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

The investor in hospitality business in, his turn, interested in objects with maximum rate of return on money spent. He highlights that it is not 5 stars hotel segment for sure, because it will require the enormous sum of investments, especially in after-crisis recovery the demand on it will be low.

Before the realization of a strategic investment project in hospitality, it is not enough just to pick a commercially beneficial kind of a hotel or its location. The interests of a city and a private investor should be in a consensus. There are several legislative mechanisms which regulate such kind of private-public relationships. According to the responses of representative of Investment Committee, they are conclusion of a concession agreement (usually about an existing property) and agreement on the joint implementation and appropriation of a status of a strategic investor (usually about a land plot). Moreover, the specialist remarks that it is impossible to answer which one is better. Each mechanism has its own pros and cons and for two different organizations, the same legislative scheme might work in different ways. The investor adds that both contracts with the city might be beneficial, if a city offers a cost-effective project, not a potentially detrimental one.

The management of the hotel is essential for its efficiency, especially economic one. There are three types of contracts between an investor and a hotel operator, such as franchise, IMA (international management agreement) and SDA (strategic development agreement). The question about more preffered way to operate the hotel was asked to the investor and the hotel operator as well. The investor says that cooperation with the existing hotel brand, mainly the international one via franchise seems to him the most suitable way. The hotel operator does not have particular preferencies in that question. According to the statistics of PWC, the most common conracts are franchise and IMA. Considering the SDA, there were just a few cases in the post-Soviet territory.As fot the preferred management company, the investor prefers one of the five biggest chains: InterContinental Hotels Group, Marriott International, Accor Hotels, Radisson Hotel Group or Hilton Worldwide, because they alredy have their strong image on the market, hence they are likely to be in demand and as a result be profitable.

The key indicators which evaluate the hotel performance were discussed as well. For different spheres' experts they vary a bit. For instance, the representative of Investment Committee of St. Petersburg highlights that the most essential indicator is city's net present value after realization a project. There is a calculation explanation of NPV for the city in Resolution “On the Establishment of Criteria for Compliance with the Requirements Established in Article 3 of the Law of St. Petersburg” and it will be observed in the “Project section” of the bachelor's thesis. The investor estimates the investment project in hospitality sphere with the two groups of indicators. The first ones are related to the indicators of investment efficiency, for example, NPV (Net present value) and IRR (Internal rate of return). The second group consists of hotel operational efficiency such as ARR (Average room rate) and OCC (Occupancy rate). In addition, capitalization rate is a significant indicator for the evaluation of the investment project. Specialists such as representative of Investment Committee and the Investor say that for investment projects in hospitality sphere the range varies from 9 to 11%. The exact number depends on discount rate of the marginal growth factor. The discount rate in its turn depends on the WACC.

Also a planning horizon was discussed. Respondents mention that the optimal one, in which the business reaches the maximum capitalized cost. For the hotel business it is from 8-9 to 20 years period.

2.4 Secondary data analysis

Based on the responses got, there is a sense to analyze statistics towards tourist and commercial real estate in St. Petersburg. Figure 1 depicts the level of people travelled to the city over the years. Until 2020 there was an upward trend in number of tourists. The record was registered in 2019, when St. Petersburg was visitited by 10.4 mln people.

Figure 1. Annual number of tourists visited St. Petersburg*

*Source: Department of Statistics of St. Petersburg

According to the statistics of the Federal Migration Service, the share of foreign tourists usually is 45% - 49% of the total number of people visited the city.

All tourists might be devided into groups according to their purposes of traveling to St. Petersburg. According to Department of Statistics of St. Petersburg (2019) there were the following groups:

1) recreational - 41%;

2) business - 37%;

3) educational- 5%;

4) sport - 1%;

5) others - 16%.

It can be concluded that the target audience of St. Petersburg hotels are recreational and business tourists. However, the pandemic situation should be considered. It is expected that the leisure tourism will not be common, while the business one still has to appear because there will be the need to recover business processes and relationships, what additionally prooves the words of consulting specialist form McKinsey company. That allows concluding that business accommodation facilities will be in demand after the situation stabilization at first turn.

Room fund of St. Petersburg hotel increase by 4% in 2019 and reached 23832. There were 13 new hotels opened with 852 rooms in total, 447 rooms (52%) were opened in 3 stars segment, 376 (44%) - four stars segment and 29 (4%) - in luxurious segment. All new hotels are operated by the local brand operators; the room fund is managed by 20 international hotel operators did not change last year and consists of 9864 rooms and located in 36 objects. (Colliers International, 2020)

As for the situation on hotel market towards business accomodation there are 54 properties, which meet the requirements of the business hotel. As it was discussed in the interview section the luxurious segment hotels will not be in demand because of their high price, but the middle one segment will be. The pivot table of the most relevant business hotel players of St. Petersburg is presented below.

Table 2

The business hotels in the 3-4 stars segment in St. Petersburg*

Hotel	Room fund	ADR, rub	Average occupancy in 2019, %	Star segment
Lahta Plaza Hotel	111	6600	68	4*
Crowne Plaza Airport	294	5900		4*
Marriott Courtyard Vasilievsky	214	4860		4*
Holiday Inn Moskovskie Vorota	557	4800		3*
Chaikovsky Grand Hotel	70	4400		3*
Park Inn by Radisson Nevsky	269	4100		4*
Hilton St. Petersburg ExpoForum	234	3840		4*
Sokos Hotel Olympia Garden	348	3800		4*
Holiday Inn Express St. Petersburg Sadovaya	244	3750		3*
Solo Sokos Hotel Vasilievsky	255	3740		4*
Hotel Park Inn by Radisson Pribaltiyskaya	1193	3510		4*
Ambassador	255	3500		4*
Park Inn by Radisson Pulkovskaya	842	3150		4*
Hampton by Hilton St. Petersburg ExpoForum	207	2880		3*
AZIMUT	897	2640		4*

*Source: Booking.com and Tripadvisor.ru

The hotel list has been sorted by the ADR. It is important to mention that the sample does not include the most expensive and cheapest one in case to reduce scatter. The highest price is 6600 rub per night (Lahta Plaza Hotel), the lowest one is 2640 (AZIMUT).

Almost all hotels are 4 stars segment representatives.

Room fund varied in each business hotel, however, the average number in most cases are from 200 to 300 rooms. In the selection list there are hotel with 1193 rooms in the room fund (Hotel Park Inn by Radisson Pribaltiyskaya) and 70 ones (Chaikovsky Grand Hotel). They cannot be taken as averaged, because they differ from the general supply on the market.

But this amount of accommodation is not enough for the expected development of a business image of the city. Hence, the additional hotel specified on business and congress activities is needed.

The future business hotel should be constructed on the average market data.

2.5 Risk matrix construction

One of the most significant stages of planning an investment project and preparation of its documentation is risk evaluation (Hovy, 2015). One of the effective tools to estimate risks is a risk matrix, which construction helps to visualize all potential ways affected the project (Raz, Michael, 2001). The risks of the project of bachelor's thesis are:

Table 3

Project risk matrix*

Source of risk	Probability	Impact
Location of the land plot (not satisfying infrastructure's quality and availability)	Low	High
Planning (mistakes in work stages, unpredictable costs and quality mismatch)	Low	High
Market and sales (not accurate calculations in demand for a project)	Low	High
Operation of objects (lack or absence of services needed)	Low	Medium
Strategic (inability of one ot two parties of a contract to complete their obligations)	Medium	High
Political and legislative (changing the political or legislative system of Russia)	Medium	Medium
Economic and financial (inflation, rates, currency changes etc.)	High	High
Force majeure circumstances	Low	High

*Source: based on Hovy P. Risk allocation in public-private partnerships: maximizing value for money. 2015.

The responsibility for a particular risk is distributed to the party that has more opportunities, experience and professional staff for its risk management (Kovalev, 2000). The risk mitigation during the whole project implementation is essential for its success (Boyer, 2016)

The next section of the bachelor's thesis is based on the responses got during interviews and statistical data analyzed. It consists the description of the built financial model with the following conclusions about project's economic efficiency.



3. Project section

Average market data for a similar hotel offer was taken for construction of financial model and applied calculations.

3.1 Project technical and economic specification

3.1.1 Room fund

According to the analysis presented in the second section of the bachelor's thesis, there is a need in a business hotel which meets the requirements of such kind accomodation. The hotel should consist of 250 rooms. The ADR (VAT included) will be 3900 of rubles with the following growth by 5% a year. Occupancy is expected to start with 55%, with the increasing coefficient 1.2 in the next year after the year of commissioning of the hotel and by 1.3 year by year after that. The comfort level of a projected hotel might be correspond with 4 stars.

3.1.2 Food and beverage (F&B) complex

There will be a restaurant, a lobby-bar and room service including mini bars.

The hotel restaurant will provide all three main kinds of meal every day such as breakfast, lunch and dinner. Guests may vary the number of meals and their menu according to their preferencies, hence there will be an optional kind of menu. Based on the secondary data analysis it was discovered that approximately 85% of hotel guests would like to have a breakfast in a hotel they stay in. However, businessmen rarely have a lunch in a hotel, because it is more effective to combine a business meeting and a lunch break. The similar situation is expected to be with dinner time. Consequently, the lunch and dinner services will be used by 10% and 25% respectively. Additional profit will be given by St.Petersburg residents and third-party individual visitors. The seat number of hotel restaurant is calculated as 75% from the room fund with taking into account double occupancy rooms, so the number of seats in the hotel restaurant will be 210.

Lobby-bar will include 30 places to seat. It is forecasted that its occupancy rate will be 15% with the further growth 1.05 times or 5% every year. Guests will renew approximately 15 times a day, this index will increase by 10% each year.

Room service including mini bars will be 4% from the total hotel food and beverage complex revenue.

Moreover coffee breaks will contribute to the F&B complex budget. According to the average indices, the coefficient for that indicator was taken as 100 rubles per m² rented of the conference and meeting room. It will increase by 1% every next year.

3.1.3 Business infrastructure

Business hotel has to meet all the requirements such as business facilities, conference and meeting rooms' availability. It is rational to construct one transforming conference and meeting room which will be able to serve 70 people in average with the additionals domestic produced partitions to vary the number of guests served. The room will provide modern equipment such as computers, microphones, visual and audial support for meetings held and support interactive whiteboard for presentations. Renting hours a year are forecasted to start from 500 point with the 2% rise a year. Moreover, the existence of business facilities allows to minimaze the season fluctuation.

Parking is also will be in demand in a business hotel, hence the optimal number of parking places is 25 and they are expected to be occupied by 85%, with the increasing coefficient 1.05 every following year.

3.1.4 Hotel territories to rent

It is rational to locate all rental spaces of the hotel on the first floor, near the reception and concierge desks, also the closeness of a lobby-bar will have a positive impact. Souvenir kiosks, little shops and showcases of big stores might be potential renters of such spaces. During the first three years the occupancy of renting of floor spaces will achieve its absolute maximum, 100%.

4 Services for telecommunication

It is decided to post several routers with the collaboration of the Internet providers for fast and quality access to the Internet, which is essential for the business community. Also each room will be equipped with the modern phone which will also provide international calls. The conference and meeting room will provide quality access to the Internet and international communication as well.

3.1.5 Project financial and economic justification

Project financial and economic justification is made according to USALI standards. Key financial centers of responsibility are taken as the basis. It implies description of income generated and distribution of costs for direct, fixed and unallocated ones. Using these principles, the potential account about future income and costs was constructed.

The twenty seven year period was taking as a horizon of planning with one year as a step. The described centres of financial responsibility are the following:

1. Room fund;

2. F&B complex;

3. Business infrastructure and hotel territories to rent;

4. Services for telecommunication.

3.1.6 Room fund budget

The budget of room fund (Appendix 5) is composite and consists of the following components:

1. revenue from the room fund, which is calculated as multiplying the indicators such as number of rooms in the room fund of the hotel, average daily rate (ADR), rooms' occupancy and number of days in a year of calculations;

2. after-tax profit from room fund, which is counted as revenue of the room fund minus 20% as a fixed index of value-added tax (VAT);

3. room fund operation expenditure, which includes the total number of operating expenses such as labour costs (salaries, deductions, bonuses to employees and etc.), service costs (booking, cleaning, laundry, fixing works, including outsoursed ones and etc.), room completing suppliers (furniture, personal hygiene items and etc.) and unexpected spendings;

4. net income of room fund, which is calculating as substraction room fund direct operation expenditure index from after-tax profit from room fund index.

4 F&B complex budget

The budget of F&B complex (Appendix 6) is also compound and includes the following indicators:

1. F&B complex revenue, which is calculating as sum of revenues contributed by the restaurant, the lobby bar, room services and mini bars;

2. after-tax profit from F&B complex, which is calculated as total F&B complex revenue minus 20% as a fixed index of value-added tax (VAT);

3. gross profit from F&B complex, for its calculations it is needed to additionaly substract 30% from after-tax profit from F&B complex as prime cost of food and drinks realized by a hotel division;

4.operation costs by F&B complex, which consists of labour costs, service costs, public items spendings (tableware, tablecloths, cutlery and etc.), expendable materials spendings and unexpected costs;

5. net income of F&B complex, which is counted as gross profit minus operation costs.

5 Business infrastructure and hotel territories to rent budget

The budget of business infrastructure and hotel territories to rent (Appendix 7) has a multi-component structure as well.The indicators are the following:

1. conference and meeting rooms revenue, which is calculated as multiplying renting cost per one hour on the total number of hours the conference and meeting rooms are leased in a year;

2. revenue from parking is calculated as multiplying renting cost for one paking place per month on the number of parking places, forecasted occupancy and 12 months a year to get an annual value;

3. rent territory revenue, which is counted as renting cost of one m² multiply per year on the total square of rented territory and its expected occupancy;

4. after-tax profit from business infrastructure and hotel territories to rent, which is counted as substraction fixed index of value-added tax (VAT) as 20% from the sum of conference and meeting rooms, parking and rent territory revenues;

5. operation costs by business infrastructure and hotel territories to rent, which is calculated as a sum of operating costs related to the division;

6. net income is counted as substraction direct operation costs from after-tax profit value.

6 Services for telecommunication budget

The budget of services for telecommunication (Appendix 8) consists of following components:

1. revenue from the telecommunication services, which is 3% from the revenue of rooms in the hotel. It is counted as an average index among the similar kind of the hotels in the city, in this project - the business ones;

2. after-tax profit from telecommunication services, which is calculated as revenue from the division minus 20%, the index of value-added tax (VAT);

3. services for telecommunication devision's gross profit, which is counted as substraction net costs from after-tax profit of the division. The net costs are usually taken as 60% from after-tax profit;

4. operation costs by services for telecommunication, which is calculated as total of operating costs related to the division;

5. net income is calculated as devision's gross profit minus operation costs.

Project consolidated budget

The general consolidated budget (Appendix 9) is constructed on the all budgets of each financial responsibility division of the hotel such as room fund budget, F&B complex budget, business infrastructure and hotel territories to rent budget and services for telecommunication budget.

Operating profit of the consolidated budget is the index, which is calculated as the subtraction direct costs of each responsibility center from their revenues. In addition, there is a summarization of each item of income and expenses year by year.

Non-distributed expenses are the following item of the consolidated budget. A&G (Administrative and general), S&M (Sales and marketing), hotel maintenance, communal payments and basic fee are related to unallocated operating expenses. The first component, A&G expenses, is calculated as sum of total division employees' salaries and other costs. The S&M costs are also separated into two parts: salaries of the department workers and the other item of expenses. The similar calculating situation is with the hotel maintenance expenses, except that despite of salaries and other spendings the unified social tax is also included. The full information about employees' salaries is presented in Appendix 10. There are no salaries calculated for communal payments and basic fee, so only coefficients for other costs are needed.

For the other costs from non-distributed ones it was decided to take the indeces' values as the average in the similar kinds of hotel in St. Petersburg, hence the indeces are devided as a part of operation income: A&G - 3%, S&M - 3.5%, maintenance - 1.7%; and as a part of net income of the hotel: communal payments - 4%, basic fee - 3%.

Gross operational profit in consolidated budget is calculated as operating income minus total of unallocated expenses.

Fixed costs in the consolidated budget are consists of spendings on the real estate way of possession (on property rights or under a lease), different kinds of immovables taxes, repair fund and insurance payments. Indices for calculating fixed costs were taken as average values in the similar kinds of hotel in St. Petersburg.

Operating income was calculated as the gross operational profit minus fixed costs and payments for management by the hotel operator.

Net cash flow (NCF) was counted as sum of profit after taxes and amortization and depreciation (A&D) costs.

Project investment planning

It is convenient to divide the period of the implementation of investment measures of the future hotel into planning intervals, which allow describing each stage in percentage and monetary terms (Table 4). In the bachelor's thesis the 2022th year is used as the starting point, because it is the first year of building the business hotel.

The overall investments which are required to construct the described business hotel is equal to 1000 000 thousand rub, according to the average data for similar hotel accommodation and further own estimated outlay of the project. The percentage ratio of the investments between own funds and borrowed ones is 30 and 70 respectively. The secondary data analysis and application of methods of economic-mathematical models in management was used to build the following table:

Table 4

Project investment planning*

	Expense item	Overall budget, %	Year of implementation
			2022	2023	2024	2025	2026	2027	2028
			Thousand rubles per year
1	Predesign work	0,33	3346
2	External networks and access	5,82	58160
3	Designing	2,97	29706
4	On-site networks and access	4,94	8788	40648
5	Construction and installation work	76,9		59352	100000	202026	204239	203363
6	Beautification	2,69							26932
7	Permissions and approvals	0,1							984
8	Operator services before opening	0,88							8769
9	Pre-opening	5,37							53686
TOTAL, thousand rub	1000000

*Source: based on own estimated outlay of the project

Each stage includes its own set of sub-steps, which were analysed from the experience of already built hotels of this type.

Project economic efficiency substantiation

The described strategic investment project in hospitality sphere, particularly, in a business-hotel which meet all the requirements of modern representatives of business community, is economic efficient. It is rational to explain its efficiency from two perspectives: investors' and St. Petersburg city's ones.

3.5.1. Economic efficiency from investors' perspectives

To estimate the economic efficiency to invetors it is needed to substantiate the discount rate used in the project. The discount rate is the expected rate of return on available alternative investment options with a comparable level of risk at the valuation date (Feinschmidt, 2012).

In accordance with the recommendation of Decree of the Government of St. Petersburg № 668 (dated 10.08.2017), the discount rate is calculated using the weighted average cost of capital (WACC) method.

Firstly, it is needed to calculate cost of equity (R_e) via Capital Asset Pricing Model (CAPM):

where:

R_e - projected cost of equity, %;

R_f - return on risk-free assets, %;

R_m - return on market portfolio, %;

в - beta-coefficient, characterizing the impact of systematic risk on the project.

The beta-coefficient (в) is counted with the next algorithm (Decree №668):

where:

в_U - beta-coefficient, depending on a sphere of project realization;

T - the rate of corporate profits tax, %;

D - debt, rub;

E - equity, rub.

The formula for the discount rate (r) which is equal to WACC is the following (Decree №668):

where:

WACC - weighted average cost of capital, %;

k_e - cost of equity, %;

k_d - cost of debt, %;

E - equity, rub;

D - debt, rub;

V - total investments, rub;

T - the rate of corporate profits tax, %.

Calculated results for the project under consideration are presented in the Table 5.

Table 5

Discount rate and related results*

в	1,2
вU	0,67
Re, %	8,59
Rf, %	7,5
Rm, %	8,4
T, %	20
D, thousand rub	700 000
E, thousand rub	300 000
V, thousand rub	1 000 000
ke, %	9
kd, %	12
Discount rate (WACC), %	9,42

*Source: Based on Damodaran A. Investment valuation: Tools and techniques for determining the value of any asset (2012) and St. Petersburg Government Decree №668 (2017).

The generally accepted and recommended by UNIDO set of indicators to evaluate the economic efficiency is the following: NPV (Net present value), IRR (Internal rate of return), TV (Terminal value), PbP (Payback period) and DPbP (Discounted payback period).

For the business hotel considered in the bachelor's thesis values of these indicators are presented in the Table 6 below.



Table 6

Indicators of investment project efficiency for investors*

NPV (for 27 years)	185 548
IRR (for 27 years), %	11,3
TV (for the 28th year), thousand rub	2 220 647
PbP, years	17
DPbP, years	26

*Source: Based on Damodaran A. Investment valuation: Tools and techniques for determining the value of any asset. 2012.

The first indicator NPV is the net cash flow value at the time the project is calculated. The indicator shows the economic efficiency of investments by comparing the discounted cash flows of capital costs and the discounted cash flows of the results in the form of net profit from the project (Damodaran, 2012). The positive value of NPV means that the project implementation will be profitable, on the contrary, the negative value of the indicator shows that the project will not be lucrative (Korchagin, Malichenko, 2008). The formula for the NPV is the following (Damodaran, 2012):

where:

NPV - net present value, rub;

IC₀ - invested capital, rub;

CF_t - cash flow from investments in t year, rub;

r - discounted rate, %;

n - duration of the project, number of years.

The NPV of the project is 185 548 (NPV>0), hence it is profitable to invest in (Scherbakov, Scherbakova, 2001).

The next economic efficiency indicator is IRR. It is a coefficient which shows the maximum acceptable risk for the investment project or the minimum acceptable level of profitability (Vilensky, Livshits, Smolyak, 2002). IRR is the value of the discount rate, reaching which NPV is equal to zero. Hence, the formula to calculate IRR (Damodaran, 2012) is:

where:

NPV - net present value, rub;

IC₀ - invested capital, rub;

CF_t - cash flow from investments in t year, rub;

IRR - internal rate of return, %;

n - duration of the project, number of years.

According to the calculations towards the project, IRR>WACC (11,3% > 9,42%), consequently the project might be accepted.

The TV of the project is defined as the ratio of the cash flow of the last period from the planning interval to the capitalization rate (Pike, Neil, 2006). At the capitalization rate of the project is 10%, TV of the project is 2 220 647 thousand rubles.

Payback period is a time period during that obtained profit from the project implelemtation might pay for total invested capital.There are two types of this indicator: simple and discounted one. However, the simple index does not consider the time factor, while DPbP does. Logically, DPbP > PbP (Blank, 2004). The PbP of the project is 17 years, while the DPbP is 26 years.

Based on the main indicators of economic efficiency of the project from investors' perspectives, it might be concluded that the considered project is practically applied and profitable.

Economic efficiency from St.Petersburg perspectives

Implementation of the considered project will contribute to St. Petersburg and to the Russian Federation as well.

For St. Petersburg this project realization will be beneficial because of allocation of new working places to the employed population of the city. According to the manning table (Appendix 10), there will be 102 more jobs in the city's manpower. Moreover, the number of high-qualified jobs provided by the project realization will be equal to 73. It means that the salary of these workers are higher than the size of the average accrued wages for this type of economic activity in St. Petersburg as of May 2020 (30,000 rub).

Moreover, the extra taxes and deductions to Russian funds (e.g. Pension fund, the Compulsory Health Insurance fund, Social Insurance fund, Hotel Accident Insurance fund) and as a result extra incomes which will be assignated to the regional and federal budget of St.Petersburg and Russia respectively also positively impact the city's economic image.

Deductions to funds and taxes are presented in Tables 7 and 8 respectively.

Table 7

Wage deduction rate and amount*

Deductions' direction	Rate, %	Amount, rub per year
Pension fund of the Russian Federation	22	11 272 800
Compulsory Health Insurance fund	5,1	2 613 240
Social Insurance fund	2,9	1 485 960
Hotel Accident Insurance fund	0,4	204 960
TOTAL	30,4	15 576 960

*Source: based on Consultant.ru

In calculations the taxation result after project realization (Table 8) the discount rate of budgetary cash flows is defined as the yield on bonds issued by St. Petersburg for a period comparable to the terms of the project and it is equal to 8% (Resolution by St. Petersburg government № 668).

Table 8

Project realization taxation result*

St. Petersburg budget tax income	During the status validity, thousand rub
Income tax	6 338,59
Property tax	18 084,75
Personal income tax (PIT)	5 662,02
Total net income to St. Petersburg budget	30 085,36
Total net discounted income to St. Petersburg budget	50 940,49

*Source: based on Consultant.ru

The discounted lost income of St. Petersburg budget is calculated as net discounted income of the St. Petersburg budget which might be obtained for the validity period of the status as strategic investment project without any privileges minus discounted income of the St. Petersburg budget which will be gained for the validity period of the status as strategic investment project with priveleges (Resolution by St. Petersburg government № 668). When calculating this indicator, the potential deviation of the market value of the land plot from the cadastral value of the land plot is not taken into account.

All calculations related are presented in the following table:

Table 9

St. Petersburg discounted lost income*

Income of St. Petersburg	During the status validity (2022 - 2029), thousand rub
From rent for a land plot, taking into account the provision of strategic investment status project	3 096,16
From rent for a land plot, without taking into account the provision of strategic investment status project	25 801,3
Lost income	22 705,14
Discounted lost income	15 235,33

The difference between net discounted income of the budget of St. Petersburg for the period of validity of the status and discounted lost income of the city budget for the same period is 35 705,16 thousand rubles.

All mentioned advantages are refferred to the direct economic effect from the construction of business hotel (Ivasenko, Nikonova, 2009).

Other group of advantages is related to the indirect economic effect to the city and focused mainly on the standard of its residents living like socio-economis and cultural conditions of life, enhancement of the tourist image attractive in general, and business tourists in particular, increasing the investment attractiveness of St. Petersburg.

In addition, use of domestic produced construction materials and engineering equipment during the hotel both exterior and interior building will contributeto the Russian policy of import substitution and has an additional indirect positive effect on the Russian economy, which fully complies with the requirements of the Law of St. Petersburg № 742-136 “On strategic investment projects, strategic investors and strategic partners of St. Petersburg” (dated November 19, 2008).

The strategic investment project considered in this bachelor's thesis is beneficial for St. Petersburg accroding to its direct and collateral effect.



Conclusion

St. Petersburg is forecasted as a perspective investment market for strategic projects in hospitality after pandemic will finish. It is confirmed by opinions of the sphere experts and early applied resolutions and order by federal and regional governments, which will have a futher implementation. Investment process is divided into two integrated processes: investment stage and process of getting profit from invested capital. Hence, the bachelor's thesis is focused on finding out one the most profitable ways to invest capital in St. Petersburg hotel market and obtaining commensurate income, when achieving a consensus of interests between investors and the city.

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. According to the tasks of the study the following results were achieved.

Firstly, hotel market presented by St. Petersburg was analyzed. In addition, investors' expectations and the total investment climate in hotel lodging industry was considered.Both analyses were taking into account the legitimacy system which regulates strategic investment projects in hospitality sphere. During the analysis process, it was found out that not all hospitality objests correspond to the modern high standards of accommodation. Hence, the market offer does not cover the real demand on the hotels in the city. Especially, the previously increasing busoness tourist flow to St. Petersburg has an additional impact on the whole hotel industry, which is needed to be reformated. The city's investment situation is uncertain nowadays, because of the pandemic, but the forecasts towards it are rather positive. Experts suggest to pay attention to the many assets are currently sold for much lower prices than before the crisis. So it might cause a new wave of investments. However, the forecasts about the whole future investment environment cannot be absolute accurate presently.

Secondly, taking into account the current conditions of the pandemic caused by coronavirus and fast spread of COVID-19 all over the planet have their negative impact on the development of tourism in general and hotel business in particular in St. Petersburg. The situation is fluctiating quickly, hence it is hard to predict its consequences. However, essential changes are expected in the hotel loding industry. Potential change or displacement of players is also forecasted.

Thirdly, as it was founded out by two previous analyses and with the interviews with sphere's experts there will be a demand on business accommodation in St. Petersburg. It is the most perspective investment decision after the situation caused by coronavirus will be over. The optimal financial indicators were determined on the average indices among the similar city's hotel supply. It was founded that 1 000 000 thousand rubles as investments will be enough to construct a business hotel with a room fund which is equal to 250 rooms and which will meet all the requirements of such kind of accommodation.

The next point which was needed to cover was the consideration of hospitality financial report system as USALI standards and investment estimation methodology introduced by UNIDO. The combination of both practical tools helped to study the algorithm of implementation a strategic investment business hotel project. Based on that, the financial model was constructed, which allows evaluating incomes and expenses items. According to the developed hotel plan, the strategic investment project will be profitable.

Finally, accomplishment of the previously mentioned tasks leaded to the substantiation of economic effficiency of the business hotel implementation in St. Petersburg to investors and to the city. Thus net present value of the project is 185 548 thousand rubles (it is greater than 0), internal rate of return on invested capital exceeds the amount of a bank loan, which indicates the profitability of the investment project. The positive effect from strategic investment project implementation is also notable. The difference between net discounted income of the budget of St. Petersburg for the period of validity of the status and discounted lost income of the city budget for the same period is 35 705,16 thousand rubles. Moreover, additional 102 work places for city's residents will be provided. Indirect positive effect will be as well such as the enhancement of tourist image of the city and increasing its investment attractiveness.

It allows estimating the correspondence of the results with the stated study aims as completed successfully in a full volume.

Taking into consideration the yet unstudied new circumstances of pandemic this paper might have a further application in the following researches. The corrections towards financial model or legislative framework of the project implementation might be occurred because of clarification of the tourist and economic situation.

The developed financial model of a business hotel in St. Petersburg has a practical application and it might be used by potential investors and/or the city's government in order to construct a business hotel in the city.



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Appendices

Appendix 1

Description of interview with the specialist of McKinsey consulting company.

Q. What can hotels do right now to resume business once the crisis is over?

Q. How can hotels do right now for the best save cost/use of its cash?

Q. What are the top 5 things which the CEO of the hotel should do right now?

Answer. There are three phases that can be distinguished for an effective response to the crisis:

1. Crisis management: as most hotels are in a critical position financially due to the lack of revenue, the top priority right now is liquidity management. This implies touching those cost categories that have a strong cash effect, i.e. purchased goods (e.g. food and beverages, services) and personnel cost, e.g. for waiters, chefs, housekeeping etc. The possibilities for cash savings depend on the local legislation but if possible, measures like temporary unpaid leave programs for personnel cost and increased negotiations with suppliers for non-staff cost can and should be considered to ensure liquidity. Furthermore, a quick adaptation to changed ways of working and a continued regular interaction with top customers is strongly recommended.

2. Return management: for the time when restrictions are lifted and consumer behavior starts returning back to normal, several reactions are recommended. Most importantly, each hotel needs to monitor the situation and the resulting changes on a day-to-day basis and react more quickly than usual, e.g. by adjusting governance processes. Given the novel situation, there needs to be a certain willingness to test and learn several approaches, e.g. identify microsegments that are likely to return first. Furthermore, employees need to quickly adjust to and master new safety protocols (e.g. regarding human interaction, cleanliness standards).

3. Adapting to the new normal: no one can say right now how the new normal is going to look like, but each hotel should ask itself a few key questions: Will businesses adapt to remote working and travel less? Will leisure travelers more wary of traveling far from home? Will governments tilt farther away from globalization and free movement? Will growing concerns about sustainability affect regulations?

Q. What quick cost reductions can hotels implement in the short-term to make sure they survive?

Answer. Following-up to my answer to the previous question, let's look at a typical P&L of a hotel, precisely on the cost side:

1. Labor cost (~50% of total cost): housekeeping, lobby/front desk, food and beverages, G&A and back office, engineering, other, e.g. SPA.

2. Non-labor cost (~50% of total cost): food and beverages, services, other goods.

On labor cost, the possibilities very much depend on the local legislation. In several Western European countries (e.g. Germany, Spain) there is a temporary labor reduction/temporary unpaid leave program which can help hotels to avoid dismissals. Other legislations allow pay cuts or other short-term savings measures. Labor cost obviously has a strong implication on cash via the usually monthly payroll processes, hence any savings in this area have a direct implication on cash and liquidity.

On non-labor cost, the main questions are around specifications in the contracts with suppliers. Things to consider are payment terms (e.g. timeframe, postponed payment, penalties) and legal requirements (e.g. minimum purchase quantities, minimum payments). If contractual obligations exist, the next best alternative is talking and negotiating with suppliers, e.g. by suggesting increased orders to beverage suppliers post-COVID-19 or deferred payments/cancellations for services that have been booked previously.

This breakdown only considers “business-as-usual” expenses. In case of extraordinary expenses or measures with cash effect, the guideline is to minimize all discretionary operational and capital expenditure, by reconsidering or postponing maintenance and other capital expenditure where possible to conserve cash.

On both aspects, relationships with relevant stakeholders (primarily employees, potentially employee unions/workers councils, suppliers, customers) should be considered. Transparency and honest communication usually help in an extreme situation like this one.

Q. How do you see the hospitality market change after the crisis?

Q. How do you assess the effects of the COVID-19 pandemic on the hotel industry?

Answer. Although it is very difficult to say right now how exactly the market is going to change after the crisis, it is most certain to say that it will change significantly. Therefore, let me focus on a few hypotheses on the changed market.

1. Change in demand: the biggest disruption is likely going to come from the overall changes in travel behavior and the travel industry. As of now, it is absolutely unclear when travel will return to pre-COVID-levels, but it might take years. There is also a distinction by different factors (e.g. leisure/work travel or air/ground travel) but overall it is likely that volumes will be reduced tremendously. Hotel will need to adjust to the changed traveler profile, i.e. focus less or more on business vs. leisure travel, depending on the direction in which the trend goes. Additionally, travelers will be more cautious towards security standards, both at the airport/rail station but also in the hotels. This will result in a necessity for many hotels to dramatically change operating procedures, e.g. by changing cleanliness standards, introducing social distancing rules etc.

2. Market consolidation: It is very likely that not all players will survive this crisis, just because of its magnitude. It almost all countries, travel is near zero due to lockdowns, contacts restrictions or other similar measures. Big players with a solid cash reserve and liquidity management in place (e.g. Accor, Marriott, InterContinental) will likely be in a better position to survive the crisis, while smaller players like family-owned hotels, mid-sized/small local chains might have more difficulties to manage t...