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.

We Told You So: Lack of bank credit

On every bright horizon lurks a dark cloud or two. The optimism for the coming season is not, it would appear, being matched by a sector of the economy every bit as important to tourism, if not more, as hotels, bars and restaurants - the banks. Their purse strings remain pulled tight, so complain business associations. Without their injections of credit, bars find it difficult, if not impossible, to undertake the type of work that is typical of this time of the year - some improvements, some decoration, the purchasing of stock or new equipment. The lack of credit is reflected along the chain. Suppliers have pulled back in extending particularly generous terms, often for the same reason as their customers are experiencing difficulties - their own access to credit.

As the world's tourists all descend from the skies onto Mallorca this summer, so the sight of a bar without a lick of fresh paint or some chairs minus wicker where wicker used to be will be the inspiration for complaints that standards have slipped. You can already detect the sound of indignant keys being stroked.

If not bars and a chipped tea-cup, then the annual whipping-boys of the car-rental world. To three years of crisis, hire cars are now subject to the effects of natural disaster; the earthquake and tsunami in Japan mean limited supply. On top of this, car sales fell in March anyway; by some 48% in the Balearics, though only a modest percentage of this was attributable to rental agencies not renewing their fleets.

Despite an understandable complaint that the banks might be more forthcoming and be more willing to join in with a general air of pre-season jollity, and also despite whatever impact a distant disaster might have on the price of a week's car hire, is there perhaps a sense in which retaliations are being got in early? Don't blame us, blame the banks, and the banks are as much a factor for the car-hire agencies as they are for bars or restaurants. A shortage of credit over the past couple of years has had an effect.

The apologists of the bar and car-hire trades are sharpening their keyboards as fast as the disgusteds of wherever press the send button on their emails or internet forums. The apologists are pressing their press releases. It's not our fault if bars are in a bad state. Just blame the banks; oh, and the government while you're at it for the smoking ban. Oh, and throw in the hotels and all-inclusives as well. On and on it goes. As ever.

It is something of a new excuse for the apologists that they can turn to the forces of nature. This year Japan. Last year Iceland. And one turns a wary eye skywards, as the anniversary of Ash-Cloud Wednesday looms. In fact, the volcano hasn't been forgotten. It is still being trotted out as a reason for certain inactivity this year, on account of last year having been affected, albeit for a short period and before the season really got going, and having meant a poor year.

The excuses never cease. You can understand them. Up to a point. There is a legitimate beef when it comes to the banks, but were things so difficult then why are businesses preparing and readying themselves for the season? Cash is coming from somewhere, even if the Scrooge-like tendencies of banks and suppliers suggest that cash has ceased to flow.

The truth is that you never really know for sure. There may well indeed be bars that are facing an impossible situation because of a lack of liquidity, but the tendency towards a manipulation of the press, by the very obvious mechanism of the press release or conference, can rarely be taken as the whole truth and nothing but the truth. If it is indeed the case that the effects of smoking ban have been so deleterious, then should not there now be whole towns with barely a bar still open?

This is not to make light of difficulties and obstacles which are placed in front of bars and other businesses, car-hire agencies included. There are difficulties, but the propensity on behalf of various business associations to flood the media with bad-luck stories and the headline-grabber, e.g. 70% loss of revenue owing to the smoking ban or whatever, should make you stop and question them for a moment.

It was informative, the other day, that a director of a well-known business on the island said to me that his company was good at working the press. But this is how it is. Good companies, good business associations do just this. And in the case of the associations for the bars, the intention is either to shame the banks or to simply get the excuses in. So if things don't work out according to the optimistic tourism figures, they can at least tell us that they told us so, even if the fact that things don't work out has nothing to do with the excuse given.


Any comments to andrew@thealcudiaguide.com please.