What investors need to know about resorts

MR&H 2019
The Mediterranean Resort & Hotel Real Estate Forum will be held at the Hilton Athens October 29 to 31. Photo credit: Questex

Resorts are increasingly attracting investors’ attention, but whether they are all-inclusive, lifestyle or luxury, business models vary as widely as the amenities that can be offered and the partners involved.  

At the International Hotel Investment Forum (IHIF) recently held in Berlin, a panel discussion with representatives of 12.18. Investment Management GmbH, Apple Leisure Group, Arena Hospitality Group, Blau Hotels & Resorts, Horwath HTL and Marriott International looked at what makes resorts a complex but attractive opportunity.

Business Models: Who’s Best to Operate a Resort? 

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When it comes to business models for resorts, moderator Philip Bacon, director of planning and development & valuations at Horwath HTL, asked: "Is every project unique?" Yes, according to Jörg Lindner, managing director of 12.18. Investment Management GmbH: “Every development is a new business idea and you have to find the right model for each business idea.”  

More specifically, it depends on the location of the resort. Germany, for instance, favors the long-term lease model, but challenges may arise when economic cycles evolve during the time of a lease. In the Mediterranean, the optimum business model is to be found on a case-by-case basis, said Nikos Hadjos, director of development/Greece and Cyprus at Marriott International: “In some cases it’s best for the owner to manage the property if they’re capable or we can suggest a white-label operator. In cities, where you can have year-round operations, you can look into a management-contract scenario.”  

The emergence of institutional investors in the Mediterranean region is having an impact on business models, as they favor management companies and white-label operators approved by hotel brands. However, Hadjos pointed out “the way you operate a seasonal hotel isn’t as transparent as you’d be used to in the western European or more-developed market world, and it wouldn’t be proper for a company like ours or Hilton or Accor if we weren’t able to do it by the book. The white labels or franchisees could do it the way they want to, as long as they maintain the minimum standards of integrity.” 

Luka Cvitan, in charge of strategy, capital markets and IR at Arena Hospitality Group, added seasonality has a major impact on business models. In Croatia, where Arena owns resort properties, the season lasts two months, during which 80 percent to 85 percent of business is generated. That is why it is important for the company to diversify its portfolio into cities as well.  

Is the All-Inclusive Due a Comeback? 

The panel looked more closely at the all-inclusive model. Fernando Fernandez, VP/development at Apple Leisure Group, shared his experience of an operator of all-inclusive, very upscale resorts based primarily in Mexico and the Caribbean. The company is now working on a project in Spain, where Fernandez said the all-inclusives are lagging behind their Caribbean counterparts. According to him, the all-inclusive in Europe needs to shake off a negative image based on under-invested properties: “We’re going to introduce the all-inclusive that we have in the Caribbean in Mallorca but it’s going to be a process. European customers need to get used to the concept as one that gives you the peace of mind to enjoy your vacation.”   

Hadjos said this is a product his company hasn’t traditionally looked at but “we’re looking at ways to find more values for shareholders, customers and employees, so I wouldn’t be surprised if down the road Marriott has decided to enter the all-inclusive world.” 

The success of all-inclusive depends on its segment. Arena has one in Croatia that is targeting British travelers whose needs are different from other markets. Cvitan said the hotel is doing well. “They’re filling it properly for four to five months per year; it’s more predictable in terms of cash flow but it’s less profitable." 

On profitability, Fernandez pointed out that an all-inclusive resort needs to make sure the guests go out of the property (which is why Apple Leisure Group has partnerships with tour companies), and to create out-of-package revenues—for instance, from spa services.

Addressing Financing Issues 

Under-investment is an ongoing issue in European resorts, coming down to a lack of support from banks, according to the panel. Lindner argued resorts suffer from an image problem with bankers, as the assessment criteria they use for hotels don’t necessarily apply to this asset class.  

In Greece, the funding situation is linked to the problem of non-performing loans. Hadjos said Greek banks have learned their lessons: “Before the crisis banks were giving loans without doing their homework and now, with more than 8 billion NPLs in hotels, they’ve gone too far the other way.” 

Cvitan argued some countries understand the importance of funding the resort sector. In Croatia, for instance, where more than 20 percent of the GDP comes from tourism, it’s a very important sector for the economy and banks are willing to support it: “They know the market and what they require is someone who knows how to manage.” However, new developments face the additional challenge of rising construction costs that, added to costs such as labor, have been making new development and refurbishment projects more difficult.  

The Importance of Residential in Resort Developments 

The residential component is a major part of the potential success of a resort development. Pablo Suarez, CEO of Blau Hotels & Resorts, pointed out this component can bring new developers to resorts. “We’re having conversations with residential developers who see the resort as a complement for them, so it’s a good opportunity for hoteliers.”  

It also can help manage the issue of seasonality. “We sell apartments, and when the client doesn’t use it, we lease it and use it as part of the hotel,” said Lindner. “It solves the problem of residential in resort areas when the owners use it for only a few weeks per year and it’s empty the rest of the year.”  

Resorts as an asset class will be debated next at the Mediterranean Resort & Hotel Real Estate Forum (MR&H), sponsored by Hotel Management's parent, Questex, to be held at the Hilton Athens October 29 to 31. 

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