Reward among the ruins: The way back for Greece

Despite reports that a large number of properties are currently for sale, the first half of 2011 was surprisingly positive for Greek hoteliers. According to data compiled by GBR Consulting, international arrivals picked up during the second quarter of the year, with Thessaloniki and the rest of Greece experiencing substantial increases of 20.9% and 17% respectively. In Athens, there was RevPAR growth of 8.9% compared with -4.3% in the first quarter, and in the second quarter, the country's resort hotels recorded a RevPAR increase of 12.4% from 2010. However, not every region performed as well, and with investors remaining cautious due
to the country's much-publicised debt crisis, there are testing times ahead for the sector.

"If the drop in 2009 can be ascribed to the world financial crisis, and the petering out and lack of follow-up after the Olympic effort, the 2010 drop was due to a large extent to bad publicity when the country's debt crisis came to the fore," says Aris Ikkos, managing partner at GBR Consulting. "Indicatively, 2009 saw a drop in foreign arrivals by air of 6.4% compared with 2008, and a drop in tourist earnings of 10.6%. In 2010, arrivals stabilised but earnings continued to drop by a further 7.6%. Hotel revenues followed suit."

The tourism industry was also affected by negative press coverage following the implementation of austerity measures and subsequent social unrest, which Ikkos believes was exaggerated in some cases.

However, 2011 has been a more positive story. "It has been a strong year of recovery, particularly in areas that depend on international tourists," continues Ikkos. "Year-to-date data for 2011 points to a record year for arrivals, which are expected to exceed 16.5 million. At the same time, there has been a considerable shift over the last ten years in the composition of tourists from traditional markets like the UK and Germany to new markets such as Russia and Israel."

As a result, there has been a marked improvement in favourite destinations like Crete, Rhodes and Corfu, as well as across the luxury sector. "Drivers for recovery include the reduction of VAT for hotels, which has enhanced their competitiveness, as well as social unrest in North Africa," explains Ikkos. "Other factors include simplified procedures for travel documents, which have boosted Russian arrivals in particular, together with partial lifting of restrictions for the cruise industry and the attraction of low-cost carriers to many areas."

Two sides to the story

Not every region has been as fortunate, however. "We face two sides of the same coin," explains Yiannis Retsos, president of the Hellenic Hotel Federation. "While traditional areas that sell their product abroad are performing really well, mainland destinations that target Greek clientele have suffered with a decrease in revenue of more than 20%."

"The overall picture masks significant differences among regions and operators," agrees Ikkos. "Properties depending on Greek tourists have taken a further hit as the recession has bitten into the disposable income of Greek households and uncertainty about the future has propagated hoarding behaviour."

In spite of regional differences, hoteliers remain upbeat. Starwood Hotels and Resorts, the largest operator and franchisee in Greece, has experienced a good year so far. "Despite the unrest, we have actually seen a slight increase in business across our hotels in Greece compared with last year, but we remain cautious and will keep an eye on developments in the coming months," says Tim Ananiadis, area manager for Greece, Turkey and Cyprus. "However, our island resorts are performing more strongly than our city hotels and have been impacted less by the domestic financial crisis."

¬Georgos Karatzias, general manager at Grecotel, the country's largest chain, agrees with this assessment. "We have seen an upturn in room income of approximately 10% over 2010, despite a freeze on prices," he says. "This year has proven that our long-term investments in new product development, positioning, branding, sales and marketing have reaped their rewards. Major investments over the past eight years in CIS countries, especially Russia and Ukraine, have paid dividends, with an increase in arrivals more than compensating for the drop in visitors from other European countries."

A cautious note

In addition, large numbers of hotels are currently for sale, with Greek newspaper Imerisia estimating the number at 500 in a report published earlier this year. However, investors remain cautious about Greece. "There are always investment opportunities available but as long as there is uncertainty, not just in Greece but throughout Europe, potential investors will wait to see when things will stabilise," says Retsos.

The fact that banks have been financing hotels based on their value as real estate assets rather than as ongoing businesses could also cause problems. "The current crisis could have serious implications for hotel values following sharply increased interest rates and a severe liquidity crisis," considers Ikkos. "So far, this has not come to the fore as banks have retained hotel loans and associated collateral at face value, in order to avoid writing losses on their balance sheets and bringing down vital adequacy ratios according to the Basel criteria." However, this could change, as Greece's lenders seek to identify hidden losses and assess recapitalisation needs. "If banks are forced to write down the value of hotel loans and associated collateral, they may prefer to force sales of hotels at lower values in order to increase their liquidity," he adds.

Once investors do come, however, there also could be an increase in brand penetration across Greece. "Most of the interest will come from abroad in the next two to three years," says Retsos. "With the problems we face right now, national investors are busy trying to save or reorganise their own businesses."

Ananiadis thinks that Greece has a lot to offer big-name brands. "Typically, branded hotels outperform non-branded properties, even in difficult markets," he adds. "For example, our hotels in Rhodes and south-west Peloponnese are seeing positive signs." Starwood has added three resort properties to its Greek portfolio in the last two years, including the Sheraton Rhodes, a 400-room business converted from an existing hotel. Following the redevelopment, the hotel's revenue grew by 30% in 2010, and 40% in 2011.

However, Ikkos does not expect to see an influx of international brands any time soon, citing a report by Dr D Koutoulas, which pinpoints Greece as one of the world's most mature hotel sectors but also one of the least developed in terms of branding. According to the report, only 4% of the country's hotels are affiliated with a Greek, Cypriot or international brand. "Our forecast is that this will not change dramatically over the coming years, as the most important change in distribution channels is not conducive to the development of branded hotels on a large scale," he continues. "Furthermore, brands usually follow institutional investors who currently do not have Greece on their radar."

A vital role

Despite the evident problems facing the hotel industry in Greece, it seems tourism has an important role to play in boosting the country's income. "Based on data from the Bank of Greece for the first six months of the year, there has been an increase in foreign currency of 12.6% year-on-year, which represents around €2 billion and shows that this is the only sector not in recession," says Retsos. "Tourism may be the only way we have to change things."

Karatzias agrees. "Tourism is and will remain one of the most important economic factors in the Greek economy. In 2010, it contributed 15.3% to the GDP and it accounts for 18% of total employment," he adds. "The hotel industry has always been the pillar of Greek tourism, which has been supported by subsidised investments and grants for seasonal staff that are unemployed during winter."

Going forward, there is much work to be done, however. "I think 2012 will be a difficult and challenging year, partly because of recovery across the northern part of Africa," says Retsos. "The problems in that region helped tourism in other Mediterranean countries such as Greece, Turkey, Italy and the south of France. Egypt is reorganising itself with competitive rates, and will be strong competition for us."

In order to grow and develop, there are crucial improvements that need to be made, warns Ikkos. "Tourism is by now widely recognised as the key sector that can mitigate the economic crisis," he says. "For this, it will be necessary to pursue a professional marketing campaign which is currently lacking. It will need to be coupled with effective measures on improving infrastructure where needed, liberating markets and other soft measures such as visa processing and training. Furthermore, as Greece is mostly accessed by tourists from the air, an integrated air transportation policy is also needed." Once these issues have been addressed, Ikkos believes the hotel industry will be able to fulfil its instrumental role in helping the country's economy to get back on its feet.