Hotel headache

Sales of hotels and hotel projects on the Black Sea have been taking place for a few seasons now. Prices start at a symbolic EUR 1, but investors remain cautious and are holding back until the autumn. Will even more properties be going under the hammer when the harvest time comes?

Mladen Petrov

Last year, some of the most attractive tourist regions of Southern Europe, such as Cyprus, Greece and Croatia, suffered 
10-35 pct declines in revenues from tourism. According to Bulgarian hoteliers, last summer’s season on the Black Sea wasn’t much better. Even Al-Waleed bin Talal, the Saudi Arabian prince who topped the list of the world’s richest Arabs not such a long time ago, was beset with financial problems. In order to save his fast-diminishing fortune (estimated at USD 13 bln), the prince had to wave goodbye to several luxury hotels in his portfolio, including the best known of these – The Fairmont Raffles Hotel International in Singapore.

Time to take a rain check

Hotels owners in Bulgaria now find themselves in an unenviable situation. After a few years of growth, the burgeoning Bulgarian economy has slammed hard on the brakes, with the property market being the first to suffer. During the years of plenty, coastal and mountain resorts were transformed into huge construction sites. International and local investors, often without any previous experience in the real estate business, kept on buying plots of land, planning to build ever more exclusive residences and hotels. The crisis, however, put a stop to their plans. Last year on the market in Bansko there were plenty of sales offers for new apartments at prices as low as EUR 300 per sqm. Since last year there have also been more hotels put up for sale. They were built for the same reasons as the apartment complexes, i.e. due to the easy availability of credit and the belief that the market would never stop growing. Business people whose only experience in the industry amounted to staying in a hotel on holiday themselves decided to get in on the act and become hoteliers.

Last summer, over 200 hotels were put up for sale on the south coast of the Black Sea. The prices for 85 of them exceeded EUR 1 mln. In the seaside capital of Bulgaria, Varna (and its surrounding area), 70 hotels were put on the market. What is on offer is substantial: there is no shortage of small, family hotels, but there are also large four and five-star facilities with 200-300 rooms priced at up to EUR 16 mln. The common factor between the offers last year was the lack of any particular interest from buyers; this was also the reason why these properties, often located immediately adjacent to the beach, were put up for sale. The shortfall of hotel guests (often resulting from weak relationships with tourist agencies), an inability to cope with guests’ requirements and difficulties over the repayment of loans, are among the factors listed by estate agents as being mainly responsible for this grim situation.

The next difficult step

According to consultants, the number of new hotels offered for sale this year will not be higher than last year. “However, this does not mean that there has been a positive turn-around in the trend, because the new hotels are just being added to those from last year that have yet to find buyers. It should be borne in mind that many owners are not officially putting their hotels up for sale, fearing that this would have a negative effect on the hotel’s image. Nobody benefits from rumours that a property is for sale. This is why it is hard to give an accurate picture of the situation,” explains Polina Stoykova, chief operations manager of the Bulgarian Properties real estate agency. The company has over 50 hotels across the country in its offer. “The situation has now changed completely. In 2007 and 2008, hotels were being built and almost nobody thought about selling them. One difficult season for the coastal and mountain resorts was enough for the owners to start off-loading them or leasing them to other operators, treating this as a temporary step. At the moment it can safely be said that every hotel owner would consider selling if they received an offer,” adds Polina Stoykova.

Small hotels with prices of up to EUR 500,000 are the most popular, if one can even talk about there being any interest at all. The potential buyers include both individual investors and opportunity funds on the lookout for a bargain. However, they still have reservations over the prices. “It can certainly be said that there is still a long way to go before a deal between the seller and the buyer is reached. In some cases the expectations differ by 20 pct or more,” Polina Stoykova emphasises.

Other agents selling hotels in Bulgaria claim that there is a 40 pct gap between the expectations of sellers and what buyers are prepared to pay. “Funds are still very wary when it comes to taking decisions over acquisitions. This year it should become clearer whether or not we reach the second bottom of the crisis. The latest statistics for the property market have started to indicate this once again after a period of relative stability. Only when the autumn comes and the summer season has ended will we be able to assess the situation, and then it will be revealed whether the current group of sellers is to be joined by more hoteliers,” Ms Stoykova predicts.

More haste, less speed

Petar Radev, the managing director of Property Management BG, is advising hotel owners to be in no hurry over deciding to sell, especially when there is such a big supply. The company, which is engaged in holiday facility management across the whole of Bulgaria, cannot complain about there having been a shortage of clients since last year. According to Petar Radev, the problems faced by the industry not only result from the sometimes dubious quality of the service or the lack of experience of the owners, but also from the absence of any vision for the development of the hotels. “The supply of accommodation is clearly too high and the number of people visiting the country is more or less the same,” claims Mr Radev.

Last year, representatives of the National Tourist Board, the biggest organisation of hoteliers in the country, forecasted that 20 pct of hotels in the country would be closed or would change their line of business in 2010. If this really comes to pass, it would mean that there would be 200,000 fewer hotel beds in the country. According to the board’s data, app. 70 pct of the available overnight accommodation facilities are vacant. The was a trend that was already evident in 2008 and it continued through 2009. Where does the problem lie? “Last year we registered app. 17 mln overnight stays. If the hotel facilities had stayed at the same level they were in 2002, we would have seen hotel occupancy of around 50 pct. It also looks as though projects have been built in places that did not need so many facilities, which will eventually lead to further closures,” believes Rumen Draganov, the chairman of the board, as quoted by BTV.

Who to believe?

The official figures of the Bulgarian Ministry of Economy seem to belie the claims that last year was one of the hardest for the tourist industry. According to the ministry’s data, the number of tourists increased by 0.2 pct up to 5.2 mln in the first three quarters of the year, and that the revenue from tourism even grew by 1.2 pct compared to the same period in 2008. The biggest seaside resorts, on the contrary, are complaining about decreases in revenue of 10-30 pct for the same period compared to 2008, while in the mountains hoteliers are claiming that the fall in turnover was 10-15 pct.

“In this situation there will be more and more hotels for sale. Their owners should, however, really think about how to make their offer stand out from several dozen similar ones on the market. For a hotel to sell these days it should both be recognisable and should have a higher occupancy rate. This is why owners must do everything they can to increase a hotel’s value before they put it up for sale,” argues Petar Radev of Property Management BG. The company undertakes both property management (it has over 20 hotels and apart-hotels in its portfolio) and tourism marketing. “The hotels were built without any vision or idea of what to do with them afterwards. We are now getting enquires from hoteliers who have tried to manage their hotels on their own. They believe that a substantial reduction in prices is the only solution to their problems. None of them knew how to create added value,” Mr Radev adds. Hotel consultants are advising rebranding or a change in the line of business. The demolition of a hotel in a not very attractive location and investing in a new project are only recommended as a last resort.

People looking for opportunities to invest their money on the coast cannot complain about there being a lack of offers this summer. Apart from hotels and finished apartments, there are also plenty of residential projects for sale, as well as unfinished buildings. Promotional prices start at a symbolic EUR 1 with an asterisk – which is supposed to indicate that the buyer should beware of the challenges presented by this particular purchase. But even in such cases there are no interested parties anywhere in sight. ν