Tuesday, October 23, 2012

The evolution of Tbilisi’s hotel market

by Assel Mussabekova

23.10.2012. Georgia, a country with a population size less than half of its namesake state in the United States, has been developing at an impressive pace during the past decade. But the path to economic growth has not been easy.

Georgia is one of the so-called “newly independent states,” which became independent after the collapse of the Soviet Union in 1991. Since then, and throughout the 1990s, the country has gone through a tough period in its brief post-Soviet history, struggling with civil unrest in the regions of Abkhazia and South Ossetia and economic difficulties.

The capital of Georgia is Tbilisi, which is situated on the banks of the Mtkvari River in the eastern part of the country. Tbilisi also is the largest city in Georgia both in terms of its area and population with approximately 1.5 million people, comprising almost 26% of the population of the entire country.

The 1990s

The first international hotel to open in Georgia was the Marco Polo Hotel in the Avlabari district of Tbilisi in May 1991. The hotel struggled during these difficult times, and as a result in September 1997 Starwood Hotels & Resorts Worldwide took over the management of the property under the Sheraton brand.

Although the problem of the breakaway regions of South Ossetia and Abkhazia has still not been resolved, and the regions are de facto independent from Georgia, the issue of the post-Soviet economic collapse largely was overcome in the mid-1990s with the help of international organizations, including The World Bank, the International Monetary Fund and financial assistance from Germany.

The 2000s

From 2001 through 2007, economic growth in Georgia averaged an impressive 8.4%, initially helped by foreign aid and later fueled by increased business and economic activity. This economic growth also was helped by major reforms under the Saakashvili administration, which assumed power in 2004. Increased tourist inflow (mainly business- and leisure-related) allowed developers to quickly identify a gap in the market, which needed modern hotel rooms.

The Sheraton Hotel Metechi Palace in Tbilisi was the only international hotel in Georgia until May 2002 when the Marriott Tbilisi opened. The 127-room Marriott Tbilisi was a conversion of the old Tbilisi Hotel, located along the prominent Rustaveli Avenue in downtown Tbilisi. The Marriott Tbilisi benefited from a better location compared to Sheraton Hotel Metechi Palace and offered a fresh and modern product. The Marriott quickly gained significant market share and has since become the market leader in terms of average room rates, despite additional new supply that entered the market in the subsequent years.

In January 2004, Marriott opened its second property in Tbilisi—the 118-room Courtyard by Marriott Hotel. At the time, the Marriott, the Courtyard by Marriott and the Sheraton Hotel Metechi Palace charged premium rates due to a lack of quality supply and increasing demand in the market. The largest of the three existing internationally-branded and managed properties in 2005 was the 140-room Sheraton. Together, the three hotels provided only 385 rooms. The Marriott enjoyed average rates as high as $300 in 2005, with both the Courtyard by Marriott and Sheraton Hotel not too far behind.

During the boom years between 2005 and mid-2008, many new hotel projects were announced, including the Radisson Blu, Kempinski, InterContinental, Novotel and Hilton Garden Inn. However, to date, only the Radisson Blu actually has opened. The 249-room Radisson Blu Iveria Hotel opened in a central location on the Rose Revolution Square in Tbilisi in September 2009. Other projects remain on hold for a variety of reasons, including the armed military conflict between Georgia and Russia in 2008 and the economic downturn, which has resulted in limited funding available to finance hotel development projects, particularly in emerging markets such as Georgia. In the current market, investors’ appetites have moved toward less risky asset classes.

However, given that the local market was so small, new internationally-branded supply entering the market offering modern facilities largely could absorb any existing unsatisfied demand and growth in demand. Such was the case when the Radisson Blu opened, representing a 65% increase in existing supply and offering a new and fresh product in the market with a state-of-the-art spa and fitness club, which other hotels lacked. The opening of the Radisson Blu and the impact of the economic downturn affected the market-wide occupancy and average room rate. In 2009, the market-wide occupancy for internationally branded hotels was 54%, with an average rate of approximately $160.

In December 2009, the internationally-branded supply increased further with the addition of a 66-room Citadines aparthotel. However, despite the pressure on trading performance due to the opening of new hotels, hotel demand growth rates increased, allowing the market-wide occupancy in 2010 to increase to 56%, an increase of 3% compared to 2009; average rates, however, dropped to $150 compared to $160 in 2009.

In 2011, the Tbilisi market showed continued growth despite the addition of the new 252-room Holiday Inn in January 2011. The market-wide occupancy in 2011 increased to an impressive 67% (Holiday Inn phased the opening, initially providing 126 rooms, then increasing its rooms to 185 and finally to its current 252 rooms). Average rates have never recovered to the levels of 2005. The latest research shows average rates of $150 in 2011, representing a slight decrease in real terms over the previous year. However, the RevPAR increased by 20% compared to 2010 because of an increase in occupancy levels.

In conclusion, the prospect for hotel market in Tbilisi looks positive. And with increasing business and tourism activity in Georgia, mid-market hotels are the most attractive development opportunity in the local marketplace.


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