Conversion At Fault: Changing hotels

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.