It is easy to go under – Tourist Investments

Aug 2, 2019

A lot of investment has been undertaken for touristic development ranging from hotels to places of entertainment (of good quality) and even more important addressing the upgrading of staff, food and quality service.

Indeed during the years of 2017+2018 with the tourist numbers increasing (by approximately 8% p.a.) and this coupled with the planning relaxation given by the Government, almost all the hotels and tourist establishments have expanded and/or upgraded to satisfy both the increased demand and the competitiveness of Cyprus in the international market. Loans have been secured as well as advance payments (loans) provided by the tour operators in the hope of the mid-term (at least) bonanza to come. The upgrading is notable as we have reported in our previous articles on the subject, but then the international tourist market regarding Cyprus has suddenly changed. Our competitors such as Turkey and Egypt have bounced back reclaiming their share of the tourist trade. To this end and in addition to the discounted prices offered by these countries, as well as the lack of direct flights from major European cities to Cyprus and the closing of some of the airlines, the lower exchange rate of the currency in relation to our competitors have not helped, as well as the lack of labour in the tourist industry. These circumstances have encouraged the tourist tour operators to ask for more and more discounts in order to reduce the gap between Cyprus and the other countries. Notwithstanding the above, Cyprus distance from the urban European destinations with limited direct flights, 1 hours to Spain and 3-5 hours to Cyprus affects Cyprus arrivals, whereas based on the statistics the tourist spending power, as well as the length of stay are reducing. Competition is appearing in an increasing rate also form the Turkish occupied areas at lower prices.

So, there we are dear readers and after so many years of stagnation in the quality of the tourist industry and having succeeded to upgrade our Cyprus product to an extent, we are now facing problems. So it is not unreasonable to say that profitable (to an extent) tourist projects, as they may be, it is easy to go under, since the tourist trade is not based on the local demand/circumstances alone, but the international scene (including politics) for which there is nothing much that we can do about it. As if this is not enough and being a member of the E.U. we are restricted by the E.U. policies that we cannot provide subsidised national airlines (or subsidised others) to provide cheaper air fares, whereas the climatic conditions with the so far notable increase in temperature for the northern European countries do not help our attraction of “sun and sea”.

Hotel returns vary from time to time but on average the Cyprus hotels show a 10% return based on the G.O.P. of the hotel which is a reasonable target. In cases of an increasing profitability with projections and with positive prospects this can be reduced to around 8% and on the opposite side (negative prospects) of around 12% (reducing their value).

Any business plan is based on projections based on reasonable assumptions and data, but the local tourist market is so volatile that the risk is relatively high. It is not like real estate which can be sold at a later date, since hotel businesses costs must be secured within the certain season of the year notwithstanding the income. Having said this, real estate is directly related to the success or otherwise of the tourist industry (bearing in mind that 70%in real estate sales (in terms of value) comes from the foreign market. The Chinese market is moving towards touristic/hotel investment and the various (3) hotels at Larnaca, as well as one large one at Sotira village area is an indication.

You might consider that the returns shown above are high, as opposed to the lack of alternative investments in Cyprus, as well as the low deposit rates (0.5% max.) and with a number of the local banks not having a secured future. So there is no win-win situation dear readers and bearing in mind the relatively large amount of investment required for such projects, the quoted returns are at least a reasonable expectation. “It takes one seaside bomb in Egypt to turn around the tourist demand and as such benefiting other countries, as it will take one accidental air fight with Greece/Turkey to have the same affects, causing Cyprus to suffer”, a tour operator told us.

To the various problems that the Cyprus hotel industry has, we have now the “fashionable” Airbnb and private lets which amount to approximately 30%-40% of the visitors (much of this is the fault of the hotel operators for not responding at an earlier warning of ours the 3-6 years go when we warned them through our publications and direct contact with their association of black clouds in the horizon caused partially by the Airbnb).

Yes, international circumstances can cause such investments to go under, but then part of the blame is on the shoulders of the hotel investors as well as is for the unions who are out now for additional claims.

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