Hotel business in Ukraine: opportunities and risks

Everything you need to know when opening a hotel in Ukraine: the ratio of supply and demand by room stock, the attractiveness of the hotel market for local and foreign investors, the development of the hospitality industry in Ukraine — what hotel formats are waiting for us ahead. An interview with Arthur Lupashko, the founder of the Ribas hotel chain, was published in the online edition of STAY.MANAGEMENT on August 17, 2021:https://stay.management/index.php/experts/63-interview/634-ribas 

Supply and demand for the hotel rooms in Ukraine

It is possible to highlight Kiev, Lviv, Odessa and 5-6 resort locations, where a stable supply and demand ratio is monitored by the occupancy of hotel rooms. All other cities are in short supply of quality hotels at an adequate price.

And even in these cities there is a gap in the amount of rooms between different categories of hotels. For example, the market is full of hotels with 2*/2+* and hotels with high quality service and prices. But there are not enough mid-price segment hotels on the market 3*/4* . Domestic and foreign tourists have a demand for a level like that.

"Analyzing the work of our facilities, we see that it is in the segment of the average price level that we get the most optimal indicators - less ROI, higher ADR, better RevPAR, denser occupancy. That means that the expectations of consumers and the hotel economy ideally converge precisely in the segment of hotels of the middle price level. There are few offers on the Ukrainian market, but we at Ribas Hotels Group are focused on the development of hotels 3*/4* namely, to design, build, launch and manage", says Artur Lupashko.

Based on research in recent years, the middle class population has increased in Ukraine. But the hotel market does not keep up with this growth. Just look at how many people fly on vacation to Turkey, Montenegro, Croatia and Egypt, where the average check for two is $ 1,500 a week. Even surveys were conducted that showed that Ukrainian citizens would be happy to rest in their homeland, but due to the lack of sanatoriums and hotels with a ratio of good service and adequate prices, they choose foreign resorts.

This idea is confirmed by personal observations. For example, the hotel "Verkholy", which is located in a not very well-known resort in the Poltava region. There is gorgeous nature, clean air and silence around. The average price per night at the hotel is $ 300. It's not cheap for this region. And yet, despite the unpopular destination and the high price, there is a full occupancy, and you can book a room only a couple of months in advance. And all because the guests have a rest in a hotel with a good price-quality ratio. And the Ukrainian tourist is ready to pay for it.

If your hotel falls under demand, then there will be no problems with loading rooms and the ADR indicator. Millions of Ukrainians go on vacation at least once a year. So why don't they spend the money with you?

Hotel business formats with growth prospects

"The suburban segment is a promising industry. And this is one of our specializations, which we love with all our hearts" A.Lupashko shares his emotions.

Another segment that needs to be developed is business are city hotels. There are not enough chain hotels and international operators in Ukraine that successfully operate around the world.

"We at Ribas are doing everything for the development of this segment and are working on accreditation for the management of facilities under international brands”" says Arthur.

In Kiev, Odessa and Lviv there are foreign networks that can be counted on fingers. There is a shortage of modern business hotels in the country. And this, by the way, is a promising direction. Many foreign guests come to Ukraine for business, conferences, business meetings, etc. Such people, as a rule, already have a guest experience, expectations from the hotel, a corporate rider. And, coming to any city in Ukraine, a guest has a headache, because what the business tourism market offers is not exactly what a foreign client is used to.

Also in the cities of Ukraine with a population of up to 500,000 people there are hotels with conference rooms that require either a complete rebranding or rebuilding.

“What we have on the market does not reach the level of even 3*. Basically, these are tinted Soviet hotels or guest houses that originated from business centers. For a foreign guest, such a picture will be remembered for a long time and will discourage the desire to return to our country”" says Artur Lupashko.

The ratio of foreign guests in Ukrainian hotels

According to statistics, 15% of the total tourism is allocated to foreign guest traffic. This is a good indicator, given the pandemic and other limiting factors.

The hotel business in Ukraine can increase this percentage due to the development of transport infrastructure. As soon as there is an opportunity to fly / arrive in the location, the number of guests and the demand for hotel rooms immediately increases. A real example: look at how much the influx of foreign tourists has increased with the opening of visa-free travel, new rules of entry into the country, the development of resort locations, etc. It works, just look at the workload of the rooms, where half of the tourists are foreigners.

Of course, the pandemic has affected domestic and foreign tourism, but it is worth noting that there is still interest in Ukraine from Germany, Italy, France, etc.European cities.

With the increase in the number of foreign tourists, hotels need to have to be prepared for the service in accordance with different national characteristics.

Artur Lupashko gives an example: “When the air restrictions with Arab countries were lifted, we received an explosive number of Arab guests in our hotels in Odessa, Lviv and Bukovel. To date, Ribas hotels have a 40-50% occupancy rate of just such guests. And our task was to adapt to the current situation as quickly as possible. Because Arab guests occupy most of the traffic and we are interested in them liking everything and they coming back to us".

Realities and prospects of the hotel management companies market in Ukraine

The global market of hotel management companies can be divided into 3 development models.

The American model, which is dominated by franchise hotels. They are pragmatic people who value time. They delegate and also use proven working schemes and management solutions. That's why Americans love brands and franchises so much.

The European model, where there is a 50/50 ratio of network management and independent hotels. Europe is famous for its ancestral estates and country complexes. Most often, such facilities have family management: there are a couple of people who do everything for the functioning of hotels. But for large objects, this format is not effective. And then the management company is already connected.

An Asian model dominated by chains and direct hotel management. This hotel market is in many ways similar to the Russian and Ukrainian. As a rule, the ownership and management of the hotel is with one person. And modern management culture is only at the stage of its inception. In such a situation, the main thing is to continue to develop and not be afraid to trust the management company.

“There are very few management companies that combine consistency, adequate and relevant standards, focus on financial efficiency and at the same time take into account the interests of both the owner and the investor. And somewhere you can even understand the owner of the object, who is afraid to transfer control to a dubious company. But there are us on the market, our colleagues from the Reikartz Hotel Group and the Premier hotel chain, who develop the culture of management companies in Ukraine and show that it is normal, safe and profitable. I also understand that the development of this topic in our country falls on the shoulders of Ribas Hotels Group. And we took this challenge with all responsibility back in 2014. For 7 years now, our team has been conducting educational projects, speaking at public events, leading a useful youtube channel for potential partners — all this is our contribution to the development of the hotel management market in Ukraine”, — A.Lupashko stated his thoughts.

Investment attractiveness of hotel business in Ukraine

The development of the hotel industry in Ukraine is lagging behind for several years, for example, in comparison with the Russian real estate market. This suggests that new hotel formats are still ahead of us — this pleases, because there is a huge potential hidden in this.

Analyzing the demand for residential real estate, you can see a decreasing curve. As a result, there is competition among developers and the margin of developers decreases. Accordingly, profit can be obtained only from the sale of store rooms and Parking. Therefore, developers used to focus more on office space, but during the pandemic and the remote format of work — this type of real estate also becomes unattractive.

“For a long time we have been receiving a lot of requests like “we have built/unfinished a business center, take it under management”. We are taking some objects into work and trying to convert them into apartment hotels. But we refuse to respond to some appeals, since we do not see financial benefits in the work”, — says Artur Lupashko.

At the moment, there are no apartment hotels in Ukraine that successfully operate under the management of several owners. There are few examples on the market where an apartment hotel is owned by one person, and the object itself is created according to the classical scheme, in which the rooms are adapted to a new style, including they are equipped with a kitchen for long stay accommodation. Artur predicts that “very soon the Ukrainian hotel business will be replenished with new apartment facilities. And our team at Ribas Hotels Group is diligently studying this topic, including we appeal to foreign colleagues who have successful experience in implementing such projects”.

3 components that are guaranteed to raise the demand for apartment hotels in Ukraine:

• small room size;
• optimal balance of commercial use and management areas;
• effective management software.

Description of the portrait of an investor in a hotel product

In most cases, relationships arise with internal investors who are willing to invest from 2 to 10 million dollars. Naturally, potential partners have doubts, because the amount is not small and they want to invest money effectively in order to get a stable profit. Most often we get questions: "Invest in Ukrainian or foreign real estate?" and "Can we still build a business center?". As you can see, the choice is between hotel and office real estate. But still, customers stay at hotels due to low demand for offices. The question of the country of investment disappears after we show the results of the analysis of the profitability of different types of real estate in Europe. We have 7-8% profitability in the domestic market of Ukraine, and 3-4% in the foreign market. Guess what the investor chooses.

Today at Ribas we cooperate with 2 types of clients. The first is independent businessmen, the second is representatives of large companies.

70% of investors come with their project and its development plan.

Only 30% have a more conscious approach to investing. Usually they have not yet decided on a specific project and are considering options for investing money in the portfolio of Ribas Hotels Group.

The current situation with personnel in the hotel industry of Ukraine

Currently, there is a shortage of line personnel in Ukraine and around the world. Visa-free regime opens up new working opportunities for young people. They leave for Europe, Turkey, Egypt, Greece, because there are supposedly different working conditions. In addition, teachers at universities are pushing students to work in other countries, arguing that the student will get foreign experience. But the problem is that young people don't come back. And more adults choose to work in Poland, where there are no problems with language and differences in mentality.

The owners of hotels in Ukraine are upset by this picture, because today working conditions and wages in the country are almost the same as abroad. Moreover, in Odessa, Kiev and Kharkiv, we have become on a level with Bulgaria and Poland. For example, the remuneration of our maids in Ribas hotels is 700-1000 dollars per month, while the salary of housekeepers in Karlovy Vary, where we are launching new facilities, is much less. But for some reason, this does not detain our youth within the walls of their native home.

Ribas Hotels Group considers candidates even without work experience. Because we have staff training and an algorithm for introducing an employee into the hotel workflow. We are ready to develop our staff, so we invest a lot of money in educational courses. We also grow our own top management, which grows out of the linear positions of our hotels.

"I'll tell you a secret: we track down and hunt the best employees from other networks. And what pleases me is that people willingly come to us. According to one hotelier who has been with us recently, it's not about the best salary, but the fact that we are innovative, modern and promising" shared Artur Lupashko.

Relations between hoteliers and the state, and what is the "industry hotel community in Ukraine"

Previously, the hotel industry community was raw and unfinished. They were mostly local associations, small organizations, aspiring businessmen who did not have a systematic approach and long-term goals. Therefore, if there was "lobbying", it was rather at the local level, where the state separately communicated with the leaders of such "professional" groups.

About a year ago, a new industry association Ukrainian Hotels & Resorts Association (UHRA) was created in Ukraine, which includes 10 hotel management companies. And in this short time, the Association has already successfully implemented several state initiatives.

"Ribas Hotels Group is one of the founding companies of UHRA and we are glad that we can be useful for the hospitality industry in Ukraine. By the way, the Association is related to the reduction of VAT for hotels up to 7%.

Unfortunately, there is a lack of expert resources in the country to ensure the hotel industry association. And our goal is to promote the development of information publications that help to reveal the Ukrainian hotel market and share experience with colleagues”" Artur Lupashko summed up.

More details about Hotel consulting from Ribas Hotels Group. More details at the link.

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