Southern comfort: Greece, Spain and Portugal

To say the past decade has been a difficult one for southern Europe would be something of an understatement. Since the financial crisis crash-landed in 2008, revealing weak foundations in most of the region’s economies, member states have grappled with crippling debts, high unemployment rates and political uncertainty.

While a full recovery is yet to emerge, some economies are looking at their healthiest for years. In the first quarter of 2018, Greece’s output grew by 2.3%, marking a fifth consecutive quarter of growth. Despite unemployment issues, Spain is also on a roll, its economy having grown by 3% over the past three years – well above the eurozone average.

Growth in Italy, however, is among the slowest in Europe. Recent political turmoil has done little to reassure analysts that this will pick up any time soon.

Yet, tourism in southern Europe and the Mediterranean is, broadly speaking, on an undisputed upward curve, having risen by over 12% in 2017, according to the United Nations World Tourism Organization (UNTWO). This made last year the eighth consecutive 12-month period of growth, said UNTWO. Some destinations have even seen performance levels that outstrip pre-2008 peaks.

Southern Europe’s resorts space, in particular, is thriving, thanks to increased investor interest. With more money available in the coffers, banks are showing a renewed appetite for entering deals – as are alternative lenders. A flurry of new ventures and acquisitions in recent years should be seen as ample evidence of new confidence in the sector.

On the up

One recent eye-catching deal was the revelation in 2017 that London headquartered private equity firm Orion Capital Managers had taken full ownership of Sotogrande Luxco – having bought a 50% stake from its joint venture partner Cerberus Capital Management – allowing it complete control of the Sotogrande luxury golf resort in Andalucía, Spain.

Having hosted golf’s Ryder Cup in 1997, Sotogrande, like many other Spanish resorts, fell victim to the recession. According to estate agents Savills, sales fell by 70% between 2007 and 2012. But since being bought by Orion and Cerberus in 2014 for €225 million, sales are now believed to be higher than €5 million for the first time since the economic downturn. Buoyed by the revival in the local property market, ground has since been broken on a new artificial beach at La Reserva Club – a luxury country club within the Sotogrande complex – which is expected to open its doors later this year.

Portuguese resorts are also enjoying a renaissance. In 2015, US private equity and real estate group Lone Star Funds acquired Garvecat – the developers of the Algarve resort of Vilamoura – for €200 million.

Similarly, in 2016, US-headquartered assets management group Oaktree Capital formed a new venture with Greek luxury resort companies Sani and Ikos with a view to growing both brands individually while investing in new projects across Greece. Oaktree has pledged to invest €500 million in the Sani group alone, in helping to transform smaller loss-making hotels within its portfolio into inclusive luxury resorts.

“Much of the capital going into resort property has been opportunist debt funds buying non-performing loans from locally based banks,” says Marc Finney, head of hotels and resorts consulting at Colliers International.

“This helps the local banks to recapitalise, but also enables the purchaser to buy at a deep discount. This usually sees the investors hold for a short period, picking the low-hanging fruit and then selling on to longer-term holders.

“We saw this with the Hudson/Lone star’s acquisition of the Vilamoura Resort in Southern Portugal and Cerberus acquisition of Sotogrande. These funds are repeating a trick that they have successfully delivered first in the US, then in Western Europe. Investors are now looking to southern Europe to do the same.”

One of the themes at last year’s Mediterranean Resort & Hotel Real Estate Forum (MR&H), held in Spain, was the role mixed-use resorts could play as profit-spinners. Investors, in particular, have their eye on resorts centred around well-being, leisure, recreation and sport, food and beverage, and family-friendly amenities.

Strong fundamentals

The residential and second-home market is a significant ingredient when it comes to such resorts in the Med. “The motivations that underpin the majority of sales are golden visa or passport-motivated sales as a form of investment, and rental yield and capital growth,” read the post-event report.

“Branded residences can bring in sales velocity, customer assurance and so on, provided the operator truly understands residential and works together with the hotel operation.

“Mixed-use resorts investment strategies need to look at all the elements together and not single out residential from other components: it is about planning a resort and experience where the integrated whole offers more than the sum of the parts.”

The other key considerations for those wanting to get in on the action include, according to Finney, “Strong fundamentals – good destinations with easy access.” With its reliably warm beach weather, the Mediterranean has long attracted sun worshippers in their droves.

Even a weaker pound against the euro and uncertainty over Brexit has done little to diminish the appetite of UK holidaymakers heading for the southern reaches of the Continent.

Where resorts can easily differentiate themselves from the image of crowded mega-hotels is in the security and privacy they afford guests. Sotogrande is an ideal example. While situated only a short drive away from the packed beaches of Marbella up the coast, Sotogrande, with its palatial villas and landscaped gardens, might as well be on another planet.

As the resort’s marketing manager Andrew Derrick told the Financial Times last year, “Families prefer the safety and open spaces of Sotogrande to the fleshpots of Marbella. It is more like living in the countryside.”

Safety is also a huge factor. In an address at last year’s MR&H Forum, Robin Rossman, managing director of STR, said the resort markets of the northern Mediterranean, in particular, had “flourished” as a result of tourists staying away from North Africa following terrorist attacks. Conversely, there is little evidence of the 2017’s attacks on Barcelona’s Las Ramblas having had any adverse impact on Spain’s resort segment (see our security feature on page 45 for further context).

Finney agrees with Rossman’s assessment. “Safety is a major consideration,” he says. “After events in Tunisia and other North African countries, there has been flight to safer destinations such as Spain and Portugal.”

New horizons

As to the future, the resorts of Spain, Portugal and Greece might remain the traditional draw for tourists, but Finney cites Croatia and Montenegro as “longer-term, new destinations” where investors might be tempted to place their bets.

Both countries are good examples of how business-friendly governments can entice foreign investment into national resort industries.

Buoyed by a record 16.3 million visitors to the country in 2016, Croatia is in the middle of a tourism development strategy, through which the government is seeking greater collaboration between the public and private sectors to draw in fresh money.

The strategy appears to be working. In March of this year, Valamar, Croatia’s leading tourism company, received a €16-million loan from the European Investment Bank to help finance the completion of the luxury Valamar Girandella Resort in Rabac on the Istrian peninsula. Overall investment in Croatia's hotel industry is predicted to reach €1.2 billion by 2022, according to Ernst & Young. This includes 6,000 new hotel rooms added to its inventory by that year, with an additional 3,700 being renovated.

Likewise, Montenegro’s business-friendly government is also making a concerted effort to capitalise on the country’s relatively new-found independence – and stability – to drive fresh funding.

This summer will see the launch of new golf course – designed by South African Grand Slam legend Gary Player – as part of Luštica Bay, Montenegro’s largest resort development.

Elsewhere, the Porto Montenegro resort – which includes a superyacht marina, boutique shops and an international boarding school – was acquired in 2016 by the Investment Corporation of Dubai, the main investment arm of the Dubai Government. Other major resorts are reported to be either already under construction or in the design stages.

As Ahmet Erentok, chairman of Azerbaijan-based Azmont Holdings – itself developing a €830-million resort on the country’s Boka Bay – put it to the Wall Street Journal earlier this year, “The government of Montenegro has made developers and investors feel appreciated.”

It seems other states in the region looking for a piece of the action would do well to follow these leads.