Editor’s note: The following is part of a series of monthly articles from Horwath HTL that examine local business conditions in various hotel markets throughout the world. Installments run on or about the 20th of each month.
As a service-based economy that was hit hard by the global financial crisis, Croatia recovered more slowly than other countries in the southeast Europe region. While macroeconomic stability of the country has been achieved, structural reforms lag because of a lack of strong governmental support. And while the worst of the recession is over, Croatia has yet to see signs of a sustained economic recovery. Parliament elections at the end of 2011 and Croatia’s full European Union membership as of 2013 are expected to accelerate fiscal and structural reforms.
One of major challenges of the Croatian economy is its competitiveness level. According to the World Economic Forum’s “Global Competitiveness Report,” Croatia registered advancement from 2005 to 2007, followed by continual decline from 2008 to 2011. Today Croatia, according to country competitiveness level holds 76th place among 142 countries, after recording significant declines in macroeconomic environment, innovation, labor market efficiency and goods market efficiency. On the other hand, technological readiness, infrastructure, health and primary education, and higher education underline the potential for competitiveness.
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Sanja Cizmar
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Doing business in Croatia could be challenging for hotel developers without first addressing ownership and spatial-planning issues. Most barriers for developers are in the area of administration, while bureaucratic red tape is the major impediment to investments. Croatia is ranked as 80th out of 183 economies, according to World Bank's “Doing Business 2012 Index.”
Key challenges that stand in the way of doing business include dealing with construction permits, protecting investors and registering property. On the other hand, Croatia is ranked well in infrastructural availability, possibility to getting credit, paying taxes and enforcing contracts.
Destination Croatia: Hot spot
Croatia is becoming a hot spot on the world travel map. The Croatian region of Istria is ranked among the best travel destinations in 2011, according to Lonely Planet travel guide. Istria is where the Adriatic Sea meets the diversity of southern Europe; it has abundant, virgin nature and represents a paradise for sailing along the shore and between the many Croatian islands. Famous international chefs predict Croatia is a future European culinary star, due to its rich nature gastronomy based on olive oil, fish and a high-quality wine.
Croatia is one of the last undiscovered parts of Mediterranean. Due to its rich natural and historic resources and traditional way of life, its tourism positioning relies on the “Mediterranean as it once was.” But, at the same time, it strives to become a lifestyle destination. This positioning offers plenty of opportunities to developers in tourism and real estate. However, developers should choose a viable project carefully. Because a competitive business climate as yet to be created, finding the right project could be a profitable operation and a return on investment. Entrepreneurs in hospitality strive for regulatory framework, especially value-added tax and investment incentives that would be comparable to those in other European countries.
Tourism is one of the main driving forces of the Croatian economy, generating 13% of the country's gross domestic product. The main issue is how to increase competitiveness of Croatian tourism on the international market. According to World Economic Forum and its “Travel & Tourism Competitiveness Report,” Croatia is ranked 34th out of 139 countries.
The key challenges are connected with the price competitiveness of the Croatian travel and tourism sector, which is a reflection of the high tax burden, airline ticket taxes and airport charges. Low ranks are given to the quality of human capital in Croatia, especially education, the extent of staff training and the availability of professional staff, as well as regulations related to the labor market, such as hiring and firing practices, and the ease of hiring foreign labor.
The country’s regulatory framework, which includes rules on foreign direct investment, the prevalence of foreign ownership and the T&T government expenditure, also represents a barrier in the competitiveness of Croatian tourism. Furthermore, the quality of Croatia’s air infrastructure, international air transport networks and the quality of port infrastructure are areas that must be improved to contribute to the quality of tourist services. A planned expansion of Zagreb Airport, a major international hub in the country, will improve the country’s airport infrastructure; the project is scheduled to be completed by 2015.
On the other hand, the road network is well developed in Croatia, which is important because tourists from key originating markets (Germany, Italy, Austria and Eastern Europe) are traveling to Croatia mostly by car.
Supply: Quality improvement
Although the dominant tourism product in Croatia is sun and sea, other products are under development, including nautical tourism, gastronomic tourism, diving and rural tourism, etc. Nautical marinas at islands or on the seaside, as well as mixed-use resorts especially are attractive for developers because they assure sound returns. Nautical tourism proved to be the most attractive product for high-end international demand due to the beauty of the Croatian rugged coastline with nearly 1,200 islands and a mild Mediterranean climate.
Hotels represent only 13% of total accommodation supply, while the majority share of capacities are in camping sites and private rooms. Most of the Croatian hotels are resort hotels of medium quality level and are concentrated along the Adriatic coastline.
For the most part, the hotel business is operated by local management companies, with international hotel brands operating 14% of the available hotel supply (34 properties). During the last few years, the first-class international hotel brands are beginning to show a greater level of interest in the Croatian market, searching for suitable resort or city hotel projects. Latest additions to the internationally branded hotel pool are the Hilton hotel in Split and Doubletree by Hilton hotel in Zagreb. However, for international brands, it is sometime tough to find a suitable project, as there is a relatively small number of greenfield hotel projects on the market; investments mostly are directed in brownfield projects, which require significant reconstruction and refurbishment of existing economy hotels originally developed during the 1970s into upscale hotels.
There is a relatively high degree of ownership consolidation in hospitality industry: A quarter of total accommodation supply is concentrated in five big local hotel groups. Still, there is a low level of foreign direct investment in Croatian hotel industry.
Demand: International leisure guests
Tourism demand in Croatia is internationally driven by major markets such as Central and Eastern Europe. Due to the structure of its tourism products, Croatian tourism is characterized by high seasonality pattern: 87% of annual overnights are realized in the high season (June to September).
Business mix of hotel guests consist of leisure allotments and leisure groups, while business and meetings, incentives, convention and events segments are rather small and concentrated in just few destinations along the seashore and capital city Zagreb.
Market outlook
Due to its abundant natural resources, Croatia often is called a “national park of Europe.” Croatia’s accession into the EU as a full member as of 2013 is expected to create tourism demand for Europeans looking at Croatia as a holiday destination, as well as their interest in Croatia as a place to purchase second homes..
As a consequence of increased demand, we expect real estate prices to increase. Therefore, now would be the right time to invest in Croatia. Due to the expected positive influence of Croatia's EU accession on the country's credit rating and on interests, we believe the risks of doing business in Croatia will be reduced significantly in years to come.
The Croatian government had a restrictive land use policy in the past. Although this slowed down the investment process in the tourism properties during the last decade, the positive result was that the overdevelopment on the coast was stopped, so there are plenty of preserved areas available for development. Recent changes in regulations that allow building of mixed-use resorts in the coastal zone will be encouraging for developers.
Select greenfield development of high-end mixed-use resorts and nautical marinas on prime locations at the Adriatic coast represent a strong area of opportunity for investors and developers. In these kinds of developments, investors should pay attention on the land use planning and land ownership issues that need to be resolved.
Feasible developments are also connected with buy out and revival of distressed hotel properties, especially those operating in state ownership. There are still some 15 hotel companies in state ownership that will be privatized in the last wave of privatization, expected in 2012. Most of these hotels are located on good locations on the Adriatic coast, thus having viable market potential.
Sanja Cizmar, PhD, is senior partner with Horwath HTL in Zagreb, Croatia. She can be reached at scizmar@horwathHTL.com or +385 1 48 77 200.
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