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Promising returns

Take the hotel industry, for example. As Georg Schlegel of Starwood Hotels, a hotel operator, observed at the investment conference organized by this newspaper last week in Nova Gorica, the capital cities of the region are not exactly sprawling with branded business and luxury hotels. Although building a hotel in one of the region's capitals can be a surprisingly expensive undertaking because of the rising land prices, hotel industry representatives agreed that, because of the capacity constraints at existing hotels, the rates of return could still be respectable.

Schlegel also touched upon the broader trends in the hotel industry, noting that many hotel chains are going asset-light. Increasingly, hotel operators are selling buildings and other real estate in order to focus on their core activities, managing and franchising hotels. Asked whether investors should go for luxury or mid-market hotels, Schlegel warned that the luxury portion of the market is more susceptible to the variations in the business cycle, allowing for above-average profits in good times, but threatened with steep falls in guest numbers when the economy sours.

Different ways

With the global economy cooling down, that may bode well for the Croatian tourism industry. For years, it has been trying to establish itself as an upmarket destination for wealthier guests, but seems stuck in the mass market. With the longest coast of all the Western Balkans countries - some say it is the most spectacular in Europe - Croatia has unmatched, and unexploited, opportunities to propel its tourism forward. However, as George Bobvos of Trigranit, a Hungarian real estate developer, noted, the Croatian government has not bothered to come up with a strategy for the development of its tourist infrastructure. One cannot enter the luxury portion of the market just by giving a facelift to existing tourist facilities, Bobvos commented on the ambitions of the Croatian tourist industry.

Not only does Croatia prefer to deal with domestic investors, choosing brownfield projects over greenfield ones, it also imposes onerous legal conditions on foreign entrants into its tourist industry. It is not possible for an investor to build a condo complex or a hotel and then sell it on. Such obstacles to foreign investment are reflected in a fact that very few international hotel chains are present on the Croatian market.

Contrasting the situation in Croatia with the one in Montenegro, one can see that the latter is succeeding in profiling itself as an up-market destination, especially for Russian guests. The country is experiencing an investment and real estate boom, fuelled mainly by Russian capital. Although Bobvos warns that these may also be the signs of money laundering, investment into once dilapidated Montenegrin tourism facilities has certainly helped the country to become an appealing destination.

Another important obstacle for the investors in the tourism industry is the different regulatory environments in the countries of the region. As Marjan Hribar, Slovenia's government tourism supremo, noted, individual countries in themselves are not worth a trip from overseas. The region, however, offers more than enough attractions to lure tourists from as far as Japan and the US. There is, therefore, scope for cooperation in the field of tourism between the countries of the region, although a single market with a single set of laws modelled upon the EU remains a distant prospect.

Gaining in importance

With an eight percent share in Slovenian GDP, the tourism industry is the third largest sector of the Slovenian economy, emphasized Hribar. In order to attract foreign investors, the government has put together a list of 31 tourism projects where it wants to see foreign capital involved. In the period of 2007-2013, the state will complement private investment in tourism infrastructure with EUR 145 m, of which 85 percent will come from the European funds.

The country is too small to position itself either as luxury or mass-market destination, Peter Ješovnik, the director of the foreign investment promotion agency JAPTI emphasized. The target of 10 million overnight stays will probably be achieved, he said, indicating that the Slovenian tourism strategy has been bearing fruit.

Maybe so, but not as far as gaming industry is concerned. Boris Nemec, one of the leading managers in Hit, Slovenia's biggest casino operator, said that the government is hindering the development of the industry. Few larger casino resorts are better than a high number of smaller ones, Nemec explained. In this way, one can better control addiction to gaming as well as adapt the taxation system to the needs of the industry. Hugo Zagoršek, a gaming expert at Ljubljana's Faculty of Economics, put the appropriate level of gaming operators' profits at 15-20 percent. In Slovenia, the taxes are now between 25 and 40 percent.

As Nemec pointed out, it was the level of taxation that chased away Harrah's, the world's biggest casino operator, which wanted to invest around US$ 1 bn in the construction of a new casino resort. The chances for the joint venture between Hit and Harrah's unravelled after the government had not decided to lower taxes on gaming industry's profits.

The Investment Conference 2008 titled 'Focus on the Western Balkans - Tourism-related Investment Opportunities' was organized by Slovenia's only English-language newspaper The Slovenia Times in cooperation with JAPTI, the government's investment promotion office. Over 100 participants from 14 countries took part in the conference.