SOCHI HOTEL MARKET IS PREDICTED TO FACE CHALLENGES

After quite profitable ski season Sochi hotel market is likely to face challenges. Having shown the record growth of supply it suffers with lack of occupancy. Marina Smirnova, a Partner and the Head of Hospitality and Tourism Department at Cushman & Wakefield says: “Our research proves that Sochi hotels show positive results only when peak season. Rest of the time in a year they face difficulties (only one hotel among all those of observed turned out to be profitable)”. Cushman & Wakefield specialists reveal that there are several reasons for it; reduction of hotel income base during unfavourable periods accompanied with high share of fixed costs, which in its turn is hard to reduce, increase of communal fees as well as other issues such as poorly developed entertainment sector and expensive airline tickets. All these keep income base from increase and hit market. Marina Smirnova says “In order to generate income large enough to cover loan liabilities average annual occupancy shall reach at least 45-50% with average price of 2500-5500 roubles per room. At present occupancy rate hardly overrides 30% (this is relevant to Imeretinskaya Nizmennost as well as to mountains area)”.   

Summer 2015 is now expected to bring boom to market. This is encouraged by rouble devaluation and ban on officials to cross Russian border. But without taking further steps to drive demand during weak seasons even this new demand is likely to be unable to bring profit to Sochi hotels. Cushman & Wakefield analysts draw attention to high taxes on Olympic objects. Marina Smirnova says: “If the existing tax allowance with regard to Olympic objects[1], as well as land tax benefits, none of Sochi hotels will be able to show positive annual financial statement. Beside of encouraging tax policies and “responsible” position of natural monopolies, comprehensive measures to popularize the resort for all segments and integration of new activities, including gambling, solving of issues concerning transportation rates and implementation of smart marketing are indispensable as well. 

At present Cushman & Wakefield Hospitality and Tourism Department works extensively on numerous projects on Sochi market. One of the key projects implies operational audit for some debtors of Vneshekonombank. The project contract was entered into on autumn 2014 after Cushman & Wakefield had won the tender on it. The works are being executed in 4 stages and are expected to be completed by the end of 2015.  


[1] Most of the analyzed objects in Sochi are excused from real estate taxes due to the Law of Krasnodarsky region № 620-KZ “on corporate property tax” as of 26.11.2003 Most of the debtors enjoyed property tax rate in the amount of nil per cent basing on subclause 2 of clause 5.1 in article 2 of law № 620-KZ stating the following: “Buildings, hotels and hotel complexes subject to ”Touristic objects” section of a program named “Development and reconstruction of objects within the policy to develop Sochi as mountain climate resort” are charged tax rate in the amount of nil per cent”.