Substantiation of economic efficiency of strategic investment project in hospitality: achieving balance of the interests between investor and the city of st. Petersburg

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FEDERAL STATE EDUCATIONAL INSTITUTION

OF HIGHER EDUCATION

NATIONAL RESEARCH UNIVERSITY

HIGHER SCHOOL OF ECONOMICS

Saint Petersburg School of Economics and Management

Department of Management

Substantiation of economic efficiency of strategic investment project in hospitality: achieving balance of the interests between investor and the city of st. Petersburg

Educational programme`Management'

Ivanova Irina

Saint Petersburg 2020



Over the past years, the hotel business of St. Petersburg has begun to grow rapidly due to growing demand from million of tourists who come to the city each year. The federal and city's government policy is focused on the further development of the St.Petersburg hospitality sphere. As forecasted by sphere experts, hotels with business facilities will be in demand after the pandemic caused by coronavirus will be over, hence it is rational to focus the main investment flows in that niche of the business. The aim of the paper is the construction of a practically applied financial model which demonstrates economic efficiency of the strategic investment project in the hospitality sphere to investors and to St. Petersburg. Analysis of the situation on the market via in-depth interviewing and statistics data analysis with their further application in projected modeling were used to achieve the aim. Internationally unified and applicable two main methodologies such as standards named Unified System of Accounts in Lodging Industry (USALI) and rules to estimate investment project efficiency which are developed byUnited Nations Industrial Development Organization (UNIDO) were used. The results comply with government Laws and Resolutionc which regulate the relationship between investors and the city's administration and might be applied for the further practical use. hotel business economic

Keywords: hospitality, business hotel, strategic investment project, strategic investor, USALI standards, UNIDO methodology, government.



Table of contents

• Introduction
• 1. Theoretical foundation
• 1.1 Current and expected hotel lodging industry situation in St. Petersburg
• 1.2 Current and expected investment situation in St. Petersburg
• 1.3 Legislative framework
• 1.4 USALI standards
• 1.5 UNIDO methodology
• 1.6 Hotel management
• 1.7 Hotel operators
• 2. Analysis of the situation
• 2.1 Study rationale of the object
• 2.2 Research program
• 2.3 Formal interviews with open questions
• 2.3.1 Description of interview procedures
• 2.3.2 Interview analyses
• 2.4 Secondary data analysis
• 2.5 Risk matrix construction
• 3. Project section
• 3.1 Project technical and economic specification
• 3.1.1 Room fund
• 3.1.2 Food and beverage (F&B) complex
• 3.1.3 Business infrastructure
• 3.1.4 Hotel territories to rent
• 3.1.5 Services for telecommunication
• 3.2 Project financial and economic justification
• 3.2.1 Room fund budget
• 3.2.2 F&B complex budget
• 3.2.3 Business infrastructure and hotel territories to rent budget
• 3.2.4 Services for telecommunication budget
• 3.3 Project consolidated budget
• 3.4 Project investment planning
• 3.5 Project economic efficiency substantiation
• 3.5.1 Economic efficiency from investors' perspectives
• 3.5.2 Economic efficiency from St.Petersburg perspectives
• Conclusion
• Reference list
• Appendices
• Appendix 1
• Appendix 2
• Appendix 3
• Appendix 4
• Appendix 5
• Appendix 6
• Appendix 7
• Appendix 8
• Appendix 9
• Appendix 10


Introduction

A tendency to increase investment activity is characteristic for both Russian and St. Petersburg economy. In addition, commercial real estate is considered as the most effective investment object, because the value of commercial real estate continues to increase even despite inflationary leaps, thus not only keeping the value of invested capital, but also multiplying it. Over the past few years, the hotel lodging sector has begun to grow rapidly in the hospitality service market of St. Petersburg due to growing demand from tourists.

St. Petersburg is one of the key destinations for the world tourism. Million of people come to the city every year with leisure, business, educational and other purposes. The federal and local government politics are focused on the further enhancement of the city's hospitality sphere, attracting more tourists to the city. For instance, in the Resolution № 936 “On the state program of St. Petersburg "Development of the tourism sector in St. Petersburg"” (dated 14.11.2017 with amendments dated 11.04.2019) there are several tasks towards tourist image of St. Petersburg development such as assistance in the construction of tourist infrastructure facilities, expanding the list of services provided and creating intensive measures for the stable development of tourism in St. Petersburg, especially business one and effective integration of the St. Petersburg brand in the economic and sociocultural space within the country and abroad. Hence, as St. Petersburg is tourist attractiveness developing, it becomes more beneficial market for many tourist services including the lodging industry. This sphere produces a large amount of profit for business' owners and investors, in addition, it helps to develop and increase its tourist image to St. Petersburg as well as ameliorate its residents' lives. However, in 2020 the sphere is much damaged by the current pandemic conditions; consequently, modern analysis of the market is needed. Significance and relevance of the bachelor's thesis is the further developing of the hotel business by many-sided analysis of the situation on the market, taking into account this conjuncture.

The basis for the bachelor's thesis are statistical data, normative documents, financial statements of hotels, works of Russian and foreign authors, placed in educational and periodical litarature sources.

The previous researches towards the similar topic about the development tourism in Russia in general and in St. Petersburg in particular, focusing on pre-crisis data, have no analysis of the hospitality sphere of the city in terms of the coronavirus spread, this fact narrows down their relevance and as a result their practical application. This scientific work differs from the already existing ones by including the analysis of sphere development in terms of pandemic to widen its practical use.

The object of the bachelor's thesis is the development of the strategic investment project of the hotel which is required by St. Petersburg demand. The economic efficiency of this strategic investment project in the hotel lodging industry in the framework of benefits contributed by potential project for the both sides of the private-public relationship such as an investor and St. Petersburg is the subject of the study.

The purpose of the bachelor's thesis is the construction of a practically applied strategic financial model which allows demonstrating economic efficiency of the investment project in the hospitality sphere to an investor and to the city.

The task set of the scientific work to achieve the objectives is the following:

1) to analyze the market situation according hotel business and investments in St. Petersburg and the legislative regulation mechanisms;

2) to consider the impact of virus spread on the analyzed markets;

3) to find out what type of a hotel is demanded by the city;

4) to study the algorithm of implementation a new hotel object in the market niche via financial standards and methodologies;

5) to construct a financial model to substantiate the economic efficiency of the strategic investment project to the investor and to the city.

Consequently, to complete mentioned above tasks and conduct an accurate study several types of methods are applied. For example, in-depth interviews with hospitality sphere experts such as consulting company, representative of Investment Committee of St. Petersburg, the investor and the representative of a hotel operator were conducted. Secondary data analyses will be accomplished as well. Moreover, modeling method will be applied to forecast the potential profit of a project realized. The combination of these methods allows getting the full understand of the hotel niche for the future implementaion of knowledge learnt.

The results of the study have multi-beneficial usage for potential investors to control their capital effectively, for the administration of St. Petersburg to enhance the tourist status of the city, rise live standards of the city's residents and get additional profit in monetary terms and for “West Concept” LLC specialists to analyze the sphere they work with and support the demand of the customers.

The practical significance of the bachelor's thesis is related to the wide manifested development of the hospitality sphere in St. Petersburg and its continuous enhancement after the pandemic which is forecasted by specialists (McKinsey, 2020). Moreover, the results of the study will contribute to the rational and effective investment flow and growth of the city's authority on the world-wide arena.

The structure of the bachelor's thesis includes five parts: introduction, theoretical foundations, analysis of the situation section, project section and conclusion. The theoretical foundations consist of analysis of the hospitality market and investment climate, the consideration of legislative base; in addition there are the analyses of tools for the hotel performance as USALI (Unified standards of accounting in lodging industry) and for the estimation of investment projects as methodology by UNIDO (United Nations Industrial Development Organization), as well as hotel management. The second section of main body includes the experts' opinions about current situations and the statistics analyses of the demanded hotel, also possible risks of the strategic investment project are considered. The final section of the main body consists of detailed development of the investment project and the substantiation its economic efficiency to the investor and to St. Petersburg. The total number of pages, except the appendicies, is equal to 47. The reference list consists of 35 literary resources and 8 normative acts.



1. Theoretical foundation

1.1 Current and expected hotel lodging industry situation in St. Petersburg

Pulkovo, the airport of St. Petersburg city, reported that there were 19.6 mln people served in 2019. It is the new record of the passanger flow and it is 8.1% higher than the results of the previous year, 2018. Comparing domestic and international traffic, there was increase by 9.8% and 5.3 % respectively. (Colliers International, 2020)

According to the Tourism Development Committee estimation, 10.4 mln Russian and foreign tourists visited St. Petersburg in 2019. It is almost 27% more than in 2018. Domestic tourist flow picked up by 1.2 mln guests and became equal to 5.5 mln people. The number of foreign tourists grew by 1 mln people to reach 4.9 mln. (Colliers International, 2020)

These results are explained by several reasons. For instance, increase in tourist flow is primarily associated with the deferred demand of guests who did not come because of the World Cup which was held in 2018. Another reason influenced the number of people visited the city is implementation of electronic visas mode in St. Petersburg from the 1^st of October 2019. According to Colliers statistics (2020), 80 000 people attended the city via that option, mostly from such countries as Estonia, Latvia, France. The third reason for the growth of tourist flow is the increase of city image in the international arena. St. Petersburg won the World Travel Awards in the nominations “The Leading Direction of Urban Tourism in Europe” and “The Leading Cultural Urban Direction of the World” in 2019.

The substantial increase of the tourist flow had a positive effect on the occupancy rate of St. Petersburg hotels in 2019. This year was one of the most succesful periods of time for the city hospitality industry. According to statistics of audit company Colliers International (2020), the average market occupancy of the hotels rised by 4%, reaching 69%. Approximately the same data is presented by JLL company (2020), its experts evaluated the demand on the branded offer of St. Petersburg hotels as 68%. Consulting company IPG.Estate (2020) reported that hotel occupancy was 70% in 2019, showing the historical maximum.

The upward trend was noticed since June 2019, when hotels were occupied at 7-10% more than in the same period of the previous year. The most considerable increase was observed in three and five stars hotel segments, where occupancy rate increased by 10% and 6% respectively. (Colliers International, 2020)

In addition, IPG.Estate (2020) notes that the seasonality factor smoothed out in 2019. The spring-summer period showed consistently high occupancy rates, and this indicators in the autumn season also increased. The expansion of the demand season might be explained by climate changes.

Earlier experts predicted the growth of the hospitality sphere in city of

St. Petersburg will continue in 2020 because of developing of different services such as electronic visas and the “open skies” option. According to Smolny's statistics (2020), more than 112 000 electronic visas were issued within 4 months from the launch of simplified paperwork. The “open skies” option has been launched in Pulkovo since Janury 2020 and was adopted by various airline companies such as WizzAir, Ryanair, EasyJet, Volotea, Air Baltic, Fly One to expand the route network from St. Petersburg airport.

The expected significant increase in the tourist flow of St. Petersburg and the lack of quality hotel supply play an essential role for the launch of new lodging projects. Investors are most interested in objects for reconstruction with capacity of 70-100 rooms, located in central areas or near popular landmarks. According to analyzed data, about 80% of the hotels are located in reconstructed buildings, icluding such hotels as Grand Catherine Palace, State Counselor, Bagration and Art Deco Nevsky. Also investors purchased the existing hotels of four or five star level which was proved by the shown demand in 2019. The primary interest is hotels located in the historic city center of St. Petersburg and ones situated on the highway from Pulkovo Airport to the city center.

Specialists suppose that a significant competitive advantage will be the variety of services and accommodation formats offered, as well as the presence of an international brand in the project in the hospitality niche.

However, current epidemiological situation caused by Coronavirus and COVID-19 has dramatically stopped tourism development and lodging industry particularly.

Almost whole tourist flow slumped, as revealed by statistics. The border closing with countries caused to city hotels losses amount to 48.1 mln rubles daily. Moreover, Oxford Economics experts suppose that the amount of damage may increase by two or even three times, if the spread of Coronavirus does not be stopped in the next months.

Many St. Petersburg museums, theatres and other landmarks have closed until the situation will stabilize. One of the main events of the year such as the 24^th SPIEF (St.Petersburg International Economic Forum) traditionally held in the city is cancelled. This circumstance impacts on the hotel accomodation, which will not be in demand.

The experts of the sphere shared their opinions about the cancelation of SPIEF caused by Coronavirus. For instance, Marina Usenko, partner of Cushman&Wakefield Hotel and Tourism Department, supposes that there will be huge losses of hospitality sphere because accomodation in new high-quality expensive hotels, due to coming of high level delegations, will not be provided. These four days of the event form up to 20% of annual luxury hotel revenue, which will be lost in 2020.

Another specialist Natalya Ermashova, who is the director of public relations in five stars level Astoria Hotel, agrees with that point of view, adding that all services which hotel provides such as restaurants, car rentals, conference rooms will not be in demand and room prices will go down as well.

The third expert is Evgenia Tuchkova, Deputy Regional Director in Colliers International, who thinks that the abolition of the SPIEF will significantly affect the operational performance of St. Petersburg hotels undoubtedly. Hotels of the highest price category will suffer the most. The most popular hotels during the SPIEF days do not even sell rooms to the wide market, because delegates, representatives and participants of the forum provide their occupancy. This year such hotels will incur losses.

To show the situation in figures, the cost of standard rooms for the SPIEF days is usually at least 3-4 times higher than for other days. The number of rooms of five-star hotels, which traditionally host participants of the event, is almost 2500 rooms. According to estimations, the damage from the cancellation of SPIEF for the most popular luxurious hotels will be at least 60-65 mln rubles per day. The assessment is based on analytics for previous years.

Another important event which is postponed is the football contest EURO-2020. This will affect the budget of St.Petesburg hospitality considerably as well.

A wide discussion of the current situation with representatives of the hotel business and administration of St. Petersburg city is needed to make a decision about whole range of measures.

1.2 Current and expected investment situation in St. Petersburg

An increase in demand for the purchase of objects suitable for reconstruction or re-profiling for a hotel function is observed, based on results of the end of 2019. The number of transactions with hotels over the past year increased from 4 to 6, but the average transaction amount was small, reached about 396.8 mln rubles, which is half as much as in 2018. As a result, the total investment in the hotel segment amounted to 2.418 mln rubles in 2019, going down by 25%. (Colliers International, 2020)

Investment activity in the hotel real estate sector was expected to continue increasing. The prerequisites for this are the potential for a significant growth in St. Petersburg tourist flow, backed up by such drivers as the introduction of electronic visas and the “open skies” regime in Pulkovo.

But the emergency situation caused by the spreaded virus imposed restrictions on investment decisions as well. The value of the ruble against the world currency fell sharply, many businesses started to fall in debt hole. Hence the further considerations of actions to recover the ecomony are needed.

1.3 Legislative framework

The hospitality industry itself and the investment actions especially strategic ones are strictly regulated by the governmantal laws and orders.

One of them is “General Plan of St. Petersburg” (2019). It is the main urban development document of the city which defines the areas' functional use. According to that plan an investor is able to find the possible terrirory for the hotel building or asks permission to amend the Genral Plan from the city administration.

The second document is resolution “On the Rules for Land Use and Development of St. Petersburg” (2020), which helps to choose the area for the hotel construction, based on land size permitted to use and limit parameters of possible construction or reconstruction of capital construction facilities.

Another included law is the Law “On Strategic Investment Projects, Strategic Investors and Strategic Partners of St. Petersburg” №742-136 (2008). It gives difinition of strategic investment project via the help of explanation of investment project and investor terms. Investment project means a measures set carried out on the territory of St. Petersburg, which main goal is to create and (or) reconstruct various types of property, combined technological and (or) functional communication, in order to profit and (or) achieve another benefits, and which implementation is realized by the investor. Investor is an individual or a legal entity, also a foreign business one, that develops and implements an investment project using its own and (or) attracted investments. By combination of the previous two terms the definition of strategic investment project is quiet clear. The word “strategic” underlines the long-lasting period of relationship occurance.

Also the following requirements for an investment project for assigning it the status of a strategic investment project are presented in this document. The results of implementation of the investment project must guarantee:

1) improvement of socio-economic and (or) cultural conditions of lives of St. Petersburg residents;

2) the effectiveness for the investor and for the city, based on the payback period (PbP), profitability, volume of tax revenues to the federal budget and (or) budget of St. Petersburg;

3) ensuring the total investment in the development of tourism, including creating hotels is at least 1 billion rubles;

4) import substitution measures by use of goods whose country of origin is the Russian Federation during implementation;

5) the investor and (or) affiliates must be experienced in implementation of investment projects with the worth of not less than 1 billion rubles for the hotel lodging industry for a period not exceeding ten years preceding the application submission on assignment of strategic status to an investment project (Legislative Assembly of St. Petersburg, 2017).

All above mentioned requirements must be fullfilled simultaneously.

The next document is the Order № 109 "On Amendments to the Order of the Committee on Investments of St. Petersburg dated 08.12.2017 № 357” (2019), where minimum set of documents needed to be attached to the application on assignment of strategic status to an investment project are presented. Minimum requirements for the preliminary feasibility study and for the composition and content of the financial model of the investment project are included in the Order as well. Moreover, there are requirements to the hotel operator such as not less than 3 years experience of providing hospitality services and the hotel rooms managed by the operator must be equal to 300 rooms or more.

One more legislative regulation is the Resolution № 668 “On the Establishment of Criteria for Compliance With the Requirements Established in Subparagraphs 1 and 2 of Paragraph 1 of Article 3 of the Law of St. Petersburg dated 19.11.2008 № 742-136 "On strategic investment projects, strategic investors and strategic partners Petersburg"” (2017). It provides formula to calculate the criteria such as net present value (NPV), particularly for the budget of St. Petersburg, discount rate (r) via weight average cost of capital (WACC), cost of equity (R_e) via Capital Asset Pricing Model (CAPM) and beta-coefficient (в) which characterizes the systematic risk influences the investment project.

The last document of legislative framework is the Resolution № 158 “On Approval of the Regulation on the Classification of Hotels” (2019). There are required characteristics of the hotel accomodation of a particular comfort (from “no stars” to “5 stars” level) in the Resolution. They consist of determination of construction and design specifications that must be kept to ensure facilities, comfort level and quality of services (Ministry of economic development, 2019).

1.4 USALI standards

A hotel is the combination of various departments such as A&G (Administrative and general), S&M (Sales and marketing), Rooms, F&B (Food and beverage) and others with their own income and/or expense items. To work efficiently the CEO of the hotel has to be aware of work performance of each separated part of the organization, taking decisions timely and accurately. The set of accounting standards named USALI (The Uniform System of Accounts for the Lodging Industry) helps to measure all KPI (key performance indicators which helps to achieve the strategical and operational goals) performed by hotel divisions, and as a result to conrol the whole system precisely. The main principle of the set of accounting standards is indicating the final results of the hotel despite the time limit. The reports might be made daily or for the particular period of time. It helps to make decisions on time. Moreover, as these standars are unified, it allows comparing the performance of different hotel chains, analyzing the competitors' work efficiency (Lamelas, Filipe, 2012).

It is important to mention, that USALI is management accounting standards. It doen not suggest how to manage the hotel operations, it depicts the final results what the company has to reach. All the inside managerial processes are established by the CEO.

The first time the offer of unified accounting standards was made by AHLA (American Hotel and Lodging Assosiation) in 1926 in the USA. Nowadays it is their copyright owner.

Only large hotel operators and hotel chains were able to apply the USALI in their work until 1961 (Venegas, 2011). Then many middle and small sized hospitality companies requested to adapt the standards for them as well. The AHMA (American Hotel and Motel Assosiation) entrusted to do the adaptation to the NAA (National Assosiation of Accountants. Since then new versions of USALI are released for all types of hotels.

In current time there is the 11^th edition of the USALI, which was published in 2014. The official authors of the modern edition are Financial Management Committee of the American Hotel and Lodging Assosiation (AHLA) and Hospitality Financial and Technology Professionals (HFTP). The new version was created because of several reasons such as IT sphere development, new terminology and notations, globalization, increasing importance of Green Buildings Standards, which require projects to be resourse-efficient and environmentally responsible from the beginning to the end of buildings' life-cycle, cluster services and emergence of new performance indicators (Schmidgall, 2014).

To make it more clear, there are more than thousand indicators in USALI standards, but only indicators needed to cover the actions performed by a particular hotel are presented in USALI reports.. The fundamental of them are Rev (Room revenue), Occ (Occupancy), ADR (Average daily room rate), RevPAR (Revenue per available room per day) (HANYC, HFTP, AHLA. 2014), RevPAC (Revenue per available customer) and GOPPAR (Gross operating profit per available room).



1.5 UNIDO methodology

In 1978 UNIDO (United Nations Industrial Development Organization) developed the investment projects' evaluation guidelines which are accepted by experts worldwide. It is suitable for any business sphere in general, and for the hotel lodging industry particularly.

According to UNIDO methodology each investment project has three phases: pre-investment, investment/implementation and operational one (Behrens, Hawranek, 1991). Each phase consists of several other stages.

The first one includes exploration of opportunities at the enterprise and the sector level, preliminary feasibility study where alternatives are taken into account and investment decision.

The second phase consists mainly of consulting and project activities such as legal and financial basis establishment for the implementation, detailed project plan, contract signings, including participation in tenders and other negotiations, land acquidition, construction of a building, installation of equipment, staff recruitment, pre-production marketing and finally putting the enterprise into operations. It is needed to highlight that in the pre-investment stage quality indicators of the potential project are more important than time limit factors, while in the implementation phase significance of time horizons rises because of the need to keep the project in the framework of forecast data gained in the feasibility study. (Margolin, Bystryakov, 2001)

The last third stage is exploitation of the enterprise. This phase has short and long term limitations. As for the short-term ones the technology and equipment implementation problems may arise, as well as the lack of high-qualified employees. The long term issues are incorrect chosen strategy and inaccuracy in budget revenues streams (Dasgupta, 1972).

The methods chosen to evaluate the investment project are determined by dynamics of income and expenses during the periods and are subdivided into dynamic and static. Dynamic methods are based on the discount concept, while static ones are based on accounting estimates (Gineviиius, Zubrecovas, 2009).

The first group of dynamic methods includes indicators such as net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), profitability index (PI) and dynamic payback period (DPbP). The indicators such as average rate of return (ARR) and payback period (PbP) refers to static methods (Jasch, 2015).

The main advantage of using this investment evaluation guideline is that UNIDO takes into account not only commercial efficiency, but social one such as results in related economy sectors and social and environmental effects.

The UNIDO (2014) also presents the requirements to the business plan and recommends the following structure to it:

1) resume;

2) description of sector in general and the company in particular;

3) description of products and (or) services;

4) sales and marketing of products and (or) services;

5) production plan;

6) organizational plan;

7) financial plan;

8) estimation of effectiveness of the project;

9) risks and guarantees of the company.

1.6 Hotel management

The hotel can be controlled in two ways: the investor might manage the hotel by his(her)self or attract a specialized management company (Bezrukova, Yankevich, 2012).

Self-management is more common in hotels with 10-25 rooms and the minimum need in additional services, more often via franchising (Mastura, Siti, 2011).

The larger number of rooms is in the hotel, the more complicated the management processes are (Gover, 1997). Hence, to cope with it, the investor might hire a hotel management company, which provides professional knowledge.

There are the following types of hotel management operators:

a) An operator with a hotel brand.

This operator provides not only hotel control services, but a hotel brand, within which the management takes place. There are pros and cons of such type of control.

Advantages:

1) an existing client base, the ability to integrate a loyalty system;

2) unified requirements to IT infrastructure, standards of service and staff training;

3) many years of experience;

4) approving by investment committees and obtaining loans for the implementation of the project;

5) recognizable design of hotel chains, sales and service.

Disadvantages:

1) a need to pay the brand royalties, which significantly reduce income;

2) adaptation of the project to brand standards requires significant investment in the implementation;

3) usually 10 years contract duration or more;

4) stringent contractual terms and serious consequences of termination. (Rather, Sharma, 2016).

b) Independent operator.

A hotel management company of that kind deals with the operational administration of a hotel without involving a hotel brand at all or with their own brand, less recognizable in the world than giant hotel operators' ones.

Advantages, comparing to a famous brand operator:

1) flexibility of the operator during the contract discussion;

2) open financial history and reporting to the owner (investor);

3) usually 5 years contract duration;

4) the amount of management fees is significantly lower. (Rather, Sharma, 2016).

A hotel management company is responsible for the full range of business activities in a hotel such as departments managing, controlling financial indicators, recruiting and training the staff and selling services provided by the hotel.

The contract period usually is 5-25 years. It depends on the type of hotel management company as it was mentioned above. Moreover, for upper-class hotels contracts last longer (on average 20-30 years) compared to middle-class hotels (10-15 years). Also there are contracts that are concluded for an indefinite period of time. Management fees range from 2.5 to 3.5% of gross profit. In addition, often there is a bonus of 8-12% of gross profit, which is implemented to motivate the management company to make the indicators of a hotel performance raise. (Karhunen, 2008)

The investor is able to conclude a lease and management agreement with the operator or only a management agreement.

1.7 Hotel operators

Analyzing Russian hospitality market from the hotel operator perspective, it might be concluded that the concentration of international operators is higher than Russian ones (PWC, 2019). In 2019 there were 1.8 times more hotels operating under international brands than national hotels (197 and 108 respectively). (Jo, 2019)

In addition, international brands provide services which meet high standards mainly of four and five stars hotels, 33% and 52% of the total supply, while the major niche of Russian hotels are the middle segment, 50% of supply are the 3 stars level hotels.

Considering the supply in St. Petersburg, the concentration of international hotel operators was expected to decrease by 3% from 21% to 18% in 2020 (Jo, 2019). This should have happened due to the opening new hotels on Russian territory. The largest market share, approximately 80%, is destribute among five operators: Accor Hotels, Hilton Worldwide, Marriott International, Radisson Hotel Group and InterContinental Hotels Group. Moreover, it was predicted that Radisson would increase its propotion from 18% to 23%, becoming the most influental on the market.

The most common Russian national operators in St. Petersburg are Azimut Hotels and Cronwell Hotels & Resorts.

Before launching of the project, all operators' specifics should be taken into the account to make a decision about more suitable strategy for the future hotel (Bystrov, 2005).

The following section of the bachelor's thesis includes the analysis of the situation, based on theoretical foundations with their further application.



2. Analysis of the situation

2.1 Study rationale of the object

The object of the bachelor's thesis the development of the strategic investment project of the hotel which is required by St. Petersburg demand in the framework of benefits contributed by potential project for the both sides of private-public relationship. The project has to be profitable for the investor and has direct and/or collateral use for the residents of St. Petersburg.

There are several reasons to study that object. Before the disease spread, the hospitality sector of St. Petersburg was developing by the authorities as well as other regions of the country. Government of the Russian Federation elaborated the Order №872-p “On approval of the Concept of the federal target program "Development of domestic and inbound tourism in the Russian Federation (2019-2025)” dated 5.03.2018, where the following problems, needed to be solved, are described:

1) slow pace of modernization and building of engineering infrastructure (for instance, energy and water supply networks, transport networks, treatment facilities and others) of individual regions comparing to the pace of general socio-economic development. This is the reason why private investment in the tourism sector is not attractive;

2) lagging of the level of tourist infrastructure development from the rate of tourist interest growth to the territory (insufficient or lack of tourist accommodation and leisure facilities, unsatisfactory condition of many tourist facilities, mismatch of road infrastructure on almost all highways of Russia with modern tourist needs);

3) absence of long-term credit instruments available to investors (for example, project financing) with interest rates that allow to pay back investments in objects of a tourist and recreation complex in terms beneficial to investors;

4) insufficient quality of service in all sectors of the tourism industry due to a lack of professional staff;

5) low intensity of promotion of Russia as an attractive destination for tourists.

All the points above from the federal Order prove the fact that the lodging industry of Russia does not meet all needed standards and the level of development is not enough to attract as many tourists as it could do. Hence, the sphere needed to be improved, also with the help of private investors. However, there are little options which may attract potential investors to the project, because the objects are not economically efficient for them. Conseqiently, this problem needed to be solved in the first turn.

Moreover, the modern conditions of development of tourist sector in Russia will be taken into the account, because the spread of the coronavirus changed a lot the existing way of realisation strategic investment project in hospitality sphere. The absence of any tourists, even the Russian one, imposes restrictions on development of the hotel niche. In addition, unpredictability of situation and reluctance of investors to spend their money on objects have their own impact, which is more exacerbated to the situation. The result of coronavirus spread might occur in freezing or stopping the construction of new hotels for a period of time. Hence, the further analysis and the consultations with the specialists from the sphere are needed.

The following subsection will describe the research program in details and the tools needed to realize it.

2.2 Research program

The research program consists of analysis stages and corellated to them tools and statistical data needed to solved the particular tasks of every analysis phase. For the convenience, the information about the research program is presented in a table format below.

Table 1

Research program

	Research stage	Tools
1	Evaluation of a potential of hospitality sphere of St. Petersburg, taking into account the current conditions	Secondary data analysis Formal interview with open questions with a consulting company
2	Estimation of a investments attracted to the hotel lodging industry, considering the current situation	Formal interview with open questions with an investor, who has experience in the sphere of hotels
3	Considering ways to overcome the consequences of crisis appeared in 2020	Formal interviews with open questions with the consulting company and a representative of a hotel operator
4	Analysis of the changes of hospitality market of St. Petersburg, understanding what hotels will be needed to the city based on their location, comfort level, facilities and room fund	Secondary data analysis Formal interviews with the consulting company, a representative of authority in Investment Committee, the investor
5	Determing the most appropriate contract between a private investor and administrative of St. Petersburg	Formal interviews with open quiestions with the representative of Investment Committee and the investor, comparing their points of view
6	Defining the preffered management method to operate the hotel	Formal interview with open questions with the investor
7	Choosing the most suitable hotel operator and negotiating the terms of cooperation	Secondary data analysis Formal interviews with open questions with the investor and the representative of a hotel operator
8	Review of key indicators to estimate and substantiate the economic efficiency of strategic investment project in hospitality sphere	Formal interviews with open questions with the representative of Investment Committee, the investor and the representative of a hotel operator
9	Determing the particular set of variables needed to build a pivot tables of financial model of the investment project in hotel lodging industry	Formal interviews with open quesitons with the investor and the representative of a hotel operator
10	The risk matrix construction	Secondary data analysis Formal interviews with open questions with the consulting company, the investor, representative of a hotel operator

Considering the research program table, it is seen that the most common methods for the analysis of the situation are secondary data analysis and formal interviews with open questions with experts of the hotel lodging industry. All mentioned respondents are representatives of different spheres of one field. This approach allows getting more proper information the subject of the study and as a result to make more accurate conclusions on every stage of the research program.

The next subsection includes the more detailed description of the conducted interviews with necessary derivations and generalizations.

2.3 Formal interviews with open questions

2.3.1 Description of interview procedures

To fully understand the researched topic, interview-method was chosen. It is rational for the current situation caused by coronavirus spread and professional field experts' opinions are the most reliable nowadays due to the lack of reliable specialized literature on that issue. However, the existing literary sources were analyzed as well, for instance released by PWC (2020).

The preparation of interviews included several stages such as selection of respondents who are professionals of the hospitality sphere, compiling a plan of inquirers with particular sequence of questions and their formulation in open forms, negotiating the time and place of the interviews, choosing the method of recording.

According to the type of persons interviewed, all of them are experts of a sphere they work. The first interviewed specialist was the representer of leading international top management consulting firm McKinsey who preferred to stay anonymous. The next interview was conducted with the representer of authority, the Investment Committee worker, who preferred to remain anonymous as well. One more interviewed person was the investor with the investment experience in hospitality sphere, Ivanov Vyacheslav. The last interview was given by the representer of Marriott International hotel operator, Kolesnik Mihail.

Every conversation was held individually. The procedure of the talk occurred once. The type of all interviews conducted in frameworks of that research was in-depth.

The conducted formal interviews were both introspective and projective. It allows collecting information, focusing on the current events and also getting opinions about the coming ones. Analytical aim was the reason to interview.

According to the method of communication, interviews were devided into personal and indirect ones, conducted via Skype program. It was a necessary measure due to the coronavirus spread and distance which did not allow holding a conversation face-to-face with a respondent who is a constant resident of Berlin, Germany.

The venues of talking were the workplaces and houses of respondents.

The answers were registered with the help of audio recording with the following transcription. Due to the first formulations of the questions were in Russian language for the convenience of the Russian speaking respondents, help of a professional interpreter was applied. The traslation into English language was checked by the professioanal, what confirmed that interpretation to another language was correct.

The interviewer reproduced the questions without any deviations from the formulations, and the respondents gave their answers in free form.

The questions were formulated basing on the methods applied in literary sources and secondary data analysis. All conducted interviews were structured with the particular set of questions to every interviewed person. For the future analysis it was decided to devide interviews into theme blocks, each of them has its own set of questions related to the theme. Before the interview every respondent was familiarized with the questions to answer.

In this bachelor's thesis the use of all data gathered during the interview processes was agreed with every expert individually. Also almost all the interviewed experts agreed to be named.

The full set of questions and respondents' answers are presented in Appendicies 1, 2, 3 and 4 of the bachelor's thesis.

2.3.2 Interview analyses

According to the research program, it is rational to consider changes and perspectives of hotel lodging industry and investment market in St. Petersburg nowadays. The specialist of consulting company McKinsey supposes that the future development of the spheres is hard to predict and estimate because they depend on many factors. For example, both spheres depend on overall economy recovery. The expert supposes that the recovery will depend on not only effectiveness of Russian economic policy with the government help, but on the world economic development and as well.

The McKinsey expert is sure that hospitality industry is waited to have the lowest speed of recovery than other sectors. The most common reasons for that are travel restrictions, discretionary character of travel spendings and the supply-side effect. Travelling rate is expected to reach its pre-crisis level not earlier than in 2023. The target audience of Russian hotels such as Chinese, Japanese, German and residents of West Europe are likely to decide to visit the nearest places instead of going abroad. Moreover, the extra costs will be required by hiring and training new employees because of high level of dismissals, as well as finding new suppliers, renting places etc., what might cause in its turn the deceleration of the recovery process.

The investor agrees with the consultant of McKinsey that the situation caused by pandemic is destructive for the whole economy, for the lodging industry particularly. The implemention of social and economic measures to prevent the spread of coronavirus reduced the demand on hotels almost by 97-98%, hence the recovery of the sphere will take a lot of time.

There two opposing trends in investment decisions occur nowadays: low prices for assets to increase the liquidity, what will cause many attractive solid investment opportunities, and uncertainty. People are not very positive about their economic future. It has an impication on financial markets, hence banks will not give as many loans as before the crisis. Taking business debt into account complicates the whole process of recovery.

For partly or even whole survival of the existing business there are three essenatial phases needed to be passed. Among them are crisis and return management and adaptation to the new rules. Crisis management includes also the liquidity regulations via the reduction of food and beverage spendings, service costs, impementation of tempopary unpaid leave programs for employees or salary cuts and deep negotiations with suppliers about timeframes, postponed payments and minimum purchase quantities, preservation of a part of the room fund. Changes in business model are also might be helpful in framework of survival in crisis. All mentioned measures depend on local legislation, especially changes in labor structure. The hotel operator adds that this will affect economy in a negatively anyway.

For sure, the current situation caused by pandemic will impact the whole hospitality market, transforming demand and tourists' expectations and preferences. The travelers' profile might be changed, focusing more on business trips, especially at first time. Moreover, more attention may be paid to the healthcare standards in rooms, lobbies and other inside public places of hotels. The expert of McKinsey supposes that market consolidation will changed as well. It means that large players of the sphere such as Accor Hotels, Hilton Worldwide, Marriott International, Radisson Hotel Group and InterContinental Hotels Group will be in a better position to survive the crisis because of a solid cash reserve and liquidity management, while mid-sized and small local chains might become bankrupts. Consequently, the market will consolidate with the large players emerging with a higher market share and a significantly reduced the total number of players in the market.

The main target audiences of St. Petersburg hotels were families and tourist groups. However, the trend started to change before the crisis and expecting to transfrom after it. There are two main ways of it: global tourism trends and trends specific to St. Petersburg. Millennialism and digitalization are related to the first group, they are strictly connected with digital ecosystems used in hospitality industry from Google Hotels to OTA (Online Travel Agencies). Large chains like Marriott are already partnering with OTA to negotiate better clauses and additional competitive advantages. The second group of trends includes development of business activity and e-visas introduction. Transferring St. Petersburg into the business center of Russia will increase the demand for business accommodation. Such kind of hotels has a promising future, but their requirements are different from the usual tourist ones. For instance, new infrastructure such as conference and meeting rooms, business centers. The online free e-visas implementation is likely to change the tourist profile of St. Petersburg as well, attracting more young people to the city, who are likely prefer hostels and AirBnB services for a cheaper stay. So, to stay competitive on a market, the hotels have to adjust their offering. For instance, opening newly branded properties that value design and a special guest experience.

The representative of Investment Committee of St. Petersburg also proves that there will be a demand for business hotels in the city. Planned shift of the Gazprom headquarter to Lakhta Center and, in addition, moving of Constitutional Court and other objects to St. Petesburg will significantly increase the business image of it. It is a result of Federal Government decisions. The location of potential hotel is determined by the commercial perspectives of land plot. The most beneficial places are between Saint Isaac's Cathedral, Moyka and Fontanka rivers and Church-on-spilled-blood. Also the availability of key transport nodes such as transport highways, Moskovsky railway station and the aiport is essential. The room fund range is from 100-120 to 400 rooms in a hotel, the exact number of rooms depend on the particular location for a building.

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