Without changes to the Land Law, we will no longer invest in Croatia

If Croatia does not allow the sale of 40 to 60 percent of apartments in tourist resorts, speculators will remain and international investors will not even come. Apartments will continue to be built in residential zones, while tourist zones will not develop further.

Interviewed by: Željka Laslavić
[email protected]
Photo: Dražen Lapić

Co-owner of the multinational company Falkensteiner & Michaeler Tourism Group (FMTG) Otmar Michaeler has been visiting Croatia every week for ten years, and we caught him just before the gala dinner at the Zadar hotel Club Funimation Borik, where he gathered collaborators on the Punta Skala project. Michaeler has doubted the profitability of investing in Croatia several times due to Croatian laws, and the economic crisis has contributed to this, which he considers an ideal opportunity for the Croatian government to change its approach towards large investors in tourism. The FMTG company builds and manages tourist complexes in 11 countries in Central and Eastern Europe, with 700 million euros in new investments, and its key markets are Austria, Italy, the Czech Republic, and Germany.

• The opening of the large Punta Skala resort was announced for this year’s summer season; however, we did not welcome it. How are things progressing and where has it stalled?
– The project is proceeding well, and we plan to open Punta Skala in June next year. For now, we do not plan anything new except for the completion of existing projects, namely Punta Skala, the construction of hotels and apartments in Punat on Krk, and, what is most recent, in 2010, we will sign a management contract for the facilities with Dino Motto, the owner of the Italian company that plans to invest between 50 and 60 million euros in the tourist resort Crvena Luka.

• The last time FTMG presented its projects in Carinthia, you expressed great dissatisfaction with the existing Croatian Land Law. Do you still believe that, given Croatian laws, it is not profitable to invest?
– We are still not satisfied with the Land Law, which prevents us from selling capacities in T2 tourist zones, and until the government changes that, we do not plan further investments. I agree that such a law was necessary at the beginning to prevent illegal construction, but I think it is time for serious changes in tourist zones. I believe that the time of economic crisis is the most suitable for attracting new investors and investing in mixed-use projects. In this way, 40 to 60 percent of the capacity in tourist resorts would consist of hotels, while the rest would be apartments with the possibility of sale, as is the case in Spain and Austria. With such a concept, the investor cannot sell apartments before completing hotel projects anyway. For me, this is a key point in the development of Croatian tourism. If Croatia does not change the law, speculators will remain, and international investors will not even come. Apartments will continue to be built in residential zones, and there will be no further development in tourist zones. If an investor invests about 50 percent of the capital in hotel construction and the rest in apartments, the total return on investment will be between seven and ten percent. Investors in Croatia, for whom tourism is not a core business, may achieve a return of four or five percent with excellent business, but that is not enough for our company.

• What exact consequences has the existing Land Law caused in the international investment market? How do foreign investors currently view Croatia?
– Croatia has lost very good opportunities. Four or five years ago, Croatia was a ‘hot’ market, but investors always encountered the same obstacle in tourist zones that I have already mentioned. Eastern European countries gradually opened up, and investors moved their capital there, just as we moved to the Serbian market, where we are building a hotel in Belgrade, then to Ukraine, Romania, and Bulgaria. However, if the law changes, they will return, but it should be noted that the financial market is no longer the same as it was five years ago. The new law must be structured in a way that is somewhat favorable to investors.

• What percentage of apartment sales would you be satisfied with?
– The best would be 50 percent.

• But you know that this is almost impossible?
– In Italy, that figure exceeds 50 percent. Twenty to 30 percent is no longer enough. But let it be 30, just let that process start already.

• Can we even count on new investors during such a crisis?
– Currently, it is very difficult times for investments because we do not know how consumers will react to the financial crisis. All ‘hot’ markets are gradually cooling down. For this reason, at the time of crisis, it is important to adopt a very clear new law because otherwise, very bad signals are sent to international investors. Without clear rules, banks will not give investors a single euro for tourist investments. Given the economic situation, FMTG does not plan to open new projects in the foreseeable future. We started building Punta Skala six years ago, and if we had started today, we would not have received funding for it. Investing in Croatian hospitality without mixed-use projects is not profitable for investors because business in Croatian tourism does not operate year-round. Bureaucracy is too slow; it takes a long time to issue the necessary permits. Croatia is not open enough to new investors. An investor should be a user of bureaucracy, not its problem.

• What do you think, how will the crisis affect Croatian tourism?
– If a very serious recession occurs, tourism will be in big trouble. We will lose the middle class of consumers, and there are no products for the high-class tourists in Croatia. Croatia is currently too expensive for what it offers. The only reason guests spend money in Croatia is that it has the most beautiful coastline in the Mediterranean.

• What is the reaction in the Austrian market? Can we expect a decline in arrivals from Austrians?
– Currently, Austria is working on the nationalization of banks, giving them, for example, two billion euros, remaining a shareholder for five years without interfering in their operations, and in return expects investments of seven billion euros in products and services from the banks. Interest in Croatia is declining in Austria; it is their closest seaside destination, but Austrians have realized that they do not receive the appropriate quality for the money invested. However, everyone somehow hopes that Croatia will work on this.

• What is your estimate for the next tourist season? How is your company preparing for a very tough battle?
– At this moment, we really do not know what to expect because we do not know what will happen in the economic market in the next six months. In the most ideal case, we expect results at the level of this year’s. In the four-star Borik hotel, the annual occupancy is around 73 percent, with a decent price, which we are satisfied with. It will be the season of opening Punta Skala, which we will only put into year-round operation in 2010, and we are counting on a good winter season due to quality wellness programs. For the needs of year-round operations, we will have to invest a lot in promotion in the Croatian and Slovenian markets, from which guests come by car, but also in all markets of the former Yugoslavia. Our usual investments in promotion amount to about five percent of total revenue, but for Punta Skala, we will invest between seven and eight percent.

• How will Punta Skala be different from other projects in Croatia?
– In the resort, we are building the first real family hotel in Croatia, where everything will be geared towards families, from rooms, menus, pools, and so on. After all, Croatia is a family destination. The second part will consist of quality wellness and capacities for business tourism and conferences.

• You have developed a tourism business in many countries, currently focused on 11 countries in Central and Eastern Europe. How do you perceive your investment in Croatia in a competitive environment?
– For Croatia, it is important to think exclusively about the quality of the product, which implies capacities with four and five stars. The Croatian coast is too precious for low-budget tourism.

• Your company Aejo Beteilingungs also competed for the Dubrovnik Maestral. What is your opinion on the privatization processes in Croatia after you were not selected in the tender?
– After the construction policy in T2 zones, the second major problem in Croatia is the problem of privatization, and these tails of unresolved issues torment us both in Borik and in Punat. Sometimes I think that the Croatian government does not have enough courage to solve this problem, and without its resolution, no one gains anything, neither the state nor investors. Of course, there will always be bigger winners and losers in these processes, but without the continuation of privatization, we are all losers. It is true, we were interested in Maestral, we were ready to invest between 70 and 80 million euros in a very good tourism concept with another partner from Austria; however, we are no longer interested in the whole story. It is no longer enough to ‘paint over’ hotels, as has been the case in the last 20 years, after which the facilities are destroyed and completely out of global trends. Croatia needs serious investments if it wants quality tourism. Overall, we will invest about 260 million euros in Croatian tourism, and in the coming years, we plan to invest about 700 million euros in the markets of Slovakia, Ukraine, and Russia at the group level. However, in the next year, we are halting all investments until we see the outcome of the economic crisis.

• Why did you choose to invest in the Zadar region rather than the Dubrovnik or Istria regions, which are considered the most profitable for investors?
– Dubrovnik, Istria, and Opatija are very quality destinations, but I believe that the area between Zadar and Split is the best for investment, especially in golf. In that area, five to ten golf courses can perfectly pull the concept of year-round tourism business.

• Are you planning to increase prices in your facilities next year?
– We will raise prices by a maximum of two to three percent, which is the inflation rate. During the summer, we have decent prices, but in winter we significantly lower them because we are still creating a market during that period.

• Does Croatia have the correct pricing policy, in your opinion?
– Prices and costs are rising in Croatia, but the quality does not change significantly, which is causing us to lose the trust of guests. Costs can rise, but only with an increase in quality. The Croatian Tourist Board can do as efficient and good promotion as its product is of quality. Croatian regions do not function according to a tourism concept; processes do not proceed in the same way as in other countries where regions have strategically set tourism as their main economic generator. Zadar needs a thorough SWOT analysis from which it would be clear what kind of guests it wants, what kind of investors, infrastructure, and promotion. When drafting a strategy, all relevant players must be invited to represent a certain pact and protect their interests.

• There is often talk about the concept of destination management, but hoteliers often expect the amenities in the destination to be served to them, showing no interest in the pact you are talking about. Have you talked to the local community about participating in the DMC concept?
– We have been here for years, but no one has invited us to participate in creating destination management.

• How did you connect with the Falkensteiners, whose international business actually developed from a small family hotel in South Tyrol, with only seven beds, 50 years ago?
– I met Erich Falkensteiner when I was still a student of economics, and I was born into a family of hoteliers. My mother had 12 siblings, and they all worked in the hotel business. At the time I met him, Falkensteiner had three or four hotels, and I was working in a consulting firm and wanted to enter tourism. I suggested to him that we start a business together, and that is how it all started.

• What exactly is the ownership structure of the FMTG group, and what is the exact role of the company Aejo Beteilingungs that has been mentioned in the media?
– Aejo is a corporate holding through which we do business in Croatia, and it is named that way because it represents the first letters of our names, the shareholders. The FMTG Group consists of three core companies, FTMG Services, FTMG Development, and FTMG Assita management, and has three partners, shareholders; besides me, the owners of the company are the Falkensteiner brothers. The company has a good market position; we are generally growing rapidly, and we are one of the fastest-growing Austrian tourism companies. However, we are all a bit nervous and very cautious when it comes to new investments.

• How did you connect with the Falkensteiners, whose international business actually developed from a small family hotel in South Tyrol, with only seven beds, 50 years ago?
– I met Erich Falkensteiner when I was still a student of economics, and I was born into a family of hoteliers. My mother had 12 siblings, and they all worked in the hotel business. At the time I met him, Falkensteiner had three or four hotels, and I was working in a consulting firm and wanted to enter tourism. I suggested to him that we start a business together, and that is how it all started.

• What exactly is the ownership structure of the FMTG group, and what is the exact role of the company Aejo Beteilingungs that has been mentioned in the media?
– Aejo is a corporate holding through which we do business in Croatia, and it is named that way because it represents the first letters of our names, the shareholders. The FMTG Group consists of three core companies, FTMG Services, FTMG Development, and FTMG Assita management, and has three partners, shareholders; besides me, the owners of the company are the Falkensteiner brothers. The company has a good market position; we are generally growing rapidly, and we are one of the fastest-growing Austrian tourism companies. However, we are all a bit nervous and very cautious when it comes to new investments.