The hoteliers' federation has been meeting with Mallorca's leading banks. There are no prizes for guessing what the federation is after.
The regional government's new tourism act, welcome though much of it is, has some serious fault lines running through it. And these fault lines are such that they end up coming together to make an even wider fault line. The new law has an absence of joined-up thinking, but unintentional joins can still be made which really shouldn't be there, and wouldn't be if the government had displayed a bit more common sense.
The federation has gone to the banks with cap in hand to ask for finance for 52 change-of-use projects that have so far been identified by its member hoteliers; one shouldn't dismiss the possibility that this number will rise. The banks are said to have taken the request on board and are supportive of such initiatives in the tourism sector.
The banks would probably say this anyway, but when it comes to handing over the cheques, how supportive might they still be? As the different projects haven't been identified, one can't say for sure which hotel groups would need bank finance, but one could make a good guess; they probably wouldn't include the larger chains which are well capitalised and would already have plenty of lines open for credit or investment were they to need them.
Predominantly, they will be the smaller hotel groups (the federation has said as much) and it is their difficulties in raising finance for hotel conversion that exposes one of the law's fault lines. The act makes provision for conversion, but conversion will be awkward because of the lack of credit in the banking system. These smaller hotel groups are not necessarily blessed with holding huge assets by way of collateral, which wouldn't be the case with the larger chains. Consequently, the banks will need some convincing.
An option for conversion is that to residential use. This would mean the loss of a hotel, but for the smaller hotel chain it might be a loss worth bearing if it were able to realise value from its asset. The main problem with this, and so therefore a further fault line, is the state of the property market. Sales are down and values of property are down, quite markedly in some instances. Conversion of hotels to apartments of a minimum size of 90 square metres would simply add to a supply for which there isn't the demand and for which there is unlikely to be the demand in the foreseeable future.
So, what do the banks do? Take a risk and potentially end up with more debt on their books because the converted properties can't be sold? Hotel conversion could well lead to a type of property bubble, but without the rise in values, while at the same time making it even harder for other owners to shift property because of an increase in supply, engineered by a tourism law and not a property law. The attractiveness of conversion as a solution to hotel obsolescence becomes less attractive when the realities of the marketplace kick in.
The government has issued the tourism bill in English, German and Russian, hoping that by doing so investors from overseas will be attracted, and one thing they may be attracted to is a hotel that can be converted into real estate for sale. Foreign investors might mean a hotel group not having to avail itself of bank finance for the conversion, but the investor would be confronted by the same problem of supply and demand.
The further fault line in the law, and this is where the fault lines come together, is that to do with illegal accommodation. Why would someone want to buy an apartment in a tourist area? Would they want to live in it? Some would, but many would not. I imagine you can see where this is heading, but if not, then the government has created an inherent obstacle with one aspect its own law to facilitating and making a success of another aspect. The threat of legal action over privately owned apartments being made available for holiday purposes undermines the aims of modernisation and conversion. It doesn't make sense.
One wonders if the smaller hotel chains are going to wise up to the problem, though one can probably imagine that they already have and were well aware of the issue prior to the law being approved. The law has been called a law for the hotels. Increasingly, it is looking like a law for the large hotel groups. Because they don't have the same problems.
Any comments to andrew@thealcudiaguide.com please.
Showing posts with label Hotel conversion. Show all posts
Showing posts with label Hotel conversion. Show all posts
Friday, August 24, 2012
Tuesday, July 17, 2012
MALLORCA TODAY - New Balearics tourism law
Ok, sort of as you were when I posted the original article re the main points of the new tourism law.
Voting was 32 in favour, 19 against with four abstaining.
Here are some of the main points.
1. Hotels can be converted to other use, such as to condohotels or residential apartments, but on the condition that fundamental redevelopment of buildings is undergone. A 5% tax will be raised on the value of the redevelopment work which will be payable to town halls for use in modernisation of tourist areas.
2. Condohotels will have to be of a minimum 3-star or 3-key superior rating.
3. The law will permit whatever increase to the built area of current 4-star and 5-star hotels is possible, so as to allow for modernisation.
4. Final say on conversion of hotels will lie with town halls and their reports will be binding.
5. Hostels, pensions, camping sites, hotels of 1-star and 2-star and apartments of 1-key or 2-key will be given four years to modernise or will be closed if only temporarily pending modernisation.
6. Hotels which offer all-inclusive have to have a plan to meet specific quality standards. The taking out of food and drink from hotels by guests will be banned.
7. A general principle of the law is to promote conversion be it in urban or rural tourism areas. The law appears not to promote the occupation of more land as such.
8. New accommodation in rural areas, through conversion of existing buildings, will be permitted. This measure is part of a move to increase the level of agrotourism.
9. Fines for illegal accommodation will increase by 30%.
Voting was 32 in favour, 19 against with four abstaining.
Here are some of the main points.
1. Hotels can be converted to other use, such as to condohotels or residential apartments, but on the condition that fundamental redevelopment of buildings is undergone. A 5% tax will be raised on the value of the redevelopment work which will be payable to town halls for use in modernisation of tourist areas.
2. Condohotels will have to be of a minimum 3-star or 3-key superior rating.
3. The law will permit whatever increase to the built area of current 4-star and 5-star hotels is possible, so as to allow for modernisation.
4. Final say on conversion of hotels will lie with town halls and their reports will be binding.
5. Hostels, pensions, camping sites, hotels of 1-star and 2-star and apartments of 1-key or 2-key will be given four years to modernise or will be closed if only temporarily pending modernisation.
6. Hotels which offer all-inclusive have to have a plan to meet specific quality standards. The taking out of food and drink from hotels by guests will be banned.
7. A general principle of the law is to promote conversion be it in urban or rural tourism areas. The law appears not to promote the occupation of more land as such.
8. New accommodation in rural areas, through conversion of existing buildings, will be permitted. This measure is part of a move to increase the level of agrotourism.
9. Fines for illegal accommodation will increase by 30%.
Tuesday, December 13, 2011
An Obsolete Law: Hotel conversion
The new tourism law, widely being referred to as the "hotels' law" because it is said to concentrate almost exclusively on hotels' needs, might not be quite as accommodating as the hotels had hoped. They might, for example, not have been expecting to have pay for conversion of obsolete hotel stock over and above what they will pay for the work to be carried out. But the new law has a catch. Two in fact.
The catches apply to hotel buildings that would be converted into apartments for sale. One is that not all the building can be converted for this purpose; 10% would have to be set aside for other purposes, such as shops or restaurants. The other is that a 5% tax will have to be paid on the value of the building, money that would find its way into upgrading the tourist area in which it is located.
Designating a part of the building for other purposes is in line with what happens with the construction of apartment blocks. But it is a regulation that has not been without its critics. It reduces the return on investment on building or conversion and it simply adds to a stock of units that are hard enough to fill as it is. Paying a tax might seem reasonable enough, but whether it would really be allocated for local modernisation, who's to say.
The obsolete stock that the law has in mind covers two types of current accommodation, one of them being rather vague as it applies to old hotels in "mature tourist areas", the other being one and two-star/key hotels and apartments. As far as the latter are concerned, there are various possibilities, but they are all aimed at elimination. They can be converted to residential use, upgraded to a minimum of four-star rating or be closed down.
An issue with all of this is just how many hotels might be affected. A further issue is whether conversion to residential use is in fact viable, either because of the cost to the hotel or to a potential market which is in the doldrums as it is.
Hotels, you might think, aren't short of a bob or two. Many aren't, but, and as I reported on 12 July this year ("For Sale: Hotel, Needs Work"), there are plenty of hotels that owners would gladly see the back of, if they could sell them, and plenty of hotels for which the cost of conversion would be prohibitive. The solution would be to sell the hotels to developers, but in the current market climate, how likely would this be?
One doesn't know the number of "obsolete" hotels, but were it to be a significant number and were they actually to be converted and not simply abandoned (thus creating eyesores), to what extent would the overall number of hotel places fall, and especially in the "mature tourist areas"?
There is an argument that a reduction in the number of places would be no bad thing. Indeed the government wants to avoid an "over offer" of hotels, even if a decline in the number of places would be potentially bad PR for governments which love to be able to declare statistics of ever-growing numbers of tourists.
Let's suppose, however, that these hotels were to be converted. What do potential owners of apartments that these buildings would comprise want from their investment? Not all of them would want to live in them. The alternative is that they want to make a return, and that means renting them out. You can probably see where this is going.
Potentially releasing a whole load of privately-owned apartments in tourist areas smacks of the government not thinking things through. Buyers could rent them out - for residential use. But not for tourism use. Not as holiday lets, because they wouldn't be legal. Or would they?
The other type of conversion that hotels will be permitted to undertake is to provide condos. But they, too, are subject to market demand. Owners would at least be able to make a return through the apartments being also part of a hotel's offer; indeed they would think it essential, as they would personally be limited to only two months use a year.
There are, therefore, a number of unknowns lurking in the provisions of the new law. It is a bold law in that it sets out an agenda for modernisation, but in issuing a tourism law that is a law for the hotels, the government needs to be sure that its objectives can be met. The closer you look at the law, the more the questions arise.
Any comments to andrew@thealcudiaguide.com please.
The catches apply to hotel buildings that would be converted into apartments for sale. One is that not all the building can be converted for this purpose; 10% would have to be set aside for other purposes, such as shops or restaurants. The other is that a 5% tax will have to be paid on the value of the building, money that would find its way into upgrading the tourist area in which it is located.
Designating a part of the building for other purposes is in line with what happens with the construction of apartment blocks. But it is a regulation that has not been without its critics. It reduces the return on investment on building or conversion and it simply adds to a stock of units that are hard enough to fill as it is. Paying a tax might seem reasonable enough, but whether it would really be allocated for local modernisation, who's to say.
The obsolete stock that the law has in mind covers two types of current accommodation, one of them being rather vague as it applies to old hotels in "mature tourist areas", the other being one and two-star/key hotels and apartments. As far as the latter are concerned, there are various possibilities, but they are all aimed at elimination. They can be converted to residential use, upgraded to a minimum of four-star rating or be closed down.
An issue with all of this is just how many hotels might be affected. A further issue is whether conversion to residential use is in fact viable, either because of the cost to the hotel or to a potential market which is in the doldrums as it is.
Hotels, you might think, aren't short of a bob or two. Many aren't, but, and as I reported on 12 July this year ("For Sale: Hotel, Needs Work"), there are plenty of hotels that owners would gladly see the back of, if they could sell them, and plenty of hotels for which the cost of conversion would be prohibitive. The solution would be to sell the hotels to developers, but in the current market climate, how likely would this be?
One doesn't know the number of "obsolete" hotels, but were it to be a significant number and were they actually to be converted and not simply abandoned (thus creating eyesores), to what extent would the overall number of hotel places fall, and especially in the "mature tourist areas"?
There is an argument that a reduction in the number of places would be no bad thing. Indeed the government wants to avoid an "over offer" of hotels, even if a decline in the number of places would be potentially bad PR for governments which love to be able to declare statistics of ever-growing numbers of tourists.
Let's suppose, however, that these hotels were to be converted. What do potential owners of apartments that these buildings would comprise want from their investment? Not all of them would want to live in them. The alternative is that they want to make a return, and that means renting them out. You can probably see where this is going.
Potentially releasing a whole load of privately-owned apartments in tourist areas smacks of the government not thinking things through. Buyers could rent them out - for residential use. But not for tourism use. Not as holiday lets, because they wouldn't be legal. Or would they?
The other type of conversion that hotels will be permitted to undertake is to provide condos. But they, too, are subject to market demand. Owners would at least be able to make a return through the apartments being also part of a hotel's offer; indeed they would think it essential, as they would personally be limited to only two months use a year.
There are, therefore, a number of unknowns lurking in the provisions of the new law. It is a bold law in that it sets out an agenda for modernisation, but in issuing a tourism law that is a law for the hotels, the government needs to be sure that its objectives can be met. The closer you look at the law, the more the questions arise.
Any comments to andrew@thealcudiaguide.com please.
Tuesday, September 27, 2011
At A Fraction Of The Cost
Amongst the proposals for the new tourism law due to be enacted next year is one to allow for fractional ownership of hotel accommodation. The concept is one that, at first glance, might raise alarm bells - oh, oh, timeshare. The alarms would, however, be rung falsely. Fractional does not mean timeshare as it involves actually owning part of the bricks and mortar as opposed to a block of time, though time is, nevertheless, a factor.
Fractional ownership has become well-established, especially in the US. The concept was initially used, as far as the property market was concerned, in Colorado's ski resorts. It is something normally for a high-net-worth upper market, rather than the great unwashed of the mass tourism market. But it doesn't have to be and can range from three to five-star style accommodation.
The diffusion of fractional ownership into the European property market has been relatively slow, but it has been gathering pace. What it offers is an opportunity to acquire a holiday home in the knowledge that shares in the property can be sold on.
Of fractional-ownership opportunities currently available in Europe, two give an example of the sort of money that they can command. A residence in a Tuscan hamlet will set you back a minimum of 63,000 pounds; a golf resort on the Algarve comes in at no less than 79,500 pounds (or only 79,500 pounds if you prefer). It depends how much use you want to make of the property, but typically four weeks per year are about what you would get for your money.
Where fractional ownership has been applied to hotels, it has generally been in the form of private residence clubs, i.e. exclusive five-star complexes with all the trimmings you could pretty much hope for. They certainly aren't cheap. If this model of exclusivity were to be followed, their sheer expense draws into question just how much impact they might have in Mallorca.
The tourism ministry would have us believe that within three years some form of revolution will have occurred in Mallorca's tourism, based on hotel conversions into fractionals or condos. As far as the condo is concerned, it is bought outright and used as and when the owner wishes (though this can be limited if the hotel closes), making it more flexible than a fractional. Whereas fractional properties tend to imply something grand, such as a suite with three or four bedrooms, a condo can be as small as a studio apartment.
Condos can be sold as private residences within existing hotel-apartment buildings, which is what Meliá Hotels International appear to be planning for one of the hotels in their projected Magalluf megacomplex (the Royal Beach in all likelihood). Such a mix of regular tourism accommodation and private ownership could also apply to fractionals, though at the more exclusive end of the market (the private residence club), the anticipation would probably be to have fractional owners only.
In wider terms, both fractionals and condos hint at benefits. They are not, for example, all-inclusives. Might they also help to break the cycle of seasonality? The suggestion is that they would be available in winter, especially at Christmas and New Year times. But would they be? It is unclear whether a hotel would actually stay open out of season (which it would have to, as it would be managing the property).
What is also unclear is how much demand there would actually be. The high-end fractional is said to attract considerable interest, partly because it offers a good investment opportunity and partly because of its exclusivity. But what of other levels of the market?
The impact of fractionals and condos will depend on a number of things: the costs, the constraints, the locations and the accommodation itself. To what extent either will amount to the sort of transformation the tourism ministry envisages, time will tell, and it will take longer than three years. In the meantime, though, everywhere else is gearing up for fractionals and condos. Where, for example, is there already a fabulous fractional complex? Egypt.
There is one other issue. Though the fractional is not the same as a timeshare, it is near enough to bear similarities. Which brings us to how fractionals might be sold. Timeshare has a dirty name in Mallorca, because of the past tactics of certain operators in certain resorts. If fractionals are to be part of the way forward for Mallorca's tourism, then their sale needs to be strictly controlled and regulated. If not: "Here, have a scratch card; oh look, you've won a prize, all you need to do is to come along to our office ... ."
Any comments to andrew@thealcudiaguide.com please.
Fractional ownership has become well-established, especially in the US. The concept was initially used, as far as the property market was concerned, in Colorado's ski resorts. It is something normally for a high-net-worth upper market, rather than the great unwashed of the mass tourism market. But it doesn't have to be and can range from three to five-star style accommodation.
The diffusion of fractional ownership into the European property market has been relatively slow, but it has been gathering pace. What it offers is an opportunity to acquire a holiday home in the knowledge that shares in the property can be sold on.
Of fractional-ownership opportunities currently available in Europe, two give an example of the sort of money that they can command. A residence in a Tuscan hamlet will set you back a minimum of 63,000 pounds; a golf resort on the Algarve comes in at no less than 79,500 pounds (or only 79,500 pounds if you prefer). It depends how much use you want to make of the property, but typically four weeks per year are about what you would get for your money.
Where fractional ownership has been applied to hotels, it has generally been in the form of private residence clubs, i.e. exclusive five-star complexes with all the trimmings you could pretty much hope for. They certainly aren't cheap. If this model of exclusivity were to be followed, their sheer expense draws into question just how much impact they might have in Mallorca.
The tourism ministry would have us believe that within three years some form of revolution will have occurred in Mallorca's tourism, based on hotel conversions into fractionals or condos. As far as the condo is concerned, it is bought outright and used as and when the owner wishes (though this can be limited if the hotel closes), making it more flexible than a fractional. Whereas fractional properties tend to imply something grand, such as a suite with three or four bedrooms, a condo can be as small as a studio apartment.
Condos can be sold as private residences within existing hotel-apartment buildings, which is what Meliá Hotels International appear to be planning for one of the hotels in their projected Magalluf megacomplex (the Royal Beach in all likelihood). Such a mix of regular tourism accommodation and private ownership could also apply to fractionals, though at the more exclusive end of the market (the private residence club), the anticipation would probably be to have fractional owners only.
In wider terms, both fractionals and condos hint at benefits. They are not, for example, all-inclusives. Might they also help to break the cycle of seasonality? The suggestion is that they would be available in winter, especially at Christmas and New Year times. But would they be? It is unclear whether a hotel would actually stay open out of season (which it would have to, as it would be managing the property).
What is also unclear is how much demand there would actually be. The high-end fractional is said to attract considerable interest, partly because it offers a good investment opportunity and partly because of its exclusivity. But what of other levels of the market?
The impact of fractionals and condos will depend on a number of things: the costs, the constraints, the locations and the accommodation itself. To what extent either will amount to the sort of transformation the tourism ministry envisages, time will tell, and it will take longer than three years. In the meantime, though, everywhere else is gearing up for fractionals and condos. Where, for example, is there already a fabulous fractional complex? Egypt.
There is one other issue. Though the fractional is not the same as a timeshare, it is near enough to bear similarities. Which brings us to how fractionals might be sold. Timeshare has a dirty name in Mallorca, because of the past tactics of certain operators in certain resorts. If fractionals are to be part of the way forward for Mallorca's tourism, then their sale needs to be strictly controlled and regulated. If not: "Here, have a scratch card; oh look, you've won a prize, all you need to do is to come along to our office ... ."
Any comments to andrew@thealcudiaguide.com please.
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