Financial investment potential is decreasing
Indicators of business optimism for accommodation services and food preparation and serving in Germany and at the EU level are declining, and the tendency to save in the next 12 months is reaching record levels. Indeed Wage tracker shows that the growth of wages advertised in job postings in the euro area has slowed to 2.5 percent compared to an average of 4.5 percent in 2024. The relatively stronger decline in the travel sector from the Eurostoxx600 index of -10.8 percent compared to the underlying Eurostoxx600 index (-6.5 percent) is also concerning.
On the other hand, there is encouraging news about the better state of bookings among domestic hoteliers and campsite owners, as around 81 percent of them expect booking growth above six percent, and about 57 percent expect revenue growth above six percent, according to a survey by the Croatian Tourism Association (HUT).
Therefore, even in a potential scenario of falling real disposable income and recession in the euro area, we do not necessarily expect a significant decline in foreign demand for travel. Namely, citizens have not treated expenditures for this type of consumption as a ‘luxury’ for a long time, and they are also relatively small at below three percent of the income of the average European.
On the other hand, the existing capacity structure, dominated by short-term rentals with the lowest share of hotel accommodation in total accommodation in the European Union and the Mediterranean, generally generates low added value and attracts guests with lower purchasing power, which poses significant limitations to further growth for Croatian tourism. Especially in the case where the decline in the number of foreign overnight stays continues in short-term non-commercial rentals in an even more uncertain year.
Tourism is the only sector in Croatia where gross added value per employee reached the average of Germany in 2022, but in the last two years, we have recorded a real decline in productivity compared to growth in the Mediterranean. Analyzing the results of the leading 10 listed hoteliers over the last three years, we see stagnation in EBITDA margins at around 30 percent and a decline in net margins to 10 percent, along with a continuous increase in the share of labor costs in revenues. The EBITDA margin is also four percentage points below the level of 2019, while the share of labor costs (27.4 percent) is three and a half percentage points above the level of 2021.
This is a consequence of a sharp increase in the minimum wage by 92 percent since 2019, in addition to the ongoing increase in energy prices above the EU average, and this year’s increase in the ‘minimum wage’ of 15.4 percent further pressures profitability as well as the financial potential for investments in the hotel sector. For illustration, nearly 70 percent of hoteliers expect labor costs to rise between 5-10 percent or above 10 percent. Therefore, it is not surprising that cash expenditures for investments have continuously fallen to just 26.1 percent of business revenues or even 13 percentage points below the level of 2019.
It is necessary to improve investment conditions in hotels
The HUT survey shows that 44 percent of hoteliers consider investments in tourism to be insufficient, and among the obstacles, they highlight urban planning, the long process of obtaining building permits, the issue of tourist land and maritime property, as well as project profitability.
Due to the uncontrolled expansion of short-term/non-commercial accommodation and the loss of competitiveness, declining productivity, and increasing imported and domestic uncertainties in the business environment, it is necessary, they state in HUP, to improve investment conditions in hotel capacities in four areas, with the aim of realizing five billion euros in investments over five years:
1. Operationalize the Spatial Planning Act, the Expropriation and Compensation Act, and the Act on Strategic Investment Projects of the Republic of Croatia, especially when investments in transport and communal infrastructure fall under the jurisdiction of multiple local government units and if one ‘refuses’ to cooperate. Local governments should include (regional) tourist boards in the preparation of spatial plans. It is also necessary to introduce an obligation for project holders to calculate acceptable capacities as well as to adopt a Destination Management Plan in the Tourism Act with the aim of prohibiting or limiting the use of areas intended for residential purposes as accommodation units for temporary guest stays.
2. One of the main innovations of the Maritime Property Act is the ‘concession on demand’ institute, but it is necessary to define open issues through subordinate legislation, such as the land issue in the camping segment in the company’s core capital subsequently declared as maritime property, as well as the conduct of commercial activities on maritime property. It is essential to enable users to easily obtain a concession, directly upon request, for technologically or functionally inseparable units of beaches, tourist moorings, and tourist ports with hotels, camps, and tourist resorts. Furthermore, it is necessary to precisely and fairly regulate the status of property that entered the regime of maritime property after the completion of transformation and privatization. Quality regulation of maritime property is a prerequisite for investment development and raising the quality of Croatian tourism.
3. Addressing the issue of maritime property is often an obstacle to resolving the issue of ‘tourist land’ and signing lease agreements, which would finally define the legal interest of tourism companies regarding ‘tourist land’ and open the way for a necessary new investment cycle.
4. Local government units must make a strategic decision about future tourism growth, primarily regarding the accommodation structure based on promoting the quality of accommodation facilities in accordance with development plans and sustainable development of the environment.
