Andrey Yakunin, co-founder of VIY Management (VIYM) on view of the Russian hospitality market and the most promising investment opportunities currently available.

… We spoke with Mr Yakunin to find out more about VIYM‘s view of the Russian hospitality market and the most promising investment opportunities currently available.

What are the major differences between running a hospitality business in Russia and abroad?

“I would suggest that there are more similarities in particular in terms of the evident lack of availability of financing on favourable LTV and performance bond terms, certain challenges in attracting top young talent to the hospitality industry as a long-term career option, and a general squeeze of operating margins as the economy goes through a rather sluggish phase of the cycle. However, bank financing terms remain much more favourable in Europe and general availability of credit is not under unneeded pressure from the regulator. In terms of hotel management, in Russia there are only a limited number of management schemes available, such as management contracts with operators or franchising agreements with own management. By comparison, in Europe, in addition to these routes, other options are widely available such as lease contracts, leasing plus franchising, and AGOP guarantees. Obviously, the tax and duties policy when operating in Russia still also remains a pretty annoying issue as well as the visa requirements for leisure and business travellers.”

How would you describe your clients or investors from Russia over the past few years? Are they HNWIs, which regions do they focus on, what influences their investment decisions?

“I would venture to suggest that they seek exposure to the balanced risk/return profile between established European markets and fast-growing emerging opportunities in Russia, other CIS economies and the Baltic states, as well as diversification across private equity high-growth capital strategy for SMEs in consumer-driven industries, materials, high-tech and industrials. When looking to include low-risk hospitality real estate investments they are more and more looking for mixed-use components to provide stable returns with value-added upside potential.”

You have sold a number of hotels in the Russian hospitality market. How does this fit with VIYM’s overall strategy?

“In December 2016, we exited one of our projects in the Russia-focused part of our portfolio and closed a deal for the sale of a 100% stake in Regional Hotel Chain (RHC) to Vladimir Evtushenkov’s Sistema. The assets sold included Courtyard by Marriott Paveletskaya in Moscow, Holiday Inn Express in Voronezh and seven hotels run by Park Inn in Astrakhan, Izhevsk, Kazan, Novosibirsk, Sochi, Volgograd and Yaroslavl.

We still have a number of hotel assets in Russia. One example is the 5-star Four Seasons Hotel in St. Petersburg, which is one of the company’s most iconic and unique projects. Also, works are currently in progress on the restoration of the historic former Nikolsky Market site in the heart of St. Petersburg. The completion of the project is planned for summer 2018 when a new multifunctional complex comprising mid-range and affordable hotel properties (a 3* hotel and a hostel) are due to open, operated under global hotel brands such as Holiday Inn Express and Meininger.”

Do you have plans to invest in alternative accommodation, such as serviced apartments? Do you believe this sector promises high returns?

“We are exploring the serviced apartments market for our hotel projects across Europe. Earlier this year, VIYM presented the Holsboer Residences apartment complex in Davos and Gloriettes Residences in Vienna at the Property Investor & Homebuyer Show 2017, a leading property exhibition held in London.”

You have been investing in different hospitality assets in Russia and abroad, from hostels to upscale luxury hotels. When you make an investment, what locations and property types do you usually consider?

“The ones that you can reasonably expect to make above-average returns on. We try to source properties that are under-managed or under-capitalized, that have significant upside potential, larger footprints and scope for additional development such as residential components. This gives us the opportunity to apply our value-added strategy and tailor-made approach to objects that are adjusted to particular markets and locations.”

What is your opinion on new project financing in Russia? It seems that banks have non-performing properties on their balance sheets, and are not keen on financing new hospitality projects.

“Unfortunately, if we look at the prospects for development of the Russian hotel industry in terms of availability of financing, it quickly becomes clear that today’s macroeconomic situation is rather difficult. Although the cost of building a three-star or a five-star hotel in the regions (or even in Moscow) is significantly lower than in comparable locations elsewhere in the world, the cost of loan financing practically negates this advantage. That means the resources you stand to save on construction when building a new hotel in essence just flow into another part of the budget, i.e. the financing costs. This situation is gradually improving and recently we have been able to attract debt financing for our Nikolskye Ryady project in St. Petersburg on relatively favourable terms from a leading Russian bank, but there a lot needs to be improved to make new developments more appealing to investors. At the same time, banks are not active in selling their underperforming hotel assets and, in our experience, offer these assets with only a slight discount on pre-crisis prices. Along with the gradual improvement in the debt financing terms, this trend prompts us to believe that banks are much more optimistic about the prospects for hotel segment growth than for the office market.”

What is your vision for the hospitality market in Russia over the next few years?

“We have been involved in the hotel industry in Russia for the past 15 years and, of course, we believe in its potential. The Olympic Games in Sochi and the 2018 World Cup to some extent stimulated a surge of interest in the industry, but from a professional investor point of view, we cannot simply rely on football or the Olympics.

One of the factors that should be taken into account is the increased tourist flow to St. Petersburg. Russia’s “Northern capital” has been recognised as Europe’s Leading Destination for a second year running by the World Travel Awards. We see an increase in tourist flow from North America, and naturally, great interest from Chinese and South-East Asian markets. Therefore, we believe the demand for hotel infrastructure will remain. We also see an increase in domestic tourism, which in turn has a positive impact on the development of the hotel industry in the regions.”