Financial Times: Belarus’s unlikely hotel boom. EnterInvest comments the situation

It is no secret that many multinational companies avoid Belarus because of the unfavourable reputation of the country’s authorities and western sanctions against them. But this, apparently, does not apply to the hotel business. Several big name hotel brands are springing up around the capital, Minsk.

France’s Accor Group became the latest recently when a four-star Novotel hotel ceremonially began construction in the city. Accor will manage the hotel under contract. It will be built by Lada OMC Engineering, a local construction company, for an estimated $47m, with 70 per cent of the finance coming from the local operation of Sberbank, the big Russian bank.

Accor has a similar deal with Lada OMC for a mid-market Mercure hotel, planned to be built for an estimated $21m.

And there’s much more. A five-star Kempinski hotel is under round-the-clock construction in the very centre of Minsk, for an estimated €57m. The developer in this case is Real Estate, controlled by Yuri Chizh, a well-known Belarusian businessman blacklisted by the EU on suspicion of providing financial support to the authorities.

A five-star Hilton should soon appear just two hundred metres from the office of the Belarusian president in an estimated $60m investment by Blue Eagle Private Equity of the Netherlands. And Hyatt International is set to manage a five-star Hyatt Regency hotel, also under construction by a local developer. The investment is estimated at up to $100m.

In all cases, the hotel brands themselves are taking no financial risk – all have signed management agreements promising to deliver the same standards of service in these hotels as they offer in their properties around the world. It is the development and construction companies that are taking a punt on the Belarusian market, backed by their own cash or by bank loans.

And it’s not just big international brands that are piling in. Several more hotels will be constructed and operated by Belarusian investors. There are also projects under way by companies from countries that are traditional foreign partners of the Belarusian government, such as China, Iran and Russia.

According to EnterInvest, a Minsk-based investment company, up to 25 new hotels are set to open in the city in 2014, with a total number of rooms estimated at more than 5,000. This includes seven five-star and 10 four-star hotels. Today, Minsk’s hotels have a sum total of about 2,000 rooms.

One spur for the boom is the World Ice Hockey Championship, due to take place in 2014 and expected to attract a big influx of tourists. There is also a chronic shortage of hotel rooms in the city,with correspondingly high prices. “Consequently, some development companies expect a quick return of their investments,” says Oleg Andreev, managing director of investment banking at EnterInvest.

He says there is also an element of compulsion by the Belarusian state for local companies to develop the city’s infrastructure ahead of the ice hockey tournament, including the construction of hotels. And he is doubtful of the return for investors.

“The World Championship in Belarus will be held just after the Winter Olympic Games in Sochi, which will bring together the strongest Olympic hockey teams. So the flow of people who wish to see fairly similar action in May 2014 in Belarus, where many players may not feature because of participation in national leagues, will be substantially smaller.”

He says this, along with the tainted image of Belarus abroad, may negatively affect the number of visitors to Minsk’s hotels, especially the four-star and five-star ones.

He also predicts that the price of hotel rooms in Minsk will fall sharply after the World Championship, especially if all the hotels whose construction has been announced are actually put into operation. “This will negatively affect profits and, consequently, the ability to repay loans for the construction of the hotels. It is important to remember that 90 per sent of investments in hotels construction are financed by loans” Andreev said.

So, are we witnessing a boom that could turn into a crisis?

Financial Times