Moscow is having trouble attracting tourists, in large part because of a lack of quality mid-priced hotels. But the city is hoping to attract investors to the hotel sector in an effort to raise funds to help spruce up the capital’s inns.

The Moscow city government has unveiled plans to list bonds and stocks issued by Moscow hotels on stock exchanges to raise funds for renovation of existing establishments.

Analysts also say that, once reconstruction of dozens of mid-priced hotels is complete, city officials will want to place them in private hands, and that the placement of stocks and bonds is just a prelude to their future sale.

The Moscow government owns stakes in most of the city’s hotels, according to Marina Smirnova, deputy marketing director of Hotel Consulting and Development Group. She said the city owns some hotels completely and has holdings in other inns, such as a 30 percent in the Novotel, which was built in 2002.

To be sure, there are some entirely private hotels in Moscow, especially those in which the building site is rented. These are either family owned inns or have other private individuals as shareholders. "It is very difficult to say just who exactly owns these hotels," Smirnova said. "You end up with a multilevel ownership system. You have one company founded by another and so on down, devolving onto a single owner."

She cited the Sverchkov-8, Royal-Zenit and NII VNITsEVT hotels as examples. "This is a very complicated situation, and no one can say for sure exactly who owns the hotel in question," she added.

Most experts agree that the city could use more rooms. Alexander Udalov, president of Universal Management and Consulting Co., said that many travel agencies have had to turn away foreign tourists looking to visit Russia last year because of a shortage of hotel rooms. "There’s really no use in even hoping the situation will improve much this year," Udalov said. "What we have is, in effect, the classic situation of demand for holidays to Russia outstripping supply."

But attracting money into the mid-priced hotel sector is difficult, as investors prefer to put their money into the top-range inns that make a return more rapidly. According to Hotel Consulting and Development Group, it costs about the same, including land cost, to build a three-star hotel in Moscow as it does to build a four-star one.

There is money to be made in the Moscow hotel market. Hotels in the capital earned more than $600 million last year. Occupancy rates are usually between 67-79 percent and, in some months, even higher.

Demand for top-class hotels is up 8-9 percent over last year, 3-4 percent higher in the mid-range sector and relatively stable in the lower segment, industry experts report. Top-range hotels such as the Metropol, National and Baltschug Kempinski have stable demand from businesspeople and wealthy tourists.

Many mid-range Moscow hotels – such as the Izmailovo, TsDT, Salyut, Sevastopol, Solnechny and Soyuz – were built for the 1980 Olympics and, so, are more than 20 years old. Many hotels in the category have undergone little renovation since the 1980s.

Smirnova said that, in most major cities, hotels take on major renovation projects every 10 years.

"Of course, the reconstruction issue is on the agenda of most hotels, but what priority it has depends on the owner," she said. "The Zarya, Zvyozdny, Salyut and Orlyonok hotels, for example, have done major reconstruction work. The Orlyonok is now thinking of moving into a higher category."

Situated on the picturesque Sparrow Hills, the Orlyonok has seen one of the most spectacular transformations of the last three to four years.

According to GAO Moskva, the first hotels being eyed in the city project for listing on financial markets include the Ostankino, Zolotoi Kolos and Vladykino. The valuation procedure should provide a clear picture of the hotels’ current business situation and its prospects.

Specialists from Metropol, which won the tender for providing state support to hotels, and GAO Moskva are preparing the main documents for getting the city’s hotels ready to enter the stock exchange.

"Overall, these plans are reasonable," Smirnova said. "The only ‘but’ is that there is not, as yet, any clear procedure for valuing the hotels, and the hotel market still lacks transparency for potential buyers."

The idea of putting hotels on the stock exchange is not new. "We’ve talked for a long time now about the prospects of creating a hotel stock exchange," Smirnova said.

"Unless they have a controlling stake, holders of shares in hotels might never see dividends. As the corporate culture develops here, this mechanism will become increasingly attractive," she added.

Anna Amosova, PR and advertising manager at Le Royal Meridien National, said that raising money through bond offerings is one of the best options hotels have.

"Despite the election-time hesitations, now is a good time for borrowing," Amosova said. "The hotel business in Moscow is considered very promising from an investment point of view, and reform of the sector is very timely. Using the open market is certainly not the worst way to raise money."

Last year, the city government found investors for the Budapest and Belgrade hotels, which were also due for reconstruction. They were sold on the condition that the buyers invest several million dollars in their renovation.

Tim Walton, vice president of development at Le Meridien Hotels & Resorts, said that, for hotels that do operate here, the overall situation is helping to keep occupancy rates high at a time when other major European hotel markets are suffering, with empty rooms.

"During 2002, Moscow’s hotels recorded double-digit growth in both occupancy and RevPAR [revenue per available room]," he said. "Furthermore, and despite the anticipated increase in the number of rooms in the city, the outlook for the near- to mid-term remains good across all sectors of the market."

Walton said that, as a hotel-management company, Le Meridien works with numerous real-estate development and ownership partners around the world in order to expand its portfolio of hotels. Le Meridien’s National Hotel and Moscow Country Club are among the more successful hotel projects in Russia.

"The ways in which our partners raise investment and financing for their hotel projects occur in a variety of ways, including the raising of money on the stock markets or through bond issues, depending on the circumstances surrounding each individual opportunity," he said. "However, it is fair to say that, as long as the market dynamics support the development of new hotels in any given market or sector, Le Meridien will welcome any initiative to encourage the development of new hotel projects."