"Uzbekistan Needs Affordable 3-4 Star Hotels" — Marina Usenko
In an interview with Spot, Marina Usenko, Partner at the Hospitality and Tourism Department of Commonwealth Partnership, shared her views on the current state of the hotel business in the country, as well as the industry's challenges and opportunities.
State of Uzbekistan's Hotel Market
Since 2017, Uzbekistan's hotel market has been developing at an active pace. According to the State Statistics Agency, the country has approximately 23,000 hotel rooms. However, our estimates suggest that only 3,000-3,500 of these can be considered to meet modern quality standards for accommodation, primarily consisting of chain hotels built and managed according to international brand standards. About 2,800 such rooms are located in Tashkent, with the rest in the historic Silk Road cities of Bukhara, Samarkand, and Khiva.
The number of modern quality rooms is expected to continue growing in the near future. By the end of 2028, approximately another 3,500 rooms are anticipated to open. This might seem like excellent news for tourists! However, upon closer inspection, the situation is far from ideal, as the development of the hotel market is heavily skewed towards expensive and very expensive hotels. Of the current operating room volume, over 50% is offered by 5-star hotels, while only about 9% comes from 3-star establishments.
This market structure is inherently unstable, as established markets typically feature a larger proportion of budget and economy-standard hotels. This situation is unlikely to change in the foreseeable future, as of the 3,500 rooms currently under construction or planned, 40% are for 5-star hotels, while rooms in 3-star hotels will account for less than 6%.
Thus, the supply of modern, affordable hotel options remains largely underdeveloped, clearly indicating opportunities for growth in this niche.
This logically raises the question: how well-thought-out is this strategy by developers who prefer to build high-priced hotels, oversaturating a market niche and risking difficulties in filling them at rates commensurate with their stated quality? Is there currently sufficient demand in Uzbekistan to support this?
Market Challenges
In the first half of 2024, Uzbekistan welcomed 365,000 citizens from Russia, 2.7 million from Kyrgyzstan, Tajikistan, and Kazakhstan, and 327,000 from countries further afield. This inbound flow structure is stable: in 2023, a total of 6.6 million people visited the country, with 714,000 being Russian citizens and 656,000 from countries further afield.
However, over 90% of citizens from neighboring countries arrive in Uzbekistan to visit relatives, meaning they are not the target audience for hotels. Therefore, the primary clientele for local hotels consists of Russians and guests from countries further afield.
Is the annual inbound tourist flow of 1.3-1.4 million visitors sufficient to fill existing and under-construction hotels? Let's look at the numbers. According to STR Global, a major aggregator of hotel operational data, the average annual occupancy rate for modern quality hotels in Tashkent in 2019 was 64.8%, with an average room rate of $149. In 2023, occupancy slightly increased to 65.5%, but this was achieved by lowering the average room rate to $133.
As a result, the revenue per available room (RevPAR) in 2023 was lower than in 2019 ($87 versus $96). There could be several reasons for this, but the most logical, in our opinion, is a significant increase in market supply (around 700 rooms in 4 new 4-star and 5-star hotels) without a substantial increase in tourist flow.
It is likely that this year, the average annual occupancy in Tashkent will slightly decrease, and tariffs, if they increase at all, will do so insignificantly. Meanwhile, the construction of new hotels continues, and the 2,000 rooms planned for opening by the end of 2028 will primarily be in 4-5 star hotels. All of this will put pressure on tariffs and demand volumes for the entire Tashkent hotel market.
Not all foreigners visiting Uzbekistan want or can afford to stay in expensive hotels. A significant portion of tourists coming to experience the culture and life of another country are not willing to overpay and are quite content with mid-range hotels or even more budget-friendly accommodations, provided there is a guarantee of safety and a sufficient level of comfort.
We should also not forget domestic demand – citizens of Uzbekistan, who make millions of trips annually. They currently constitute the main consumer base for guesthouses, rental apartments, and inexpensive hotels.
Furthermore, legislative and administrative barriers also hinder the more balanced development of the industry. On one hand, Uzbekistan encourages the construction of modern high-end hotels; a subsidy program for the construction of 3-5 star hotels is in effect until the end of 2026. However, national hotel classification standards often have stricter requirements than international ones. For example, to obtain a 4-star rating, a hotel must have at least two restaurants, a swimming pool, shops and kiosks, as well as a sports and wellness center with a gym. All of this creates an additional financial burden on developers and is not always justified for centrally located city hotels, which guarantee guests access to these amenities in close proximity.
For instance, a Hampton by Hilton hotel, by brand standards, could be classified as 4-star, but due to the absence of two restaurants and a swimming pool, it has been assigned a 3-star category. This affects its marketing potential, as tourists often rely on the number of "stars" when choosing a hotel.
The country still faces a shortage of professionals in the hospitality sector, both in management and construction. Most developers come from the residential real estate segment, meaning they lack hotel construction experience and often cannot assess the complexity of hotel design, construction, and operation, nor the importance of a professional management team for a hotel's future success.
In our opinion, the key to success for hotels operating in Uzbekistan is collaboration with major chain hotels, which ensure high service quality and access to developed sales channels. Of course, partnering with booking platforms like Booking.com ensures hotel occupancy even under independent management. However, collaborating with international chain brands allows hotels to receive professional management and enhances service levels, which is particularly valuable amidst economic instability and fluctuating tourist flows.
A specific characteristic of Uzbekistan's hotel market is the dominant role of non-chain hotel companies established by local hoteliers, who directly manage almost all local chain hotels under franchise agreements with brand rights holders. Exceptions include the Hyatt Regency and InterContinental hotels, which are directly managed by international chains under management agreements.
Development Prospects and Trends
Following the outbreak of the armed conflict between Russia and Ukraine in 2022, many hotel chains scaled back their operations in the Russian Federation and became more active in Uzbekistan, making the country even more attractive to international companies, including those from the Middle East.
However, as the market is still developing, there are not many developers here who deeply understand the specifics of hotel projects. Nevertheless, hotel operators are actively seeking and negotiating with potential investors.
Promising markets in Uzbekistan include not only cities but also suburban recreational areas in the Tashkent region, ski resorts, and areas around Charvak. Tashkent, as the most populous and affluent city in the country, has a sufficient number of residents willing to pay for leisure and wellness, as well as companies and organizations generating demand for group outings for events in suburban hotels. Consequently, there is growing interest in business and recreational tourism, which intersects and reinforces the development of both sectors.
The hotel business is undoubtedly profitable, but one should not expect a quick return on investment. Firstly, this type of real estate has a "high initial price tag" – a hotel must open fully equipped and ready to receive guests, which implies a significant investment at the initial stage. Secondly, the operational nature of the hotel business, unlike rental properties, presents many "hidden pitfalls" and risks for inexperienced owners and requires considerable daily management expertise.
"Impatient" developers should consider the condo-apartment format. This involves selling individual rooms to private investors as an investment product to generate passive income. Rooms sold to individuals are returned to hotel operations and provide owners with profit after deducting operational and fixed expenses. This scheme is advantageous compared to buying apartments for rent or resale, as it does not require owners to handle rental and maintenance of the property.
The Future of the Hotel Market
In the future, we can expect an increase in the number of hotels across various price categories and formats, especially affordable brands. This will broaden choices for tourists and help attract more guests from countries further afield. It is also important to continue developing destinations like Samarkand so that tourists can better experience the country's culture and life.
For the successful development of the hotel market, controlling and stimulating measures from the state are necessary. It is important to continue stimulating hotel construction in cities, including by limiting uncontrolled residential construction. Moscow's experience shows that this can be an effective measure for tourism development. Hotels should be built as business projects that provide stable income and attract tourists.
Uzbekistan's hotel market has enormous potential for growth and development. The emergence of new brands, an increase in tourist flow (inbound and domestic), legislative changes, and state support will contribute to this process. It is important to consider the experience of other countries and adapt it to local conditions to achieve maximum efficiency and sustainable development.
Source: Spot.uz
