COMMENT: Your new Moscow apartment - branded and serviced

By bne IntelliNews September 18, 2007

Christer Lystad of Cushman & Wakefield -

How often do you hear in Moscow about the opening of a new branded residential compound offering its clients serviced apartments? Not very often, if ever. However, this is bound to change as economic growth fuels a big increase in demand, forcing developers - both local and foreign - to take a closer look at what this segment has to offer.

Branded residential real estate can be succinctly defined as a union of the residential and hotel. In terms of development schemes, such projects can be either standalone or coupled with other uses, primarily hotel, but also office, retail, leisure. Usually such properties are sold fully or partially fitted out, while managed and serviced by hotel operators. Depending on property class, onsite services that form part of the package include: room/valet service, laundry, dry cleaning, 24-hour in-room dining, restaurants, fitness/spa, travel and courier services, internet and other business facilities, and child care/nursery. Hence, owners are treated as permanent hotel guests. While away, the owners may be offered to place their homes in a rental pool and share the generated revenues with the hotel operator. The owners are not the only ones that gain from having their homes taken care by professionals, developers gain as well. For them, association with a well-known brand can bring a premium of 25% and above on the value of real estate compared to non-branded developments.

The players

On the global arena, the biggest market players, ie. brands, are Starwood, Four seasons, Marriott International including Ritz Carlton, Hilton and Mandarin Oriental. The first four players are actively expanding their hotel chains in Moscow and St Petersburg. However, none have actually gone as far as to bring serviced residencies to the market. Hopefully, having opened a few successful hotels in Moscow and St Petersburg, these hospitality groups will set out to conquer the residential market.

In the meantime, Asian and Eastern European groups are actively pursuing the chance to be the first with a successful branded residency project. Ascott Group, Singapore in origin, with such brands as Ascott, Somerset and Citadines well-known in Europe, Asia and the Middle East, has partnered up with a local company Amtel Properties Development to develop a 150-unit branded residency Somerset Strogino on Kulakova street, Moscow (to be completed in 2010). The group is looking for more development opportunities in Moscow and St Petersburg to expand its residential chain and have at least 1,000 branded serviced units under management in three to five years.

Somerset Strogino

Orco Group, with headquarters in Prague, is also on the look out for development schemes to bring its MaMaison residency brand to the Moscow market, having already opened a luxury hotel on Pokrovka this year.

The Portuguese company Aquapurahotels that operates on the luxury hospitality and residency market in Europe and South America has recently indicated a strong interest to enter the Moscow scene with a mixed-use development comprising a five-star hotel with a branded residential component.

Despite the present absence of branded residential properties in Russia, a market for serviced apartments is emerging in Moscow and St Petersburg, with most of demand, as high as 80-90%, generated by executives who have to relocate for work. It's actually the most popular corporate solution for providing employees and business guests with long-term accommodation (more than 3-4 days, but not exceeding several months). The advantages are evident: significantly better value for money than today's extremely expensive hotels; more spacious and flexible accommodation with en-suite bathrooms and bedrooms, fully fitted kitchens and living rooms, as well as necessary business tools like fax machines, internet, broadband and satellite television. In addition, many serviced apartments also have concierges and maintenance services; other services depend on the real estate and/or property management company.

However, serviced apartments should not be confused with serviced apartment buildings. Usually the owner of an apartment signs a long-term lease agreement with a real estate company allowing it to sublet the premises, solve maintenance issues, and even pay the required taxes on his behalf. Thus, for example, in Moscow the relatively small pool of 200-plus serviced apartments is spread out throughout the city, though the most in demand are those within the city centre.

With growing business activity and slow hospitality developments, serviced apartments experience only a long-term vacancy rate of at most 5% and have to be booked at least a month in advance. As said, serviced apartments are up to 50% cheaper than a hotel accommodation of similar quality. Average rental rates are about $200 per night in Moscow and slightly less in St Petersburg, but only for economy and business class units. No luxury serviced units are yet available, though only branded residential can really offer the required luxury serviced apartments to the market.

The potential for branded serviced residential is extremely high in Russia. The way the serviced apartment market is organized at the moment is extremely inefficient, leading to significant management expenses in trying to maintain properties located in various buildings, in various locations and belonging to different owners. Hence, real estate agents engaged in this market segment don't see much investment reward. Branded residential is a totally different story that allows one to earn money first on high sales prices for residential, and afterwards on hospitality and property management services - all in the same building.

Christer Lystad is director, head of the Residential Sales Department at Cushman & Wakefield

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