2020 Moscow hotel market overview March 2020 The material in this report has been prepared solely for info rmation purposes. Any disclosure, use, copying or circulation of this report (or the information contained within it) is allowed only with Cushman & Wakefield’s prior written consent. No representation or warranty is given, express or implied, as to the accuracy of the information contained within this report, and Cushman & Wakefield is under no obligation to subsequently correct it in the event of errors. For additional information, please contact Marina Smirnova at [email protected] or at +7 985 410 7237. © Cushman & Wakefield, 2020 Table of contents 4 Summary 6 Demand 12 Moscow airports 14 Modern quality supply 18 Modern-quality hotels — operating results 22 Hotel investment market Hospitality & Tourism | 3 Summary Demand After the “2018 World Cup year”, 2019 saw a continued inflow of visitors (both Russian and foreign) to Moscow, which not only reached the 25.1 million visitors’ mark (a 6.4% increase compared to 2018) but also visibly changed the demand structure of the market. While the share of business trips still remains dominant and exceeds 42–45% of all accommodated demand, starting from 2016, the city has seen a growing share of leisure- related visits, with up to 40% of accommodated guests arriving for cultural, tourist, personal, and other purposes. Hotel demand in Moscow and perhaps even the well-being of the tourism industry in Moscow in 2020 will likely be affected by the further development of COVID-19. At the time of this study, there were already signs of a slowdown in the tourism industry (restrictions on in-bound travel, quarantine measures, reservation cancellations, postponement or cancellation of events). The real effect of such temporary measures will be visible only by mid-spring when the mass tourism season usually starts. Supply As of late 2019, Moscow’s modern-quality hotel stock, in Cushman & Wakefield’s expert opinion, amounted to 20,200 rooms, representing just over one-third of the combined room stock in the capital. After the market stock increased by nearly 2,500 rooms in 2017–2018 (annual growth rates of 9.4% and 4.0%, respectively) and minimal growth in 2019 (128 rooms in one new hotel opening), the average annual growth rate in 2020–2025 will likely not exceed 4.0%. Net expected market growth in 2020 is 832 rooms (4.1%). 4 | Cushman & Wakefield Operating results Following the 2018 FIFA World Cup, it took the Moscow market at least six months to find a new balance between supply and demand. As a result, Moscow hoteliers spent the first quarter of 2019 in a state of anxiety. The arrival of spring, however, brought with it the first signs of improved confidence levels manifested in consistent monthly outperformance of occupancy levels compared to previous years. By the summer, it became clear that the increased demand for hotel accommodation was ready to set new records, giving Moscow hoteliers means to increase open rates. As a result, the 2019 full-year occupancy rate in the modern-quality hotel segment reached 78.0%, even though average daily rate (ADR) growth remained largely subdued (a 2.9% increase vs. 2017 results — from RUB 6,567 to RUB 6,759). 2020’s buoyant start made hoteliers confident that they would be finally able to start focusing on yield management rather than on trying to sell as many rooms as possible. However, the rosy picture of the world as of late January 2020 and the “reasonably optimistic” projections rolled out by hotel managers suddenly came to a halt due to the coronavirus, which is likely to have a direct impact on the operating performance of the city’s hotels, at least in the first half of the year. The full effect that the COVID-19 infection may have on the hotel market can only be gauged by mid-spring. Investment market Investors’ interest in prime hotel properties in Moscow and St. Petersburg remains high, and a shortage of such assets coupled with real existing barriers to entry in these markets contribute to initial yield compression. At the same time, with a few exceptions (e.g., the Tsentralnaya Hotel deal reported in early 2019 and earmarked by new foreign owners for complete redevelopment), the Russian hotel investment market remains local. Hospitality & Tourism | 5 Demand Arrivals and top feeder markets The aggregate effect of the measures and factors listed above allowed Moscow to report 25.1 million 2019 saw continued growth in visitors to Moscow, visitors in 2019, exceeding the 2016 results (16.6 a logical result of persistent efforts of the local million) by a factor of 1.5. What’s more important is the authorities to make the city more attractive to positive growth trend, as shown in Diagram 1. tourists, both domestic and international. The successful completion of the urban revival At the time of this study, official data on the split programme in Central Moscow, an impressive between Russian and foreign visitors in 2019 were calendar of public events (street festivals and other unavailable, but even a quick glance at the 2014- themed events) annually hosted in the capital, and 2018 statistics is enough to see a growing trend in the wide availability of accommodation facilities to every share of domestic demand regardless of the increased taste and budget all contributed to Moscow being number of foreigners in 2018 due to the 2018 FIFA named the 2019 World’s Leading City Destination. World Cup. If in 2014 the share of Russian citizens Additional positive factors increasing the number visiting Moscow for various purposes represented 66% of visitors were the “championship effect” when of all arrivals, by 2018 their share reached 77% of all fans and participants of the 2018 FIFA World Cup visitors. “discovered” Russia and Moscow and — last but not least — a growing list of countries whose citizens can The sharp increase in the number of guests visit Russia without a visa (for example, the United accommodated by Moscow hotels (from 5.6 million Arab Emirates). in 2015 to 8.5 million in 2016 and 9.8 million in 2017) 6 | Cushman & Wakefield shown in Diagram 2, in Cushman & Wakefield’s opinion, Diagram 1. Moscow arrivals, is reflective not so much of a sudden surge in hotel actuals for 2014-2018, forecast for 2019 demand but of a change in the number of lodging facilities tracked by the Federal Statistical Bureau 25,1 25 which, starting from 2016, surveys a wider range of 20 5,5 hotels. One hopes that such an expansion will ultimately 4,8 4,6 15 4,5 paint a more objective picture of the Moscow lodging 5,7 landscape. Another big increase in the number of Visitors, mln Visitors, 10 accommodated persons recorded in 2018 (year-on-year 5 growth of 69.1%) is due mainly to the “championship 10,9 12,7 14,4 16,8 18,0 0 effect” when, according to the City of Moscow, during 2014 2015 2016 2017 2018 2019 the weeks of the football mega-event the capital hosted Russians Foreigners more than 4.5 million visitors, of which 2.3 million were foreign tourists and 2.2 million were domestic visitors. Source: Tourism Committee, City of Moscow, 2020 When analysing the hotel accommodation demand, one can see a gradual increase in the share of foreign guests, from 33–34% in 2012–2014 to 37–38% in 2017–2018, which indicates a growing interest on the part of foreigners in visiting the Russian capital (thus, the dominant — and growing — share of domestic demand in the total Moscow arrivals noted above to a large extent consists of day visitors who do not generate hotel stays). While no full-year statistics for 2019 were available at the time of this study, the preliminary (monthly) data on foreign citizens lodged by the Moscow collective means of accommodation (the definition of this term is provided in Section “Structure of modern quality stock”) published by the Federal Statistical Bureau put their share at 39.6% of total accommodated persons, which is in line with the trend described above. Table 1. Moscow arrivals, 2014–2019 Year 2014 2015 2016 2017 2018 2019 Arrivals, mln 17,2 19,0 21,6 23,5 25,1 % 16,6 3,6 10,5 13,7 8,8 6,4 Russians 12,7 14,4 16,8 18,0 no data % 10,9 16,5 13,4 16,7 7,1 Foreigners 4,5 4,6 4,8 5,5 no data % 5,7 -21,1 2,2 4,3 14,6 Source: Tourism Committee, City of Moscow, 2020 Hospitality & Tourism | 7 Demand Overall, however, the dynamics of accommodated Diagram 2. Moscow hotel demand hotel guests in 2017–2018 were in line with growth in the number of overnight stays (69.1% and 66.1%, 18,0 50 respectively), which meant that the average stay 45,0 remains practically unchanged at 2.7–2.8 nights. 13,5 6,2 The list of the main feeder markets (Diagram 3) also 27,1 23,4 9,0 25 remains stable, although the share of some countries 3,7 2,5 saw a sharp reduction following the launch of 2014– 13,4 mln Bed nights, 12,8 13,3 13,4 4,5 1,8 1,8 2,1 2015 sanctions. For example, the number of UK citizens mln guests, Accommodated 1,7 visiting Moscow in 2018 was 24.6% lower than in 2013, 3,3 3,4 3,6 3,5 6,1 6,1 10,4 and the number of Turkish citizens was 47.3% lower.