News Ticker

Belarusian hospitality industry needs adjustment

Too many hotels and absence of ideas may affect profitability

Despite 2014 IIHF World Championship which caused rapid growth of hotel construction in Minsk, Belarus hotel market hasn’t formed a well-balanced market mechanism yet. It is developing according to its own laws, which are still to be understood.

Colliers International company was the first in Belarus to analyze the hotel market in the capital and to estimate its development opportunities. According to the forecast, if strategic mistakes are not corrected right now, in 2016 hotels in Minsk will face financial problems, which can lead to rather serious consequences.

According to the Minsk City Executive Committee, more than 80% of room stock in the capital is owned by the state today. As it was emphasized by Denis Chetverikov, Director of Consulting and Valuation Department at Colliers International in Belarus, during preparation for the 2014 World Championship private investors could not ensure the construction of the required number of hotels, so the government had to take over the fulfillment of this difficult task. In world practice it was a unique, pure Belarusian case, which had its positive influence. However, after the championship most of the hotels and city authorities just waited for tourists to rush up to them, and they expected that the world leadership will cause significant growth of incoming tourism.

 

2014 World Championship doesn`t guarantee anything

As shows the experience of Kiev, which hosted the UEFA European Football Championship in 2012, holding the iconic sport events in the country does not guarantee the inflow of foreign tourists. According to Colliers International, in 2011 Kiev hotels took 1 022 000 foreign tourists, and in 2012 – only 948 thousand. In other worlds, Football Championship had unexpectedly negative effect on the hotel industry. Taking into account that Kiev had actively increased the number of rooms, it has led to a significant reduction in load of hotels and the average price per room. All the mentioned factors together had negative impact on financial efficiency of all the market players. Something similar can happen with Belarus, if prompt action isn’t taken.

According to Colliers International, hotels in Minsk showed good load of room stock – 66-69%. However, the World Championship drastically changed market, practically doubling the supply of rooms. The experts forecast that it will increase on 62% till the end of 2016. The most significant growth, strangely enough, is expected in a five-star segment, which faces rather modest demand today. Given the low level of Belarusian hotel management, a slight increase in tourism and the Belarusian specifics of doing business, all of this together can lead to a systemic crisis on the market. As it was noted by Denis Chetverikov, now we can`t say that the market of Belarusian hotels is already formed.

“You don`t buy or sell hotels in Belarus, and they are not subjects under other treaties, such as management with the assistance of well-known international operator. These contracts are so rare and unique, we can`t even summarize this information and give evaluation of the market” – said Denis Chetverikov.

 

Belarusian features

As experts say, many foreign investors and worldwide operators wouldn’t have the opportunity to enter Belorussian hotel market, even if they wanted to do it. It`s caused by absence of the market in the generally accepted meaning of this word. The whole point is the Belorussian features of public administration in hospitality industry.

As Denis Chetverikov said, international operators or investors should estimate the market before entering it. But this task arises complications.

“In order to give adequate estimation of supply and demand, it is necessary to know the current load of hotels. The problem is, we don`t know the load. We have some pieces of information, but generally hotels load data, even in 3, 4 and 5-stars segments, is positioned as state secrets or a least commercial secrets” – the expert said.

As Denis Chetverikov supposes, this situation is quite strange, as long as worldwide information about hotel load is publicity available.

He says: “Information, its freedom and its spreading is one of the key parameters, which serve the market. No information – no market”.

 

Disbalance of the market

Multiple market disbalances compose another problem of Belarusian hotels, which nobody tries to solve. Moreover, nobody wants to notice it.

Though doubling of room stock has been ensured, nothing is done to balance it by growth of incoming tourism. It is going to be only 6%, as it was before. As a result, nobody knows how to attract visitors to the country after closing of the Championship. Belarusian authorities applied for holding other sport events, but they don`t solve the problem.

One more disbalance, that influences the market, is the inconsistency between price and existing demand. Inflated prices in Belarusian hotels have been discussed many times. There was a slight decrease in prices after new hotels had been put into operation, but still they are too high and don`t comply with demand. At the same time government representatives, responsible for the market development, soothe themselves with the fact that prices have leveled with the prices of neighboring countries. Meanwhile, experts believe that prices are dictated by demand – it is the law of every market.

Let`s take for example hotel prices in London, they seem to go beyond the limit. In Europe there are highest prices. But considering the demand, i.e. number of tourist who visit hotels in London during a year, prices are well-balanced. Situation in Belarus is quite different: correlation between demand and prices is several times higher than in European countries. So in London the ratio of the average price per room for 1000 tourists does not exceed 0.05 euros, as well as in Prague and Paris, which can be taken as examples of structured market. In Belarus, the ratio is 0.22 euros for 3-star hotels, 0.4 euros for 4-star hotels and 0.46 euros for 5-star hotels.

Similar situation is seen if we consider the ratio of rooms to 1,000 incoming tourists. For example, in Riga and Vilnius there are 5 rooms for one thousand tourists, and a little more than 7 rooms in Paris and Prague. In Belarus we have almost 16 rooms per 1,000 foreign tourists. Thus, if all the construction plans will be implemented, there will be 22 rooms per thousand foreigners entering by the end of 2016.

 

Consequences for the market

According to Denis Chetverikov, main trouble of Belarusian hotel market is its major player – the government: public administration is always notable for low level of management. This is a common point of all the countries. None of the current players or a group of them are not even trying to analyze the market in order to properly align all business processes. Moreover, the government strongly resists to such an analysis when consulting companies try to conduct it. This can lead to disastrous results.

It is not enough to take state decisions that will attract more foreigners into the country and thereby provide loading of hotels. This process will take much more than one day or one year, considering that until now taken measures haven`t led to significant results. Meanwhile, the market has to balanced today, based on international practice.

As Denis Chetverikov says, if all the current trends will continue, load of Belorussian hotels will decrease to its critical level – 27-35% – by the end of 2016. When the load equals 30%, the hotels operate at a loss and anti-crisis measures have to be taken.

According to the Minsk City Executive Committee, today the profitability of the state hotel stock is only 6-8%, while in 2008-2013 it was at a level of 25-40%.

“Thanks to 2014 World Championship there was a push for tourism development in Belarus. Hotel market is slow-paced and it pays back slowly, authorities have to make significant efforts to create demand for built hotels” – concluded Andrew Aleshkin, the director of Colliers International brokerage division in Belarus.

About Ksenia Ulyanova (3 Articles)
Ksenia Ulyanova got a Degree in Management in Plekhanov Russian University of Economics. She works at Distribution department of a publishing house. She loves travelling, cooking and reading great books. Ksenia is based in Moscow, Russia.

Leave a comment

Your email address will not be published.


*