The Mediterranean has seen a comeback in tourism in recent years, but several issues remain in the region.
BERLIN—Southern European and Mediterranean markets have seen huge improvements in hotel performance and business fundamentals in the last few years, but the good times are not spread evenly, according to sources.
Speaking at a panel titled “Southern Europe and Mediterranean” at the recent International Hotel Investment Forum, Frédéric Josenhans, president of Grape Hospitality—which owns and operates 85 hotels in eight European countries—agreed with the other panelists in that Spain would continue to be the big star.
“Italy is harder to calculate as results are not the same everywhere in the country,” Josenhans said.
Gregory Gilbert, principal and head of Iberia for pan-European private equity firm Benson Elliot Capital Management, said people should not start being complacent about Spanish performance numbers.
“There is significant growth in (average daily rate) in the Spanish market but also a lot of repositioning, so you might need to strip this out and see like-for-like,” Gilbert said.
Gilbert said his company takes great care selecting assets carefully because investments typically have a horizon between three to seven years with plans to sell to institutional investors on the exit.
“You need to stay on top of the product so that it stays relevant, and in this way you can guard against those other Mediterranean countries coming back, which have a different price point, lest we forget,” he said.
Neville Graham, managing director of international member services at Best Western International, said he did not see emerging Mediterranean markets denting Spain at least within the next three years.
“It has sun, and the demand is there,” Graham said. “Those who did not want to travel are largely back, and there are new markets such as China.”
Arnoud Duin, VP of finance at Arena Hospitality Group, which mostly invests and operates in its native Croatia but has some city hotels in Germany and Hungary, said Croatia is doing well but still suffers from a reputation problem.
“All the products are being upgraded, so supply has changed in quality if not in numbers,” Duin said. “We have to be very disciplined in our approach, certainly as the season is limited.”
Turkey and Egypt are the Mediterranean countries that have suffered the most, panelists said.
Mehmet Önkal, partner of consultancy and hospitality consulting at BDO, said Turkey is showing signs of reopening.
“2017 was a very bad year,” Önkal said. “Visitors dropped to around 20 million from 37 million, but we expect 2018 to be the correction year, with 30% growth on visitors, although ADR is dragging, and we predict it to be down 10% this year.”
Gilbert noted investors seem to key in to just parts of the region.
“I am not sure if there is much investment interest in the far east of the Mediterranean,” he said. “For urban hotels, there’s a much broader appetite.”
Önkal it’s hard to go from one property type to the other.
“Those specializing in urban hotels have a hard time understanding resort properties, and vice-versa. We are trying to come up with something that works for both owners and brands so as to get brands into the country,” he said of Turkey.
“And there are more franchise than management agreements, mainly due to the very difficult Turkish hotel owners,” Önkal said.
Spades in the ground
Now that trading is up in many Mediterranean markets, panelists wondered if that will lead to more hotel construction in the region.
Again, different markets will see more, but even in Spain, financing is getting tight, selective and cautious.
“It is getting difficult to find financing for new developments,” Gilbert said. “Perhaps if you have a lease you are fine, and occasionally if you have a management agreement.”
He said there are several things to keep in mind before building new properties.
“For us with our deadline, we cannot be developing a new destination and be worrying about airlift and publicity,” he said. “There are even very few development opportunities in Spain, and we’d shy away from greenfield developments.”
Madrid, the Spanish capital, is more to Gilbert’s current liking.
“There still is a lot less risk on the exit in Madrid, with steady demand and both business and leisure,” he said. “There are more than enough opportunities for refurbishment as there is a lot of very tired hotel stock.”
Önkal sees repositioning as the next step for Turkey.
“We do not need new destinations,” Önkal said, “but currently no one wants to invest in Turkey.”
Grape’s Josenhans said it is a sellers’ market. Gilbert agreed.
“I believe liquidity is already there for some urban cities and is coming to resorts,” Gilbert said. “There is a lot of institutional liquidity for coastal resorts, but maybe in Spain. It is far too early to say it is coming to, say, Cyprus.”
Construction costs are not getting lower, panelists added.
“There is a lot of pressure on construction costs and not enough construction companies to support the growth in tourism,” Arena’s Duin said.
“There are risks everywhere,” Josenhans said. “A lot comes down to having the right price for your product. Access to credit could be a risk.”
And hoteliers still must cope with unpredictable risks and expert predictions that do not materialize.
“In Barcelona, terrorism had no effect, while the political referendum that caused one day of political unrest is still being felt now,” Gilbert said.
Panelists said the scramble to widen demand is already in full swing, including efforts to increase airlift, appeal to MICE and sports teams’ winter training business and develop medical and wellness options.
“You need the state involved in any of this, or one just has a marketing message. You cannot do it yourself,” Best Western International’s Graham said.