkish hotel Management Company Rixos (founded in 2000, includes 8 hotels) has opened hotel “Rixos Hotel Prikarpatye” (Truskavets) and this year opens new hotel “Rixos Hotel Kiev” (Kiyiv).

Unfortunately the process of getting all the permits, licenses that are necessary for building and putting into operation a hotel in Ukraine is onerous. The time needed for the process depends on the rank of a hotel and in some cases it can take several years. Long period of time for obtaining the necessary documents creates some additional risks for investor such as market situation possible changes. Investor can significantly fasten the process by investing in purchase, subsequent reorganization and restoration of the existing hotel. For decreasing these risks while building a new hotel it is better to bring in professional Ukrainian company which specializes in the business-creation, knows all the problems of issuing the necessary documents and knows all the methods to solve them.

Of course there are some examples of negative experience of investing in Ukrainian hotel sphere that are based on the wrong estimation of required expenses and time of realization of the investment project. For example, the investment project of building hotel “Teatralnaya” (Kiyiv) for hotel Management Company Marriot International was revised and changed for the investment project of building elite office facility “Leonardo”. In this case it can be clearly seen that if the beginning of an investment hotel project is unsuccessful investor has possibility (till certain moment) to revise the plan and make a decision to transform it in real estate investment. The investment in commercial or office real estate in Ukraine has shorter pay-back period than hotel investment(9-12 years for 4,5-star hotels, 5-6years for 3-star hotel) and higher efficiency (up to 20% for real-estate investment, up to 15% for hotel investment). In the long-range outlook investor has to consider the tendency for both markets. The markets of office and commercial real estate have tendency for swift demand saturation therefore pay-back period increases and efficiency decreases. On the other hand in the foreseeable future the demand for hotel services greatly outdistances the overall offer of Ukrainian hotel sphere. Therefore this tendency defines growth of average rate of load for hotels in Ukraine. Though the average rate of load of the Ukrainian hotels is 31% and it is 56% in Kyiv – the average rate of load of graded hotels (higher service standards) is 50% in Ukraine and 70-80% in Kyiv

Mostly cities in Ukraine do not have a document which determines each land’s purpose at the same time the rate of growth of building in Ukraine increases. In this situation there is a risk that infrastructure in the area may change and cause reduction of hotel attraction or cause additional expenses to prevent it. In order to decrease this risk investor may consider building the hotel in the city that has document which determines each land’s purpose and feel safe about possible changes of real estate in the area. If the city doesn’t have such document investor needs to consider if there are any changes possible in the area or all real estate objects in the area are permanent.

In the view of swift development of hotel sector in Ukraine the regulative legislation changes from time to time. Therefore investor has to consider legislative initiatives which are on approval and to predict changes it may cause. As an example of governmental actions there was revocation of status “priority development territories” which gave tax remissions for hotel business. This action has negatively affected investment projects that have been started on such territories but were still running at that time. Today there is legislative initiative to reestablish  the hotel tax which may affect investment efficiency. Investor can get a knowledge of necessary laws of Ukraine, foresee the changes and make corresponding estimations in investment plan with the help of professional company, specialized in hotel business and legal services.

Making the decision of investing in hotel sphere of Ukraine investor needs to pay attention to cultural features of the group of people who are potential guest of the planned hotel. Regardless of chosen strategy foreign investor which enters Ukrainian market on his own has a risk to misjudge the specificity of Ukrainian hotel sphere. But foreign investor has several common possibilities to lower this risk: to use services of competent company which specializes in business-creation and business-development in Ukraine or to bring into the investment project a partner that knows specificity of Ukrainian market (foreign partner that does successful hotel business in Ukraine for a long period of time or Ukrainian partner with good reputation).

If the strategy for hotel investment is based on reliable state of market information, is chosen accordingly to the possible risks and risks’ minimization actions are correctly executed investor can count on high profit and stable market share in Ukrainian hotel sphere.