KPMG in GeorgiaAdvisory

Overview of the Tbilisi Hotel Industry 2012December Update

About this publication

This publication is a periodic update to the Overview of the Tbilisi Hotel Industry, which was released in August, 2011. The material presented in this publication is based on information acquired by KPMG from primary and secondary sources at that time. The purpose of the overview is to obtain primary information about the hotel industry in Tbilisi, including the factors driving changes in demand and supply of hotel rooms, daily rates and customer base, and common services provided by hotels.COUNTRY FACTSCapital TbilisiPopulation, 2012 (beginning of the year)

4,497,600

Currency Georgian Lari (GEL)

Source: National Statistics Office of Georgia

KEY ECONOMIC INDICATORS2011 20121

USD/GEL exchange rate (period average) 1.6860 1.6513

Nominal GDP (USD, million) 14,439 11,4632

Real GDP growth (%, p-on-p) 7.2 7.52

Inflation (%, period average, p-on-p) 5.6 0.2FDI (USD, million) 1,117.2 684.13

FDI growth (%, p-on-p) 4 -11.63

Source: National Statistics Office of Georgia, KPMG calculations

KEY ECONOMIC INDICATORS

Source: National Statistics Office of Georgia* Data for 2012 is based on the first three quarters of the year

HORECA* INDICATORS OF GEORGIA2011 20121

Nominal GDP contribution (USD, million) 277 2512

Component real growth (%, p-on-p) 7.9 13.62

Inflation (%, period average, p-on-p) 3.5 -2FDI (USD, million) 22.7 15.33

FDI growth (%, p-on-p) 32.6 -48.43

Turnover (USD, million) 340.3 312.4Source: National Statistics Office of Georgia*Syllabic abbreviation of the words Hotel/Restaurant/Catering

1 Data for 2012 is based on the first three quarters of the year.2 Adjusted data will be published by the end of November 2013.3 Preliminary data.

Overview of Tbilisi Hotel Industry 2012 / Advisory / February 2013

2005 2006 2007 2008 2009 2010 2011 20120

300060009000

1200015000

-20%-5%10%25%40%

Nominal GDP

DEMANDThe hotel industry has been growing with the increase of foreign investments in Georgia, the increase in the number of foreign visitors to the country and decisions on strategic development of the tourism sector at the government level.

Profile According to the data provided by the Border Police of Georgia, 4,389,256 foreigners visited Georgia in 2012 representing a 56% increase compared to 2011. The total number of foreigner visitors in 2011 was 2,822,363. In the last five years (2007-2012) the number of tourists has grown on average by 28% annually. The significant increase of tourists is due to simplified visa regimes with Turkey (107% increase), Russia (83% increase), Azerbaijan (30% increase), and Armenia (29% increase).Source: National Statistics Office of Georgia

FOREIGNERS VISITING GEORGIA

Source: National Tourism Agency of Georgia

According to the data, 56% of foreign visitors to Georgia in 2012 were from the Commonwealth of Independent States (CIS) countries, 40% from the European Region (including Turkey, excluding the CIS countries) and 4% from other countries. The visitors from the CIS countries were predominantly from Armenia, Azerbaijan, and the Russian Federation and most of the visitors from the European region came from Turkey.

BREAKDOWN OF VISITORS TO GEORGIA, 2012

Source: National Tourism Agency of Georgia

Drivers and Forecasts Georgia is undergoing a transition period to a newly elected government and the process, as in most developed countries, involves some uncertainties. If the political situation remains stable, a 10% annual increase in the number of visitors to Tbilisi in 2012-2016 is expected. We identified the top five most important factors considered by hotel guests to be the following (listed from the most important to the least important):

FACTORS AFFECTING DEMAND FOR TBILISI HOTELS

Price

Image (Reputation)

Location

Cleanliness of rooms

Friendliness of the staff

0 1 2 3 4

3.27

3.45

3.55

3.73

3.86

Level of Importance

* Ratings scale based on the level of importance (4-high, 3-moderate, 2-low, 1-none)Source: KPMG Analysis, December 2012

In addition, we determined the following five economic indicators to have the greatest impact on the flow of visitors to Tbilisi (listed from the most influential to the least influential):

ECONOMIC INDICATORS

GDP growth

International assistance

FDI

Business spending

Government spending

0 1 2 3 4

3.18

3.27

3.36

3.36

3.45

Level of Influence

* Ratings scale based on the level of influence (4-high, 3-moderate, 2-low, 1-none) Source: KPMG Analysis, December 2012

SUPPLYInvestmentsThe demand for hotel rooms has been growing in the last 10 years in Georgia, which has stimulated investments in the hotel sector. In 2007-2011, investments in fixed assets in the hotel, restaurant and catering (HoReCa) sector in

2

2006 2007 2008 2009 2010 2011 20120

1000

2000

3000

4000

5000

983 1,052 1,290 1,5002,033

2,822

4,389

Thou

sand

s of

Vis

itors

35%

21%

20%

12%

2%2%

8% TurkeyAzerbaijanArmeniaRussiaIranUkraineOther

Georgia totaled USD 228 million. Additionally, for the period of 2007-2012, foreign direct investment in the HoReCa sector in Georgia amounted to USD 516 million. As a result, new hotels were opened and the existing hotels renovated their facilities to service the growing demand.

INVESTMENTSmillion USD 2008 2009 2010 20

11 2012

*Fixed Asset Investments, HoReCa, Georgia

36.7 84.8 30.7 27.2 N/A

Fixed Asset Investments, HoReCa, Tbilisi

12.5 78.0 15.9 N/A N/A

FDI, HoReCa, Georgia 181.9 37.5 17.1 22.7 15.3

Source: National Statistics Office of Georgia, KPMG calculations* Data for 2012 is based on the first three quarter of the year.

Room AvailabilityThe latest entry in the market was the Holiday Inn (opened in 2010) operated by Intercontinental Hotels Group with 180 guest rooms in November 2011, Citadines Apart-hotel (opened in 2009) operated by The Ascott Limited with 66 guest rooms, and Radisson Blu Iveria Hotel (opened in 2009) operated by Rezidor Hotel Group with 249 guest rooms.Most of the hotels use different naming conventions for their rooms based on the room features and sizes. As a result, five main room categories were identified: standard single, standard double, business, junior suite, and executive suite.ROOM BREAKDOWN OF LOCAL HOTELS

39%

43%

0%10%

8%

SingleDouble BusinessJunior SuiteExecutive suite

Source: KPMG Analysis, December 2012

ROOM BREAKDOWN OF INTERNATIONALLY – BRANDED HOTELS

46%

25%

22%

7%1%

SingleDouble BusinessJunior SuiteExecutive suite

Source: KPMG Analysis, December 2012

For all main hotel room categories, the internationally-branded hotels offered significantly larger rooms than did the local hotels. The average size for a standard single room in local and international hotels was 23 sq. m. compared to 25 sq. m. for a standard double room. It should be mentioned that it is a common practice among internationally-branded hotels to offer business rooms in Tbilisi and their average size is 44 sq. m.ROOM SIZES

Single Double Junior Suite

Executive suite

020406080

100120140

19 2238

5032 32

61

115

Local Hotels Internationally-branded Hotels

In s

quar

e m

eter

s

Source: KPMG Analysis, December 2012

Daily RatesThe daily rates for hotel rooms during the high season, shoulder season and low season did not show significant variation for the surveyed hotels. The seasonally-adjusted average daily rack rates (net of VAT, breakfast included) were:DAILY RACK RATES FOR INTERNATIONALLY – BRANDED HOTELS (USD)Standard single 119 - 279Standard double 132 - 279Business 151 - 339Junior suite 189 - 460Executive suite 710 - 865Source: KPMG Analysis, December 2012

DAILY RACK RATES FOR LOCAL HOTELS (USD)Standard single 70 - 145Standard double 80 - 170Business* 146 - 186Junior suite 100 - 228Executive suite 120 - 250Source: KPMG Analysis, December 2012

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Based on the information provided by STR Global (www.strglobal.com), the average daily rate amounted to USD 136 (a 3.1% increase compared to last year) and the average yearly occupancy rate in Tbilisi for international brand hotels during 2012 was 68%. According to the same source, revenue per available room in 2012 amounted to USD 93, representing a 16.8% increase compared to 2011.

Services and FacilitiesAlmost all hotels operate at least one restaurant and at least one bar on the hotel premises. Almost all hotels have one or more conference/meeting rooms. The average conference/meeting room seats 67 people in a theatre setup. The large conference rooms are equipped with audio/video equipment, such as projectors, microphones, teleconferencing equipment, etc; however, it is not uncommon to see projectors and microphones in the smaller meeting rooms among the internationally-branded hotels. The conference rooms are rented out for a half or a full day. Nevertheless, it is a common practice to charge a per person flat rate that will include breakfast and/or lunch.Almost all hotels have a fitness room that is normally open to hotel guests and outside customers. The fitness facilities are free of charge for hotel guests, while the other customers have to pay to use the facility.Almost all hotels have one or more swimming pools. Generally, the swimming pools are open to hotel guests and outside customers, while the outside customers are charged a fee for using the facility.

Pipeline & ForecastsInformation about upcoming hotel projects in Tbilisi is often difficult to obtain and even harder to verify. The information below has been obtained from various media and other sources and may not be completely reliable.Hilton Garden InnIn late November 2012, EBRD confirmed that it would be providing USD 18m of financing to 64 Chavchavadze LLC to develop a 160 room property on Chavchavadze Avenue.Park Hyatt The cancellation of this project was confirmed by Mindia Gadaev of Loyal Estate in January 2013. Instead the site, near Hero Square, is slated to become a shopping centre.Inter-Continental (former Ministry of Agriculture building)

According to the developers (Georgian Property) as of 5 February 2013, the project will still go ahead.Millenium HotelThe UAE based Dhabi Group confirmed back in May 2012 that this project (a 220 room hotel) would still go ahead although very little activity had been noted on this site until recently.Rixos HotelThis 60 apartment development on Gudiashvili Street would be the latest addition to the high-end Rixos chain and should open in 2014 as planned.Golden TulipAccording to press reports, this 103 room hotel on the edge of Vake Park should be ready by the final quarter of 2013.

ROOMS IN TBILISI

2010 2013 20162500

3000

3500

4000

4500

5000

3,604 3,812 3,683

4,438

High Probability Low to Medium Probability

Actual 3,323

Source: National Tourism Agency of Georgia

It is expected that the supply of hotel rooms will grow by 8% annually in Tbilisi in 2012-2016.

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Projections

Andrew CoxshallManaging PartnerSouthern CaucasusE: acoxshall@kpmg.com

Clinton HagfeldtSenior Manager, Head of AdvisoryKPMG GeorgiaE: chagfeldt@kpmg.com

Contact us

KPMG in Georgia3rd floor, Besiki Business Center, 4 Besiki Street, Tbilisi, 0108, Georgia

T: +995 (322) 93 57 13 / 93 56 95F: +995 (322) 98 22 76

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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.© 2012 Tbilisi branch of KPMG CIS Limited, a branch incorporated under the Laws of Georgia, a subsidiary of KPMG Europe LLP, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

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