JLL: Kiev hotel market analysis (UA)

Jones Lang LaSalle Hotels has published a report on the current state and outlook of the Kiev hotel market.

Just a few years ago, thanks to Ukraine's positive political and economic developments and due to a virtual lack of any modern quality hotel stock, investors and international chain operators viewed Ukraine and Kiev in particular as one of the most attractive hotel markets in the CIS. Beginning in H2 2008, however, when the global crisis sunk Ukraine's economy, hotel development in the country lost relevance, especially since the number of foreign visitors to Ukraine decreased by 18.3% compared to the previous year.

As the most developed market in the country, Kiev was affected considerably by this drop as demand for hotel accommodation fell by 22% compared to the previous year.

Before the economic crisis, the most expensive hotels practically determined prices and rarely offered corporate discounts, driving average room rates to US $400-500 per night. But by 2009 corporate clients sensed the opportunity and started bargaining for better accommodation at more attractive prices. According to Jones Lang LaSalle Hotels' estimates, aggregate Average Daily Rate (ADR) for the top four hotels in Kiev (the Hyatt Regency, Premier Palace, Opera, and Radisson) in 2009 fell by 25% to US $275. The situation was further aggravated by the Sept. 2009 opening of the 273-room InterContinental which began work amid plummeting demand.

As tourist arrival volumes shrank and corporate cost-saving initiatives reduced business trip budgets, the city hotels were forced to fight for every single guest. Moreover, higher-end hotels dependent upon imported supplies found themselves particularly vulnerable to unpredictable fluctuations in the Hryvnia exchange rate. As a result, room yields (RevPAR) in 2009 nearly halved compared to the more profitable period of 2007-2008, while operating margins shred at least 10% - thanks to considerable efforts by operators to cut day-to-day costs.
Mid-market hotels (The President, Rus, Ukraina, Dniepro, Lybid and others) also experienced a drop in demand, but since these hotels have become the focus of attention for consumers with travel budget cuts, their survival was not under threat. Jones Lang LaSalle Hotels estimate that the aggregate ADR in this segment fell from US $90-140 in 2008 to US $50-80 in 2009, with occupancy levels remaining at 65-70%.

In 2010, amid reassuring news from global financial markets as well as hopes for a more stable political outlook in the country following presidential elections in February, demand for Kiev hotels stabilized but did not fully recover. Though occupancy rates at the top-tier hotels grew in H1 by 5.6% compared to the same period in 2009, this was possible at the expense of the ADR, which reduced by 13% year-on-year (in US $ terms). Contrasting directions in the dynamics of the two main hotel trading indicators – occupancy rates and ADR – demonstrate a fragile trend towards recovering demand (amid an increase in supply which will boost competition).

Against this backdrop, the expected completion of the five-star, 250-room Fairmont project, slated for 2011, threatens the current balance in the upper-end segment where a continued decrease in ADR is expected and where occupancy rates are projected at conservative 50-55%.

For the mid-market hotels, conditions are unlikely to improve in any considerable way either, with the expected opening of the 213-room Ibis hotel.

In the meantime, Ukraine's government continues supporting any investment initiative in hotel development as it prepares for the Euro-2012 championship. As a result, the development pipeline includes the 270-room Hilton project, where construction resumed earlier this year, as well as the 192-room half-finished Holiday Inn (construction still frozen) – both slated for completion by mid-2012.

Marina Usenko, Executive Vice President, director of Jones Lang LaSalle Hotels Russia, commented: "Our research shows that the high-end segment of the hotel market is unlikely to offer an

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