Money Growing: A City of Rest

However the largest share till now has been made up of Soviet holiday homes with a low level of service. The resort, which everyone positions as a holiday spot for people with more money than average, catastrophically does not have any high quality hotels, analysts consider.

Visitors expect good service

According to GVA Sawyer, the hotel fund in Sochi is about 8 rooms per 1,000 tourists, and in terms of high-class hotels, does not exceed 0.3 rooms per 1,000 tourists. This is a rather low figure for an actively developing city, says Evelina Pavlovskskaya, vice-president of consulting at GVA Sawyer.

There are only about 10 4-5-star hotels in the market (a total of 1258 rooms). These include Grand Hotel SPA Rodina, Chernomorye Sanatorium, Chebotarev Hotel, Odisseya Sanatorium, Prestige Hotel, Radisson SAS Lazurnaya Peak Hotel, Radisson SAS Lazurnaya, Radisson SAS Park Hotel, Zapolyarye VIP village, and Marins Park Hotel. Since 2002 the volume of supply in this sector has grown by 18%, say analysts at GVA Sawyer. "The supply of high quality hotels is not capable of satisfying demand during high season," notes Ilya Volodko, general director of Macon Realty Group.

"The tourist infrastructure of Sochi was formed last century when the city was considered a place for mass and inexpensive relaxation," says Elena Ristavaara, director of consulting at Colliers International. According to her, the majority of "accommodation" was built in the Soviet era with a low level of service.

In Sochi hotels independently establish the price for rooms. "In Grand Hotel SPA Rodina a single room costs 866 euros, and a double costs 475 euros," Danil Zarubin, head of investments in real estate at Finam Management gives as an example. In his opinion, in the future, Sochi will develop exclusively as an expensive resort. “In Russia Sochi will become the only international class resort, and the Olympics will really help this," considers Zarubin.

Stars in the future

According to Macon Realty Group, this year in Sochi only one new hotel complex opened: Gazprom opened the first phase of a mountain-tourist center in Krasnaya Polyana – the 4-star Grand Hotel Polyana with 124 rooms. As announced by GVA Sawyer, Gazprom is going to build two more hotels (with 180 and 300 rooms) by 2010, though their class is not certain yet.

Kurort is building Sochi-City multipurpose complex on place of the former Chaika hotel in the city centre. A 5-star Chaika hotel with 224 rooms has been stipulated. The complex should be completed in 2010.

In the central part of Sochi the new building of the Zvyozdny hotel is being built. The building will have 11 floors and there will be a spa complex with three pools. Once construction has been completed, which is planned for the second quarter of 2009, Zvyozdny will be a 4-star hotel. According to the regional administration, the new Zvyozdny Hotel will be able to hold 570 people. The cost of the new construction and reconstruction has been estimated at $24 million by the regional administration, which has financed the project with the attraction of foreign investment.

OAO Krasnaya Polyana plans to put the second phase of its Gornaya Karusel sports-tourist complex into operation in December this year. The complex is located in the Esto-Sadok settlement of the Adlersky area in Sochi. According to the deputy general director of the company Evgeny Krivov, by 2011 the complex will also have completed accommodation for tourists. "The designing of the hotel, residential blocks, clubs and other infrastructure is currently being conducted," he says. According to Krivov, by 2012 the volume of investments in the project may reach 38-40 billion rubles.

Yuzhnaya construction and communication company intends to open the Esto-Sadok tourist complex in the Krasnaya Polyana area by the end of 2008. The company has informed us that the complex is practically ready. Since the start of construction the project has undergone changes. Besides a hotel with 102 rooms, there will be eateries, health and entertainment blocks, administrative and housekeeping buildings and a car show room and mountain-ski equipment hire shop.

This year several other developers have also introduced new projects to the market. Sistema Gals has completed the preparatory works for the Kamelia resort complex (being realized together with Saraya). The press-service of the company has said the complex will include apartments, a congress hall, underground parking, indoor and outdoor pools, a fitness center and a 5-star hotel with 200 rooms. It also plans to have its own mooring for yachts. "The 5-star hotel will be located in an architecturally-unique 100-meter tower. When you look at he tower from different directions its silhouette constantly changes," says a representative of Sistema Gals. According to the company, the prospective volume of investments in the project will exceed $350 million. Kamelia is planned to open in 2011.

Obyedinennaya Promyshlennaya Korporatsiya (OPK) (Incorporated Industrial Corporation) has announced plans to invest 150 million euros in the construction of an elite hotel and residential complex in the place of the Primorskaya Hotel. According to Dmitry Morochenko, a PR expert of the company, OPK will begin development of the project in November. Construction is planned to begin in 2010 and be completed in 2012-2013. OPK will construct a new luxury class hotel with 150-200 rooms in place of the Primorskaya but will reproduce the historical facade of the existing hotel. There will also be a multi-storey residential complex with 200 apartments. It is presumed that an international operator will manage the complex.

"According to our estimations, this year in Sochi almost 135,000-150,000 sq.m of hotels will be constructed. But the main building boom is expected in 2009-2010," predicts Zarubin.

An office with a view

In recent years in Sochi another segment besides tourism has started to actively to develop and that is business tourism. To save the time of businessmen, developers have started to include office centers within the structure of hotels under construction. Demand is growing in the city for both types of real estate: in the opinion of analysts, in Sochi there are not only insufficient good quality hotels, but also a lack of good offices.

According to GVA Sawyer, the total amount of office premises in Sochi on the market stands at 57,449 sq.m. In the opinion of the Moscow company, class A office premises are represented by one business center, the Pyat Kolets (Five Rings) (5,449 sq.m). There is about 19,000 sq.m of class B premises and approximately 33,000 sq.m of class C premises. According to Macon Realty Group, in 2008 in Sochi the Gorky Center was put into operation (total area – 3,356 sq.m, total office space 2,900 sq.m).

"The office real estate market in Sochi is characterized by a deficit of quality supply and a low level of vacant space. After the announcement of Sochi winning the bid to be the city for the Olympic Games the market has noticeably quickened, investment activity in the city has grown, and large development companies have started to enter the market," analysts at GVA Sawyer note.

In the opinion of Alexei Kudryavtsev, head of the analytical service at MIAN Real Estate Agency, demand for office real estate in Sochi is mainly concentrated in the class B+, B- and A segments and is formed by the "visitors" of companies who taking part in projects for the preparation of the Olympics. Therefore, Kudryavtsev explains, office and multipurpose centers under construction are aimed at these high-class segments although there is no precise classification of offices in Sochi yet. To make money, office premises are positioned by proprietors as class A though in practice they not match it. According to MIAN, the sale price of class B offices per sq.m reaches 120,000 rubles, and for class A can be 250,000 rubles.

By the end of the year the class A Alexandria shopping and business center (17,000 sq.m, 13,800 sq.m of which will be shops and 2,500 sq.m will be offices) will open. According to a representative of Optima-Invest, one of the investors in the project, initial investments in the project are estimated at 600 million rubles.

Kurort has announced the construction of the class A Sochi-City business center (79,300 sq.m, offices totalling 23,300 sq.m). The office premises will be placed in a separate 14-storey building of the business center.

Gras is building a 24-storey business complex in place of the former Sputnik cinema (42,170 sq.m, 20,000 sq.m of offices). They promise to open a new, modern cinema with 550 seats in the business center by the same name as the former cinema.

Yumako has announced that is going to demolish the Moskva hotel and construct the Sochi-Plaza center in its place (class A, 95,100 sq.m, offices – 22,500 sq.m). The completion ate has been preliminary planned for 2010. However the company could not even give a date for the demolition of the Moskva.

Investment group Pokrov has already started moving inhabitants from a shabby building where it plans to build the Pokrov Plaza multipurpose complex (16,200 sq.m, of which offices will total 6,680 sq.m). According to the development department of Pokrov Group they intend to invest $50 million in the project and complete it in 2011

No place for trade to develop

While the hotel and office real estate markets of Sochi have shown a revival, the retail segment continues to remain outside the interests of large developers.

"At present in the city there is no quality shopping center. Although there is need not only for expensive shopping and entertainment complexes that focus on consumers with high levels of income, but also for shops for people with average salaries," notes Volodko. Macon Realty Group name only four large operating retail premises: these are TsUM, Kolizei, Noviy Vek shopping and entertainment complex and Pyat Kolets. Analysts note that the quality of service is very low.

According to GVA Sawyer, the total area of shopping premises in Sochi (together with the Adlersky and Khostinsky areas) is 105,100 sq.m. At the same time analysts note the extremely poor quality of shopping areas. The ratio of shops to the population, according to their information, remains at a very low level: 51 sq.m per 1,000 inhabitants.

In the near future analysts predict that there will be new trading areas only within the limits of already mentioned multipurpose complexes: Alexandria (10,000 sq.m of retail area) and Sochi-City (41,700 sq.m).

Only OPK has announced the future development of the retail segment. As has informed Morochenko, OPK plans to spend 50 million euros on replacing the old TsUM building with "one of the most advanced shopping and entertainment complexes in the Krasnodar region, which will include restaurants, cafes, cinemas, games halls, rest zones and children’s zones." The total area of the new TsUM and underground parking will be almost 22,000 sq.m. According to Morochenko, the company is currently developing the concept of the project. Construction s planned to start in 2010, and end in 2013.

Zarubin hopes that the Olympics will affect and help develop the retail segment. "Due to an increase in consumer demand already existing premises as well as new retail real estate premises will be more popular", - he considers.

Warehouses for Olympians

The Olympics has also affected the development of another segment of the market - warehouse real estate, which until recently there was practically none in Sochi.

Base Element has announced plans to construct a logistics center on 6 hectares, 3 km from Imeretinskaya lowland for Olympic requirements. According to the press-media, it will be able to process up to 3 million tones of non-metal materials a year and will supply 50 per cent of Sochi’s constructions. The project is expected to be completed by the end of 2009, beginning of 2010. The company refused to comment on the details of the project.

In the opinion of analysts, according to a poll carried out by Vedomosti, the construction of warehouse premises in Sochi has become complicated due to geographical factors: it is difficult to build a large warehouses in a mountain district. There will also only be high demand for logistical parks before the Olympics, but afterwards the premises will no longer be in demand, Zarubin adds.

Outlawed land

The weak activity of developers and the "sagging" of market segments are also explained by other reasons by analysts. For example, the absence of an approved town-planning scheme of Sochi.

"In Sochi there are no precise rules for the allocation of land plots for construction. And the land is some of the most expensive in Russia. There is no real working scheme of allocating land plots for Olympic requirements. Construction is connected with high risks, and therefore the realization of large projects is mainly carried out by large national developers who have administrative resources," Kudryavtsev says.

Local developers note that there is a catastrophic shortage of good land plots in the city for construction. "Offers that satisfy investors rarely come on the Sochi market. And for every offer there are many buyers. Accordingly, the price of a "very good packaged" land plot (i.e. a land plot that has been transferred to the necessary category and has all the necessary approvals) is growing faster than the market," says Nikolai Krainov, president of Pokrov.

In opinion of analysts that participated in Vedomosti’s survey, uncertainty in the land market, overestimated prices for real estate premises and the frequent poor quality of new projects have forced many developers to wait. To say which projects will become a reality and which will simply remain on paper, will not be possible in less than a year or two, Zarubin says.