RPT-FEATURE-Hotels a hard sell in tourist magnet Croatia

Fri Nov 6, 2009 7:04am EST

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* Fewer than half visitors to Croatia sleep in hotels

* Tangled laws and state involvement hinder investment

By Adam Tanner

DUBROVNIK, Croatia Nov 6 (Reuters) - Pavle Radonic has worked as assistant manager for Hotel Belvedere, overlooking the medieval city of Dubrovnik, for 18 years. Except for the first few months on the job, he has never welcomed a guest.

How a five-star cliffside resort on the Adriatic has remained shuttered for so long -- or how other prime seaside hotels live in a socialist-era, state-owned time warp -- are among the enduring mysteries of Croatia's tourist industry.

"It is hard to believe that I have been here 18 years and nothing has happened," Radonic said as he toured the hotel's broken glass, shattered walls, and twisted metal -- damage from the war of independence that started soon after he took up his post in 1991. "I didn't think it would be 18 years. If I knew that before, I would never have come."

Offering crystal-clear Adriatic waters uncommon in many parts of rival destinations such as Italy and Spain, Croatia has enjoyed a tourist boom since the end of the Yugoslav wars.

Relatively affordable prices and the country's accessibility by car helped lift tourist arrivals and overnight stays by four percent in August -- despite economic crisis -- over the same period in 2008, according to the Croatian bureau of statistics.

The region has lured foreigners for many centuries. The Romans and Venetians made the Dalmatian Coast part of their empires. Today, Germans, Italians, Slovenes, Czechs and Austrians are prominent among the nine million who visited from January to August.

Yet fewer than half stayed in hotels, preferring self-catering private accommodation, campsites or other options.

The Belvedere earns about 3,500 euros ($5,200) a month renting its roof for cellphone towers and leasing its gutted lobby for boat repairs, Radonic said.

Tourism and travel now account for nearly a quarter of Croatia's GDP, a share the World Travel and Tourism Council expects to rise. The sector makes up just less than a tenth of GDP in the European Union on average.

Beefing up hotels are, some investors say, an opportunity on the coast especially as Croatia heads for European Union membership, due in 2012. But to make something of that potential, Croatia needs to address problems of past privatisations, corruption, unclear laws, muddled ownership and the lack of a national investment strategy.

PROBLEMS WITH PRIVATISATION

On Korcula, the most populated of Croatia's more than 1,000 islands, the state has a virtual hotel monopoly around the medieval old town resembling a little Dubrovnik.

The indebted hotels lack funds for renovation and recall the styling of the 1970s and 1980s, so many wealthy visitors opt to sleep on cruise ships or yachts instead.

"There are huge problems with privatisation in general in Croatia," said Bill Montgomery, deputy chairman of the Adriatic Luxury Hotels group which owns several Dubrovnik hotels.

Initial privatisations favoured cronies of Croatia's first President Franjo Tudjman and his government, said Montgomery, a former U.S. ambassador to Croatia.

"After that there has been a resistance to privatisation. The result has been that after about 20 years now the government still own an unbelievable range of things including hotels, marina, a newspaper, a printing operation, all sorts of guest villas."

According to the Croatian Privatisation Fund, the state still holds major hotel shares in coastal and island cities such as Opatija, Dubrovnik, Trogir, Rab, and Hvar.

Croatia did partially privatise the Belvedere Hotel, where Radonic works: Vienna-based Croatian businessman Zvonko Stojevic bought a 54 percent stake on the stock market in 2001 for about $6 million.

But since then he has been unable to agree on its future with minority state shareholders including state oil group INA, which has a 31.7 percent stake. Many tens of millions of euros in new investment are needed.

"What happened is corruption and all negative things that can happen for a society in transition," Stojevic said in an interview. "We had hell of nine years and we are still having hell to complete the project."

INA declined to discuss the hotel other than to say negotiations were in progress.

Dubrovnik Mayor Andro Vlahusic says he is fed up with the delays and has threatened to change the Belvedere's zoning permission to a museum unless reconstruction began soon.

COMMUNITY SPIRIT

Even though Croatia recently announced a new privatisation for a half-stake in the Korcula hotels, sold as a group, problems are already evident: the island's mayor says the timing during economic crisis is not right.

Tomislav Perovic, managing director of real estate consultants Colliers Croatia, said privatisations often hit a brick wall of local demands.

"During communism, in the smaller areas people had this sort of special fee taken out of their salaries put into the small town. So everyone feels they have a right for anything that is happening to their city," Perovic said.

"Similar to that, the local government feels that they own or should own some sort of percentage of shares for Korcula," he continued. "Most of the investors don't truly like to enter into some sort of purchase where the (national) government is selling something and the local government is not for that."

Some Korcula officials suggest the town should receive a 20 or 25 percent stake in the hotels for cooperation and promotion.

Korcula's neighbouring island Hvar completed one of the highest-profile foreigner privatisations in 2005, of nine hotels to the ORCO Property Group. Yet the deal quickly soured with the mayor accusing the new owners of failing to keep their investment promises and of mismanagement.

British investor Michael Unsworth, who explored buying the Korcula hotels a few years ago, has doubts about the current efforts there.

"The minimum price looks suspiciously high and we suspect that like most, if not all, other Croatian privatisation sales this will not be a transparent transaction," he said. "In general, for foreign investors the privatisation programme has not provided attractive opportunities to invest in existing hotel companies."

Unsworth instead bought several derelict houses and built six suites in a venture which he said came close to breaking even in 2009.

Other companies have built from scratch, including a Radisson hotel that opened in June on the coast north of Dubrovnik.

But complex building codes, including a ban on new construction directly on the coast and a prohibition on mixing condo unit sales in a hotel complex, have deterred others.

Some privatisations have resulted in impressive renovated luxury hotels, including the Excelsior on the same Dubrovnik bay overlooking the old town as the Belvedere, bought eight years ago by Adriatic Luxury Hotels.

The group paid four million euros, assumed debt of 20 million and spent another 24 million euro to remodel. But the overall hotel group still fell several million euros below projections for revenue this year, Montgomery said. (Additional reporting by Zoran Radosavljevic and Igor Ilic in Zagreb; Editing by Sara Ledwith)

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