Hotels in Kyiv: Lots of Promised Projects

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Constructing and operating hotels is considered a profitable business all over the world, with dozens of prestigious ones being opened every year by leading international hotel networks. But not in Ukraine. The poor status of this business in Kyiv is evidenced by the fact that over our 12 years of national independence, only one 5-star hotel has opened in the city. The first phase of the Premier Palace in Shevchenko St. Was opened in 2001 (the second phase should open in the spring of 2004).

New hotel projects almost systematically fail to come. Kyiv and Minsk remain the only two post-Soviet and Eastern European capitals still lacking hotels from one of the leading international networks, such as Hilton, Marriot, Hyatt, Sheraton, Inter-Continental, Four Seasons, etc. (there are 14 in Moscow). The availability of world-known hotel operations in Kyiv would improve its popularity with tourists, which would, in turn, attract more hotel developers.

Now, there will be an end to this sorry tradition soon. The capital's first hotel complex by an international operator the Radisson SAS group is expected to open before the end of the year at 22-24 Yaroslaviv Val St. It will have 255 rooms and the project is being financed by the EBRD, Raiffeisen Property Investment, Radisson SAS, et al. In addition, other international hotel operators, including Accor, Kempinski, and Marriot have announced that they plan to open one of their hotels in Kyiv.

Business Centres in Lieu of Hotels

The hotel development programme, adopted by the Kyiv City Authorities for hotel construction by 2010, is failing. There are serious doubts that the planned four 5-star, ten 4-star, and twenty-five 3-star hotels will be ready according to the deadlines (by then the capital would be lucky to have those planned for 2005).

This programme can be further delayed for two main reasons. First, even now it is difficult to find a suitable vacant site in the city centre. Sites previously reserved for this purpose have been transferred to entities currently erecting business centres which offer better and quicker returns, as well as elite housing projects. There is practically no way to stop this process.

Regrettably, two projects - the hotel and office centre in Bessarabka and the 10-story Hilton in Volodymyrska St. - will never become hotels. The site originally allocated for the Hilton is now an elite housing project, and a shopping-entertainment-office centre is being erected in place of the hotel in Bessarabka.

As a result, only 13% of the Kyiv hotels are located in the centre (compared to 39% in Moscow and some 50% in Western Europe, North America, and Southeast Asia). Unless this vicious circle is broken, ten years from now Kyiv centre will be packed with plush business centres, elite homes, and shopping malls, so that sites for hotels and entertainment centres will have to be found on the outskirts.

The second reason is the current unstable political situation, which is due to the 2004 presidential and 2006 parliamentary elections, which worries potential foreign investors.

So what is the way out of the situation that has developed- Radisson SAS experts believe that the best way is to concentrate on the upgrading of those already built and functioning.

Some hotels have adopted precisely this approach. The Slavutich, Tourist, and Bratislava hotels are being modernized on the Left Bank of the Dnieper, using their own funds. Incidentally, the 5-star Premier Palace is actually a completely refurbished version of the Ukraine Hotel. But such modernization is easier said that done, as it requires not only major repair, new equipment, furnishing, better service, but also correcting mistakes in the Soviet architectural design. Small hotel rooms built after the Soviet standard cannot meet modern requirements, so hotels have to break down partitions and replan rooms. Otherwise they would to remain forever as second-rate.

Bankrupt Complexes

So why have interesting hotel projects not been built or been suspended? Take the 10-story Hilton planned in Volodymyrska St. Unfortunately, the developers were unable to raise the necessary finance for the project ($50-60 million). However, the Hilton project was also unacceptable in terms of its design, from the outset; the site turned out to be too narrow for the giant structure, so it was decided to turn the hotel through 45?. The Urban Planning Council of Kyiv at first accepted the idea, but after the project fell through all those involved probably heaved a sigh of relief.

The failure of the high-rise-office-hotel complex at Bessarabka (worth $285 million) coincided with the liquidation of the Korean Daewoo group. Back in 1997, they had intended to embellish the cityscape with 'a little skyscraper'. Several other large real estate investment projects folded in Kyiv because of the collapse of the contractors such as Maculan.

Another project constantly in the on of-made mode is the 250-room supposed Intercontinental Kiev Hotel. Although much of the external work has been accomplished, the opening date is constantly postponed due to lack of finance. The latest news is that the hotel has a new developer with resources to complete the project soon.

Apparently there is a developer that has promised to complete the downtown Teatralna Hotel within a few years. Originally a Greek company called Alona (Overseas) Trading Ltd. undertook to complete the 'semi-finished project' with 250 rooms by December 2001 (administrators in the Kyiv Mayor's Office are still unable to explain who had found such an unreliable business associate and who would be held responsible for the sad outcome). The city administration invested $4 million and the rest, according to the contract, was to be provided by foreign firms. In 2002, the Ukrainian-Greek contract was annulled, as the Greek side had failed to come up with necessary finance. The project (worth $40-50 million) has now been taken over by the same investors that started the Radisson SAS project on Yaroslaviv Val and they have promised to complete the reconstruction within a few years.

The Leipzig Hotel building on the corner of Volodymyrska and Prorizna was to be developed as an office-hotel complex scheduled to be opened in 200. Then it was changed to an elite housing project. But then the Lviv businessman developing the project found he had only sufficient funds to renovate the façade. All his attempts to find the required additional finance failed. Now rumor has is that there is a new serious financier; some sources suggest the Russian financial group NRB, others indicate a German company.

In 2002, it was announced that the Austrian investment company Warimpex, in conjunction with the international hotel operator Six Continents, would build a 350-room Holiday Inn (worth $35 million) not far from the University Metro Station. The project is only on paper but one can only hope that it will not sink into oblivion like so many others. For most tourists, a country does not exist unless it has well known hotels.

Halving the Risk

What factors can influence the scale of hotel construction in Kyiv. To begin with, the city authorities should prepare the intended construction sites with the necessary utility connections. Foreign investors will only cooperate on hotel projects if there is substantial financial support by Ukrainian investors as well. In other words, foreign companies have no desire to take all the investment risks. Ukrainian firms wishing to take part in such projects must have sufficient funds for at least the initial construction work and necessary planning approvals. No investor will take the risk of not receiving the necessary approvals as nearly happened with the Hilton project.

A further guarantee of success for a large project can be the presence of a political backup provided by such internationally acclaimed financiers as the EBRD and IFC. Foreign investors respect such support and a current example is EBRD co-financing the Radisson SAS's Kyiv project. Several of the major hotel groups have carried out market studies for Kyiv and most believe in the opportunity presented if they can find the right site and a suitable developer and/or finance consortium.

Volodymyr Harashchenko, General Director of Double W, says that hotel construction paperwork has of late been simplified in Kyiv, with less red tape involved. Although the number of papers to be executed, approved, and signed has not decreased. 190 approvals were required for the construction of the Premier Palace. By the way of consolation, such projects in London or Vienna would involve considerably more red tape.

Most new construction projects are budgeted on cost per sq. m. parameters. Hotel developments however, are usually costed on a per room basis. The following are the general European indices:

1. 5-star hotel: -125, 000-190,000 per room;

2. 4-star hotel: -120,000-140,000 per room;

3. 3-star hotel: -75,000-90,000 per room.

Surprisingly, in Ukraine these costs are not much lower. This is explained primarily by the import duty imposed on construction materials which considering the European standard of such projects, most such materials have to be imported.

Nowadays, the Ukrainian hotel business is regarded with great interest by the big-time foreign investors who are showing an increasing interest with every passing month. This interest is expected to heighten in this segment during the next couple of years as operator and major finance syndicates take strategic decisions to enter the Kyiv market. The lifting of the hotel tax combined with the shortage of construction sites, will help to ensure the success of the first projects. In Western Europe the return on the investment normally takes 10 top 15 years but 6-7 years in the Baltic states. Return on a Kyiv hotel project could be quicker.

The Ukrainian 1/2004