Market Report: St. Petersburg, Russia

Based on data provided by STR Global, the Saint Petersburg hotel market experienced a 10.4% increase in RevPAR for the first eight months of 2011, compared to the same period in 2010. This growth was largely driven by further recovery in demand for hotel accommodation in the city. Encouragingly, movement in average rates across the Russian hotel market turned positive from May 2011.

Saint Petersburg was once the Imperial capital of Russia. It is now Russia’s second largest city and has a population of approximately 4.8 million. The city is an important port which is located at the mouth of the river Neva, where it meets the Gulf of Finland and, beyond that, the Baltic Sea. Saint Petersburg is a major Russian trade gateway and a financial and industrial centre specialising in the oil and gas trade. Other industries with a significant presence in the city include shipbuilding and shipping, wholesale and retail, processing, transportation and telecommunications.

Saint Petersburg is the leading leisure destination in Russia. The historic and well-preserved architecture, art and culture attract approximately five million visitors to the city each year (2010).  Visitor numbers have increased significantly over the past couple of years — in 2006 the city welcomed four million visitors. Parts of the city centre are on the UNESCO World Heritage List and there are over 200 museums, 80 theatres, 60 concert halls and several world class ballet schools within the city limits. Among the best known attractions are the Mariinsky Opera and Ballet, Imperial Palace and the Hermitage, which is reputedly the gallery with the greatest number of exhibits in the world.
 
The city is very well connected by air, rail (both domestic and international) and water — a large proportion of the leisure visitors arrive by ferry or cruise ship during the summer. A new high-speed rail connection between Saint Petersburg and Helsinki was opened in December 2010. Over 30,000 passengers used the service during the first month of operation. The service reduced the travel time to just three and a half hours.

The total number of passengers travelling through Pulkovo Airport between January and August 2011 was approximately 6.4 million, an increase of 13% compared with the same period in 2010. Approximately 43% of those were international. There was a particularly large increase in passenger numbers from the CIS countries (45% compared to the same period in 2010). A €340 million renovation and expansion plan is currently underway and aims to position Pulkovo as the largest airport in the Baltic Region, addressing issues relating to access, infrastructure and entry requirements.

In June 2011 the Government of Saint Petersburg launched a new programme aimed at developing the city into a year-round tourist destination. The city benefits from high levels of leisure visitors during the summer months but marketing and investment is needed to bring in more visitors during the winter. The city has already stepped up marketing efforts and participates in international travel fairs. The priority now will be on events and conventions and developing overall infrastructure — particularly for those arriving by ship. Tourism is expected to benefit from the development of the Sea Passenger Terminal and the completion of the new Pulkovo Airport terminal.
 
Trends in Hotel Market Performance
Following the volatility in utility prices experienced in 2008 and 2009, the Russian economy was severely affected. This naturally affected the Saint Petersburg market where RevPAR dropped by 31.1% between 2008 and 2009.

Demand for hotel accommodation in Saint Petersburg is predominantly leisure driven and during the summer months, hotels experience very high demand levels. There are organised tour groups visiting the city between May and August arriving either by air, sea or increasingly from Finland by rail. The tour organisers are increasingly well versed on hotel pricing and leisure group rates are dropping as a result.

Corporate demand in Saint Petersburg represents approximately 40% of the total demand and hence the losses experienced, particularly among the production line accounts, resulted in tough rate negotiations in 2009-10.

The meeting and conference segments remain underdeveloped in Saint Petersburg — despite good facilities at the conference centre operated by the federal government on the outskirts of the city and at the Corinthia Hotel in the city centre. A brand new convention facility at the Expo Forum, with 40,000m² of exhibition space, is planned to open in 2013 in the south of the city.

Currently the city hosts just one large annual event. The International Economic Forum takes place in June and attracts over 5,000 participants from Russia, the CIS and beyond. The three-day event brings other related events into the city, helping to boost both hotel occupancy and average room rates in June. It is understood that the new development programme published in June 2011 focuses on developing the conference and event segment and the initiative is warmly welcomed by the tourism industry in the city.
 
Five new, branded hotels opened in 2010 with a total of approximately 1,500 rooms. The additional supply had a negative impact on the recovery of market-wide RevPAR performance by increasing pressure on quoted rates. 

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As a direct result of the increased pressure on room rates, Saint Petersburg hotels recorded an overall drop in average room rates of 14.2% in 2009 and 7.3% in 2010, as illustrated by the data provided by STR Global. Occupancy performance improved by 7.2 percentage points in 2010. This increase in demand was driven by increased passenger ferry traffic to Saint Petersburg —the new ferry connection between Stockholm and Saint Petersburg provided a particular boost. The peak in average rates in November 2010 was mainly a correction from the strong decrease in rates experienced in 2009.  

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The following table illustrates year-to-date August 2010 and 2011 results as provided by STR Global.

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Based on our conversations with hoteliers in the market, demand is returning at a reasonable rate, despite the recent further increases in hotel room supply. The full impact of the additional supply that entered the market last year has particularly benefited tour groups in 2011 which benefit from the supply increases and resulting discounted room rates.
Despite the challenging trading conditions, the occupancy performance increased by 3.2% between January and August 2011 compared with the same period in 2010.
Although the cumulative market-wide average room rate (ARR) has grown throughout the first eight months of 2011, the market performed particularly well in May and June 2011 (18.1% and 10% increases in May and June respectively).

Trends in Hotel Supply
Based on Government of Saint Petersburg data, there are currently around 644 hotels with a total of 28,300 guest rooms in the city.  The majority of guest rooms in star-rated hotels (313 properties and 25,500 rooms) are fairly equally divided between the three- and four-star segments (37% and 30% of the total number of rooms respectively) and some 9% of the rooms are of a five-star standard.

Significant new supply has entered the market during the past few years. In 2009 35 new properties entered the market, providing 1,400 rooms. In 2010, there were 22 new properties adding a further 1,200. Most of these increases have been in the full-service and five-star segments which have seen average rates diluted further.

According to the Government of Saint Petersburg, another ten properties with a total of 1,600 rooms are scheduled to open this year — two of which are already open. The planned new Hilton Hotel surprised many and opened as a Crowne Plaza in May this year, barely a month after the long-awaited opening of the first W-hotel in Russia.

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The five-star market is expected to need a couple of years to absorb the new supply that has entered the sector in 2010 and 2011. However, there appear to be opportunities to significantly expand the lower mid-market segment — especially with the addition of new internationally branded properties.

In terms of other planned new supply, there is a shortlist of hotel companies selected for a site at the airport’s new Terminal 3. There is also a rumoured new Lotte-hotel project in town, but no further details have yet been released and both of these projects remain somewhat speculative.

Outlook
The recovery in hotel performance is widely expected to come from the corporate segments. The moderate growth in demand volume is expected to remain steady in 2012, helping the market to absorb the recent new supply. The public commitment from the Government to market Saint Petersburg as a year-round leisure destination and to enhance local infrastructure is expected to have a positive impact on tourism and the hotel trading environment.

With increased supply and ongoing price sensitivity, hotels are generally not aiming to increase rates next year. Many have adopted a careful approach to discounted corporate rates, striking a balance between optimising hotel occupancy whilst trying not to cannibalise negotiated rates. 
 
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Notes to Editors
Founded in 1935, Christie + Co is the leading firm of surveyors, valuers, consultants and agents specialising in the hospitality, leisure, retail and care sectors. Currently employing close to 300 professional and specialist staff, it has 14 offices throughout the UK — with valuation, agency, investment and consultancy teams focused on its key sectors. Christie + Co’s international operations are based in Barcelona, Berlin, Dubai, Frankfurt, Helsinki, Lyon, Marseille, Munich, Paris, Rennes and Vienna.

STR Global provides clients — including hotel operators, developers, financiers and analysts — access to hotel research with regular and custom reports covering over 45,000 hotels. STR Global provides a single source of global hotel performance data, offering concise and thorough industry research worldwide and STR Global tracks a variety of profitability, pipeline, census and forecast information covering all aspects of the industry.

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