In August 2023, the President of Russia gave a directive to allocate additional funding for the construction of modular hotels. This type of construction has gained unprecedented popularity: over 14,500 hotel rooms will appear in over 60 Russian regions until the end of 2024 including as part of the Tourism and Hospitality Sector national project. Why is the focus being placed on modular hotels and will they steal market leadership from the regular ones?
Fast, conceptual and close to nature
The Russian hospitality sector is developing actively. Dozens of city and countryside hotels are being built, and many of them utilize modular construction. Here are several reasons for promoting their development:
- Amid the increasing demand for tourism within the country, it is necessary to provide supply in a prompt way. The construction of a regular hotel takes two or three years, while a small modular hotel can be built in just 4-6 months.
- Investment spending is another important factor. The construction of a classic three-star hotel will cost RUR 10-12 million per room, while the construction of a combination of modular sections of a similar quality might cost from RUR 3 to 6 million per room.
- Temporary modular structures can be placed where a standard hotel cannot be built, including in nature reserves and remote but picturesque areas. In Russia, there are many such locations, and they are becoming increasingly popular with tourists.
Overall, the growing popularity of modular hotels is a result of a global trend towards the experience economy and nature connectedness. Consumers want new, unusual experiences and positive emotions, and at the same time, an environmentally friendly opportunity for a deep mental recharge and self-reflection. Quality modular hotels can cover these demands.
Such recreation has already become popular, even though the cost of staying at modular hotels is higher than in regular hotels of similar level. Russia already has wonderful examples of pricey but quality modular hotels, such as WE LODGE, Forest Lake, and SELIGER CLUB. In addition to a picturesque location and sights, these projects offer high level of service and sometimes unique cuisine. Major modular hotel projects have the average daily rate (ADR) that is manifold higher as compared to rural hotels boasting similar level of service.
Pros and cons of modular hotels for investors and clients
Advantages for consumers are obvious, with an opportunity for an urban resident to enjoy spending time in nature while being offered services and comfort they are accustomed to. The only downside is that high-quality modular hotel accommodation is rather expensive, with certain major hotels in Russia offering a room for RUR 15-20K per night, breakfast included.
As to investors, the obvious advantage is the entry threshold being about two or three times lower per room than for regular hotels. Furthermore, there are more hotel location options – however, the shortcoming is the difficulty in finding and keeping personnel employed at remote locations. Also, demand for modular hotels is affected by greater seasonality as compared to conventional hotels: February, October and November are generally considered low season. This is an important factor to remember while planning operational activities in order to avoid cash gaps.
What hoteliers need to know
The concept of modular hotel construction was developed as an alternative option for specific locations that have a demand for recreational activities yet no opportunity for building a fully functional hotel. Therefore, it is essential to analyze a hotel location and assess its relevance.
With transport infrastructure being pivotal, a location’s tourist potential and its transport accessibility are determining factors in choosing the site for a modular hotel.
Opportunities for investors
It is far too early to speak about market saturation, and modular hotel construction is a rather prospective sector for investment.
Yet, as with any hotel project, a key initial task is to analyze the location selected to construct a facility. The most prospective and rational option would be to choose a site where a rural resort hotel cannot be opened.
Could modular facilities replace traditional hotels?
To some extent, this is possible now as modular hotels are located near regular countryside hotels. Yet, the trend will hardly materialize in the long term: modular hotels will occupy a niche segment as accommodation facilities in specially protected natural areas, while traditional rural hotels will prevail in locations that require fully functional facilities with advanced recreational infrastructure. We can definitely say that modular hotels are a sustainable trend rather than a passing hype.
By Alexey Pryaslov, Founder and Managing Director of PFM, specialist in consulting and investments in the hotel business, member of the IBCS Association