Russia’s Hotel Projects and Investments

Sven Osmers

Head of KPMG’s Real Estate practice Russia & CIS

April 10, 2014

2© 2014 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Сontent

Overview of existing hotel supply and pipeline projects in Russia

Overview of major hotel brands activity in the Russian market

Hotel investments in Russia

Overview of existing hotelsupply and pipeline projects in Russia

4© 2014 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0

5 000

10 000

15 000

20 000

25 000

30 000

35 000

40 000

45 000

50 000

55 000

60 000

2875

56500

Room inventory beginning of the year Room inventory yearly increase

Branded Hotel Rooms stock in Russia (2001 – 2018)

Source: KPMG analysis

20 TIMES IN

CREASE

5© 2014 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Branded hotels in major cities

Source: KPMG analysis

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

0 5,000 10,000 15,000 20,000 25,000

Future room inventory

10,83421,845

Existing room inventoryFuture room inventory

Po

pu

lati

on

, th

ou

san

d

6,911

St. Petersburg

8,861 (28% )

11,06921,845 ( 97% )

Moscow

12,828

3,0425,056 (66% )

Sochi 4,168

Regions

6© 2014 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Major regional Hotel markets

Source: KPMG analysis

606

345

Rostov-on-Don

1,336

Irkutsk

208486

Kaliningrad705

Kazan

1,310

Lipetsk581

Omsk

168523

Samara918

Belgorod

155 527

Krasnodar

163 1,022

Nizhniy Novgorod

2201,168

Tyumen495

Voronezh

815

Ekaterinburg1,342

200

400

600

800

1,000

1,200

1,400

1,600

0 200 400 600 800 1,000 1,200 1,400

Kaluga

140

578

1,142

Novosibirsk

188763

Pop

ulat

ion,

thou

sand

Future room inventory

1,310606

Existing room inventoryFuture room inventory

Overview of major hotel brands activity in the Russian market

8© 2014 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Projection of Branded Hotels

Rezidor

Marriott

Hilton

Sokos

Wyndham

Lotte

Fairmont Raffles

Four Seasons

Other

- 2,000 4,000 6,000 8,000 10,000 12,000 14,000

Existing Future

Rooms inventory leader by 2018

CARLSON REZIDOR HOTEL GROUP

Hotel network leader by 2018

ACCOR

Rooms

Accor

Rezidor

Hilton

InterContinental

Marriott

Starwood

Hyatt

Wyndham

Kempinski

Golden Tulip

Lotte

Sokos

Rocco Forte

Vienna Intl

Other

- 10 20 30 40 50 60 70

Existing Future

Hotels

Source: KPMG analysis

9© 2014 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Luxury; 31.0%

Upscale; 35.3%

Mid-scale; 33.7%

Segmentation: Top performers Vs. Russian regions

Moscow, St.-Petersburg, Sochi

33%

35%

32%

Luxury; 25.8%

Upscale; 28.7%

Mid-scale; 45.6%

Russian regions

22%

25%

53%

Source: KPMG analysis Q1 2014By 2018

10© 2014 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Investing in branded hotels: factors to consider

■ New development/ reconstruction

■ Optimal room inventory (from 120 up to 300 rooms)

■ Average room size (mid-scale hotel: 22-28 m²)

■ Gross build area per room (mid-scale hotel: 40-67 m²)

CONCEPT

LOCATION

■ Population of the city more than

300 000 people.

■ Cities (regions) with existing properties under same brand

(specifically recreational properties)

■ Location that makes business sense for

the Hotel property

■ Visibility & accessibility

Hotel investments in Russia

12© 2014 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Decision

To brand or not to brand?

Efficient business processes

BRANDED

Easier access to financing and easier exit

ADR and Occupancy increase due to brand recognition

Operational risks decrease

More control over operations

INDEPENDENT

Less CAPEX

Lower marketing and reservation costs

Flexibility in pricing and positioning

THOROUGH FEASIBILITY ANALYSIS

13© 2014 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Level of influence on efficiency of the hotel project

Summarised expenses

Influence on the project efficiency

■ HBU

■ Market analysis

■ Concept development

■ ROI analysis

■ State permits■ Design

■ Shell and core construction

■ FF&E ■ Staff recruiting

■ Training

■ Set up of business processes

■ Start of sales & marketing activities

■ Hotel management decision

FEASIBILITY ANALYSIS

PROJECT DOCUMENTATION CONSTRUCTION

PREOPENING AND COMMISSIONING

Source: KPMG analysis

14© 2014 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Drivers for hotel development in Russia

Number of Keys

FIFA World Cup 2018:

19,000 Hotel Rooms

Industries Development:

Automotive cluster in Kaluga

Sochi Olympics 2014:

12,000 Hotel Rooms

Destination marketing:

Major goal a/p Federal program

Infrastructure development: Special Touristic Economic Zones

15© 2014 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Hotel projects financing sources

Financing sources

Debt financing Co-investment

Strategic funds Portfolio fundsGovernmental

banksPrivate banks

30-40%D/V

Rarely used

Majority of hotel projects

Mainlyrefinance

Very few exist

In Russia

Source: KPMG analysis

16© 2014 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Debt financing: what banks look at?

Feasibility

study/

Business

plan

Agreement

with reputable

operator

(interna-

tional/

domestic)

Prior experience

Legal due diligence/ state permits/ project

documentation

17© 2014 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

How we can help

■ Feasibility analysis and Valuation

■ Market analysis

■ HBU analysis of land plots

■ Concept development

■ Assistance in the raising of finance and investment planning

■ Operator selection and negotiating operating agreements

■ Analysis of Hotel operations and performance, recommendations to optimise performance

Advisory services provided by KPMG for the hospitality and leisure industry

Thank you

Sven OsmersDirectorHead of Real Estate Russia & CIS KPMG

Tel: +7 (495) 937 4477Fax: + 7(495) 937 4400 E-mail: SvenOsmers@kpmg.ru

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2014 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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