Scoring an offside goal

When FIFA awarded the hosting rights for the 2018 World Cup to the Russian Football Association in December 2010, as always, much was said about how much the event’s preparations, initially estimated at USD 16 bln provided by both the Russian government and private investors, would positively impact the host cities and the rest of the country. Four-and-a-half-years, a ruble crisis, the Winter Olympics and an FBI investigation later, as the work on the construction sites spread from Kaliningrad to Ekaterinburg, from St Petersburg southwards to Sochi, gradually advances, Russia is cancelling some of the planned investment projects, trimming down the World Cup budget to app. USD 10 bln and even faces the risk of losing the tournament on corruption grounds.

Mega events under little control

“As the scandal has unfolded, it has been alleged that FIFA executives have been selling hosting rights to a marketing company in exchange for money that would go to the marketing company and some which would be fed-back illegally to FIFA executives,” explains Prof. Stefan Szymanski of Stephen J. Galetti Collegiate, University of  Michigan. How could this put the brakes on the grandiose Russian plan to host the world’s biggest football festival? The FBI, which has been investigating the case, is probing – along with the Swiss prosecution office – whether a similar corruption mechanism was used in the 2018 and 2022 World Cup hosting rights bids. If wrongdoing is proven, the increasingly tarnished FIFA could be forced by the international community and the public to cancel the Russian tournament and move the event elsewhere. “If it is established that corruption has been involved in these bids, then the process has to be re-run. And FIFA must address the fundamental human rights and anti-corruption measures for the 2018 and 2022 World Cups in Russia and Qatar,” argues Amnesty International, calling for a thorough and transparent investigation of the affair.

Concrete and circuses

And what exactly is at stake? The tournament is to be held in Moscow, Ekaterinburg, Kazan, Nizhny Novgorod, Samara, Sochi, Volgograd, Kaliningrad, Rostov-on-Don, Saransk and St Petersburg, where a total of twelve green-certified stadiums are set to host the World Cup matches. While some have only required only a degree of prior renovation and modernisation work, the majority of the facilities are being built from scratch. So far four Russian World Cup stadium projects have been completed. “The construction and reconstruction of sports facilities is expected to cost app. EUR 2.5 bln to EUR 3 bln,” Valentin Gavrilov, the director of CBRE Russia’s research department, has revealed to ‘Eurobuild CEE’. Moscow’s 81,000-seater Luzhniki Grand Arena stadium, the biggest of the 2018 World Cup venues, which will host the opening and final games, is currently undergoing reconstruction with most of the work expected to be completed by the end of 2016. Meanwhile, the 45,000 sqm Victory Arena Stadium in Volgograd is under construction, as is the same-sized Nizhny Novgorod stadium. In St Petersburg, the roof has just been installed at the Krestov Island stadium, which is scheduled to be completed by the end of next year. All the work is being carried out by Sport-Engineering, a state-owned development company responsible for the construction of the 2018 FIFA World Cup Russia stadiums, supported by a range of local and international subcontractors. These include international revitalisation, design and technological companies providing the highly-specialised equipment, services and expertise unavailable in Russia. The potential cancellation of the 2018 tournament, therefore, could have an unprecedented and far-reaching legal and financial fallout for those entities, depending on the scope of the work and the resources they have already put into the preparations as well as their projected revenues from these projects.

And yet the football arenas are merely one plank of the planned development efforts. In addition to the stadiums and the more than 110 training fields and all the requisite sports infrastructure, a number of road, airport, railway, public transport, hotel, residential, entertainment and retail projects are expected to be delivered by both Russian and foreign investors. Even at this point, when the preparation budget has been significantly trimmed and ballooning expectations have been brought somewhat back down to earth, the impressive list of non-sporting projects scheduled ahead of the 2018 World Cup seems to be never-ending. An app. USD 113 mln runway reconstruction has already started at Nizhny Novgorod airport, where a terminal is also being extended to increase the airport’s annual throughput to 1.5 mln passengers. In Samara, a 20 km monorail network is being developed, while in Moscow a 67 ha DreamWorks studio theme park is under construction. The list goes on. And if that was not enough, the local organising committee also plans to create special hospitality zones in the more remote Russian cities not hosting matches. These will include Vladivostok, Irkutsk, Khabarovsk and Kemerovo. “The largest chunk of government expenditure, app. EUR 5.5 bln, was planned to be invested in improvements to the transport infrastructure. Almost every city will benefit from the airport, railway or road infrastructure projects,” says Valentin Gavrilov. “The projects will mostly be delivered by local contractors, although a number of international construction companies, for instance Turkish Renaissance Construction, will also be involved,” he adds.

Business push

While the infrastructural elements are presumably set to remain in place long after the final match is played, any disruptions to their delivery would hit not only their developers, but equally the profit-generating potential they have, and thus the entire local market. “Improved local transport infrastructure provides greater connectivity between industrial and commercial areas and can enhance the access to freight corridors, road, rail and seaports, thus raising the profile of a location,” was how Colliers International put it in its pre-Sochi Olympics analysis. “Hosting the Games now requires updating modern telecommunications technology, which is highly appealing to current and future occupiers,” the agency argued. Unsurprisingly, the return-focused approach is also being strongly embraced by property investors. “Usually cities aim to have commercial real estate located near stadiums in order to improve the payback potential for the entire project,” says Valentin Gavrilov. The complementary components can comprise the hospitality, services and retail components, with the latter having the most fragility because of the still weak Russian occupational market.

According to Cushman & Wakefield, in Q2 2015 local investors were the main drivers of retail investment activity, while international investors remained very wary and only willing to consider the major opportunities. And, as CBRE’s Valentin Gavrilov tells us, this trend will continue into the 2018 tournament. “The World Cup’s retail component will mainly be carried out by local investors, having a stronger position in the target region.”

No hotel bonanza

The corruption allegations are not the only likely obstacle to the ambitious Russian plans for 2018. The World Cup budget, which has recently been cut to app. USD 10 bln, could shrink even further if Russia’s economic turmoil persists, and a number of projects could be significantly delayed as a result. And apart from inflicting further losses, the delayed development projects could give opponents of the Russian World Cup an extra argument to move the tournament elsewhere, should the chance to do arise. Earlier this year 25 lavish hotel projects worth a total of app. USD 500 mln were cancelled in spending cuts, requiring an alternative accommodation strategy to be drawn up for the event instead. It is likely that five-star properties will be replaced by lower-standard accommodation, including dorms. Nevertheless, a total of  60 three-, four- and five-star hotels are planned to be built in Moscow alone ahead of the 2018 World Cup, according to Alexander Gorbenko, Moscow’s deputy mayor. CBRE claims that, while the World Cup hotel investment activity will mostly be local, there is “noticeable” investor interest in the construction of hotels in the host cities. “The new hotel projects erected for the World Cup could cost from around EUR 1 bln to EUR 1.1 bln,” says Valentin Gavrilov. Last year, total hotel investment volumes in Russia amounted to EUR 460 mln.


Valentin Gavrilov, the director of CBRE Russia’s research department


For most international hoteliers, the tournament has come at just the right time, as the Russian hotel market continues to be vastly under-supplied given the scale of the economy and the limited selection of hotels in different classes – especially compared to Western countries. Interestingly, however, while the World Cup pressure is on and Western hotel chains could easily take the opportunity to fill the gap in the supply (and the weak ruble could also mean a greater influx of tourists), the economic and political tension often overrides their enthusiastic investment approach. The US-based Starwood group has just opened its seventh Russian hotel in Ufa – its third Sheraton-branded hotel in a country of 143 mln people, following the openings of the Sheraton Moscow Sheremetyevo Airport Hotel and Sheraton Palace Hotel Moscow. And while the hotelier aims to double its footprint in Russia over the next three years, its currently optimistic expansion plans could be blown off the course if the Russian market continues to weaken. Currency fluctuations have already scared off the InterContinental Hotels Group, which has announced it is freezing all of its yet to be launched development projects in Russia, at least for the moment.

Mediocre is the new black

Russian hotel stock is dominated by Moscow, which attracts the largest share of internationally-operated hotels. Luxury brands make up the vast majority of these and “there remains a lack of international-quality hotel rooms priced in the mid-range,” KPMG’s analysts pointed out in a report published at the beginning of the year. “No new midscale hotels are expected this year, with the midscale market currently comprising just twelve hotels with a total inventory of app. 2,700 rooms,” the report reads. While the bigger mid-range hotel room supply might be an answer to Russia’s overspend fears, ironically it is this segment that is probably most fearful of the Russian economic turmoil. By 2020 the room stock of hotel chains in Moscow is expected to grow to almost 22,000, with 42 new properties adding almost 11,000 rooms to the total.

The statistics are rather similar for St Petersburg, the second largest hotel market in the country, where over 70 pct of branded hotels are in the upscale or luxury segments, and almost half of all pipeline properties are in the midscale segment. The city has recently launched a reclassification of its hotels in line with FIFA requirements, and the first 19 hotels have obtained their new certificates. “These include Crowne Plaza St Petersburg-Ligovsky, the Radisson Royal Hotel, Cronwell Inn Stremyannaya and Ibis Saint-Petersburg Centre,” says Colliers International. Up to now, 100 more St Petersburg hotel properties have applied for FIFA accreditation. At least eight hotels with around 1,600 rooms are being developed in St Petersburg ahead of the World Cup, supported by both local and foreign equity. Last year Korean company Lotte Group purchased the Isaakievskaya Assembly apart-hotel redevelopment project, which is now to be transformed into a five-star hotel and opened in 2017, while Turkish hotelier Elite World Hotels has started the construction of two hotels in the city.

Sustainability backlash

Would the new properties go bankrupt if the Russian World Cup was cancelled? No, is the most likely answer. However, their performance might to some extent be threatened by the economic storm clouds over the country. Of course, every property investor involved in the 2018 World Cup preparations would be left in a rather uncomfortable position should the 2018 World Cup be cancelled. Some would probably manage to transfer their contracts to the new host country or would receive compensation from the commissioning bodies. Russian-owned and financed development and construction companies – whether directly involved in the bribing mechanism or not – could suffer damaged reputations and lose international contracts. On the other hand, a well-publicised tournament prepared with sustainability in mind could provide an incentive for additional foreign investment to the country. But it is difficult to believe that commercial real estate investors would not be put off from doing so by the barely improved local infrastructure. And most asset classes are simply too vulnerable to the unpredictability of the local market.

Whether the main factor is the recent Sochi experience (the preparations for the 2014 Games consumed a record USD 47 bln, leaving a number of white elephants behind) or the preparations are simply the victim of cuts in the state budget, the scaling down of the event is not the worst thing that could happen, especially given that mega sporting events are tending to attract less visitors and investment volumes than initially anticipated. Some economists claim that their impact on local economies is often overestimated and that a more sustainable approach to the master planning sporting events is needed [see interview in box]. Soon after the corruption scandal broke out, the 2018 tournament’s local organising body and FIFA started to implement a complex World Cup sustainability management project, the first such initiative in the championships’ 85-year history. “The scale of the event inevitably has an impact that needs to be evaluated and mitigated, but it also represents a unique opportunity to contribute to a positive legacy for Russia,” FIFA’s head of sustainability, Federico Addiechi, commented at the time. The question will remain if whether wiping out all the effort and capital already invested on Russian soil – however fair and expected if wrongdoing is proven – and leaving some of the projects half-finished, could be the most sustainable thing to do.

Big money in play

Interview with Stefan Szymanski, a sports economist at the University of Michigan and the author of ‘Money and Soccer: A Soccernomics Guide’ and ‘Football Economics and Policy’

Some people saw Euro 2012 as a potential for change in a Ukraine struggling with its post-Soviet legacy. Russia is the next in line to host a huge football event...

I don’t think the 2018 World Cup in Russia will do anything to change the attitude of the oligarchs in the country. Just as Beijing 2008 did nothing to change the attitudes of the politicians in that country. I think that it can even make matters worse – the classic example is the Argentinian World Cup in 1978, when hosting the event did nothing at all to bring a brutal regime and dictatorship to an end. There’s no pay off in terms of improving the internal politics or liberating regimes. Dictators do just as well.

Is there any real transformative power behind large sporting events, then?

You can certainly think of examples that had been milestones. The classic example is always Barcelona’s hosting the Olympic Games in 1992, where clearly up until the 1980s Barcelona has been seen as a depressed, industrial city; but into the 1990s Barcelona was transformed: everyone in Spain, Catalonia and the rest of the world has started to see Barcelona as this very attractive, developing, exciting city that everybody wants to go to. And, in a sense, the 1992 Games contributed to that. Maybe one could say that in fact the Games were crucial and the cause of that transformation – but I think that’s ridiculous, I think there’s lot of evidence that the re-development was already rapidly progressing in the 1980s, whether they had hosted the Games or not. But it can make sense to host a major event as a kind of a landmark, as a transition point from one period to another. Another very good example in a less popular sport was the 1995 Rugby World Cup in South Africa, which was very much about the transition in the mentality of South Africans. Rugby has always been a favourite sport of white South Africans, and the moment when Nelson Mandela wore the national team shirt and embraced the white South African rugby players, was truly a victory. Many people will always associate South Africa’s transition with that event. So it has become a symbol of the transformation.

Nonetheless, the kind of over-enthusiastic attitude that could lead to over-investment is evident during every single event of this kind.

A good example is the South African football world cup, where from what I’ve read many people were tempted to refurbish their homes and were planning to adapt them into hotels, as they were expecting a tourist bonanza that would generate a lot of income – and in order to make this happen people had to invest their savings and, in many cases, a significant proportion of their life’s savings. But because there weren’t that many tourists, many would have lost huge sums of money – a personal tragedy for those individuals. Now, such a situation is avoidable if we get real about the hosting of these events, making it clear that they’re great sporting events, people
 will have a lot of fun and enjoy them, but they don’t have a significant economic impact. Tourist numbers almost always turn out to be massively over-estimated. I think what the IOC or FIFA have to do is to think about the standard of the facilities they really need to host an event effectively. And much of this is to do with what is in front of the television cameras, what you see on TV.

Shouldn’t the sporting organisations take the blame for this?

When you are competing for the approval of FIFA or UEFA, you are tempted to make promises that are unsustainable. But you can argue that organisations like the IOC have some responsibility to de-escalate the scale of these promises and, in all fairness, the IOC has been stepping in to say there should be less infrastructure, there shouldn’t be too much spending – so there’s been some recognition of this issue. But there’s also a certain amount of self-inflicted unfulfillable promises by the politicians who want to host these events – they want to show off and to take all the credit for it and therefore they make unrealistic spending commitments. So it is not only the IOC or FIFA that are to blame.

But it is UEFA and FIFA that make all the money from the commercial rights, broadcasting licences, etc.

You can share the broadcasting money. There is also the ticket money. But certainly UEFA mostly relies on large-scale sponsorship money and TV rights to generate income. UEFA is a relatively transparent organisation and you can see where the money goes – it essentially goes to 53 national football associations. So, in a sense, this is a festival of football, where the surplus is used to promote football in each of the member associations. And that’s a perfectly legitimate approach.

As long as corruption doesn’t come into the picture.

I would like to make a big distinction between FIFA and UEFA. UEFA is a relatively transparent organisation, where the rules are really quite clear. The problem with FIFA is that they have a 24-member executive committee that decides on everything and controls where most of the money goes, but there’s little transparency. It’s very hard to see who gets what – and this has led to serious allegations of bribery and corruption.

(The interview was conducted in 2012)