Renovation of Hotels Dating from Soviet Times

Commercial Real Estate North-West, №7 (52) / july 2012
July 1, 2012
The renovation of old hotels may dramatically increase their yield for the owners, while all shortcomings of such projects can be easily surmounted under a correct approach.

Agreat part of Russia’s hospitality stock (including in both capitals) is still represented by morally antiquated hotels built in Soviet times. Only in Moscow such hotels account for not less than 50% of the entire accommodation stock, in expert estimation. The situation is certainly much worse in regional cities which cannot offer to their guests any other accommodation option, except for hotels dating back to the days of the USSR.

At the same time, experts point to the shortage of quality three-star hotels and to high demand for such lodging facilities. Meanwhile relatively moderate investments could turn some outmoded hotels built under Soviets into decent accommodation facilities in the mid-price range with quality room service.

Several factors suggest that the Soviet hotels renovation market has a good outlook. Given an optimal approach to refurbishment and correct positioning, such a project can pay for itself during 6-8 years compared to 11–13 years for a new hotel construction. Only a large development company or hotel chain may afford the erection of a new hotel with a large accommodation stock, whereas for most Russian investors reconstruction remains the only viable option of entering this market. The usual cost of renovation ranges around 85 % of investments needed to build a new hotel, though the outlay can be as low as 30 % of new construction depending on the project. Renovation costs average $ 45, 000 -60,000 (excluding VAT) per room including fit-out, furnishings and equipment. Furthermore the renovation can be done stepwise and no temporary suspension of stable income-generating business is needed. To minimize the losses, a hotel can be refurbished gradually, during several years on a floor by floor basis. In this case only a floor under repair is blocked and the flows of guests are redistributed. When done in parallel with rebranding, renovation positively impacts the property status, since a refurbished hotel can be integrated into an international network and its management company can be replaced.

Surely the renovation of hotels built under Soviets is fraught with some difficulties. For instance, it’s not always possible to comply with some technical characteristics that are an indispensable part of modern-day hotels. Structurally, almost all Soviet hotels are desperately obsolete (small rooms, ineffective arrangement of public spaces, antiquated engineering systems, low ceilings, etc.). This imposes certain restrictions and complicates the work of the designers, however, with the right approach not critically.

The second negative outcome closely related to the first one is that even upon renovation a hotel dating to Soviet times can seldom have a higher than 3-star status. But there is no need for upgrade at all costs. A widely known fact is that budget-class hotels are more flexible and resilient in a swiftly changing market environment and pay off faster than its higher class competitors. Demand for relatively inexpensive lodging facilities remains stably high at any time, so it’s not a secret that quality three-star hotels often bring a higher return to their owners, than upscale ones. While positioning your hotel in the economy-class segment, you may well offer your guests quality service at the level of a four-star hotel by including extra functions, such as a good restaurant, a night club, a bowling alley, a billiard parlor and conference rooms. I am certain that your guests will duly appreciate these innovations and come again. In St. Petersburg many hotels have already passed through renovation of some kind. Thus Pribaltiyskaya Hotel bought in 2006 by the Norwegian holding company Wenaas became part of the Park Inn international network. Its room stock, conference facilities and restaurants were totally renewed (30 new conference rooms of different capacity were opened along with a large convention center seating 1,500 visitors). A similar fate befell another hotel integrated into the Park Inn Pulkovskaya chain, where the conference rooms were completely refurbished, new restaurants were opened, the lobbies, bars and the business centers were revamped.

The level of services and room stock quality were markedly improved at Moskva and Oktyabrskaya hotels that were awarded the four-star status starting in 2008.

Among the recently announced projects, a profound retrofit awaits the Neva Hotel at 17 Tchaikovsky Street. The hotel’s total area will increase from 7,500 to 12,000 sqm, thanks to one more attic floor. Yuzhnaya Hotel must reopen this year after a major reconstruction at 2A Rasstannaya Street, bldg. 1. The hotel’s room stock will be radically renewed. Two- and six-bed rooms without amenities, reminiscent of a student hostel, will be replaced by 115 more comfortable double rooms and five standard single rooms.

The other days, our company is completing partial renovation of the room stock at Azimut Hotel (former Sovetskaya). The client was Azimut Hotels management company which bought the second largest in St. Petersburg 1,000-room hotel Sovetskaya at 43/1 Lermontovsky prospekt back in 2006. Since those days gradual renovation (without any suspension of operations) has transformed this antiquated edifice of the late 1960s into a contemporary business-class hotel. Based on a contract with AZIMUT Hotels, STEP has renovated the hotels’ four floors covering the total area of 4,400 sqm. The owner plans to follow through with further reconstruction.

Besides the AZIMUT chain, the owners of Oktyabrskaya Hotel at the Moscow Train Station and Saint Petersburg Hotel on Pirogovskaya Embankment have already announced their renovation plans. The condition of these hotels no longer matches their prime location and in order to attract more guests and boost profitability, the room stock has to be totally revamped.

As can be seen on these examples, to date developers have been attracted only by fortunately located hotels (mainly in the historical center); meanwhile many potential candidates for reconstruction are located in the peripheral in the so-called depressive environment. At any rate, a pledge of success for any hotel is competent management of the renovation process. This will allow both a fair return on investments within reasonable times and forming of the loyal clientele.