Attractive government incentives for foreign investment are fueling Croatia’s climb to the top tourist destination in the Mediterranean. In turn, infrastructure investments are further encouraging tourism in an upward spiral.
Key Figures: Population: 4,290,612 Surface Area: 56 540 Km squared Number of Hotels: 591 Number of Rooms: 52700 Visitors per Year: 10 million Room Occupancy: 42%Emerging Mediterranean Hotspot: This year, Croatia has been emerging as the top tourist destination in the Mediterranean. Croatian has hosted 9.82 million visitors total since the beginning of 2012, a 4.2 percent increase as compared with the same period last year. This has achieved the Croatian Tourism minister’s goal of tourism income by three to five percent this year.According to Veljko Ostojic, the Croatian Tourism Minister, Croatia has registered record tourist, figures for the first eight months of 2012, returning to its heyday before the breakout of war with neighboring Serbia. “Based on the results achieved so far and announcements (for the rest of the year) this is the best tourist season in Croatia's history,” says Ostojic. His goal is to attract at least 7 billion euros to the national income from tourism. This cannot be achieved, however, without massive investment in the industry. Therefore, attracting investments represents one of main economic priorities of the Government of the Republic of Croatia. Why is the government dedicating so much energy into the tourism sector? This industry accounts for 13% of Croatia’s GDP, and therefore can provide a much-needed boost to the economy after the shock in 2009.As well as providing some optimism in the industry, the recently-released figures also show where the tourism ministry can put their resources in order to maximize revenues. Much of the growth in tourism over the past year has been driven by international visitors; International visitors accounted for 85% of Croatia’s overall number. Not only is the sheer proportion of international-domestic visitor makeup significant, but domestic tourism actually contracted 4% from last year. In harmony with this trend, the Croatian market is seeing more international hotel brands. The landscape had traditionally been dominated by local management, but that seems to be changing.Medveja Beach on Istrian Coast (.jpg)Croatia is becoming more attractive to visitors because of its paradisiacal ‘sunny vacation’ qualities in conjunction with its economic opportunism. Croatia has a 6,000 km coastline and 1,185 islands. On one hand, this shows an abundance of ideal locations in which to develop for tourism. At the same time however, part of Croatia’s edge over other traditional Mediterranean locations is that it lacks major tourism developments as of yet, keeping the sea clean and the natural environment largely untouched. This is in contrast to coastal areas in such places as most of the Middle East, Spain or Italy, which are already lost in that environmental respect.One of the features that has been boosting the Croatian tourism industry has been its currency, the Kuna. As Greece and Spain are struggling to stay on the euro, Croatia’s non-EU status has actually been adding to the attraction for European tourists. One euro is worth 7.46 Kuna. By retaining its own currency, Croatia gains an advantage over more traditional summer sun destinations in that it is not in the euro zone, so while not necessarily cheap, vacationing in Croatia offers excellent value. However, Croatia’s EU ascension is scheduled for the upcoming year, so potential investors should watch for any changes in trends. This change in the landscape could either negatively affect the industry through Croatia’s loss of its economic edge, or prove advantageous in ease of mobility.Coastland or Inland – Something for Everyone: Croatia welcomes two main groups of guests: those travelling the coast and those travelling to the inner regions. This roughly correlates with a visitor makeup of vacationers on the coast and business/cultural travel inland. However, both areas of course offer attractions outside of this generalization.Istria county has continued to be a top destination in Croatia, receiving 28% of Croatia’s visitors and 34, 77 % of total tourist nights in Croatia. This coastal area is often toted by the Ministry of Tourism as the best tourist location in Croatia. It saw an increase in number of visitors of 5% over the same period last year. In terms of visitor growth, Dubrovnik-Neretva (which houses Dubrovnik city) was the best performer, at 13%. These areas are popular to tourists due to their coastal positions and due to their nightlife.In addition, Istria has sites dating back to Roman times. The city of Pore? has preserved its Roman-style streets and city square, including two Roman temples. One of the tourist attractions here is the UNESCO-Protected Euphrasian Basilica with 6th century mosaics depicting Byzantine art. The region's largest city Pula is also a favorite tourist destination, with one of the best preserved AmphitheatersZagreb, the capital city, experienced a 5% visitor growth, and an 11% increase in the number of nights stayed. As opposed to the Italian-influenced Istria, Zagreb has an Eastern European feel, as does most of inland Croatia. Zagreb houses the historic old town, comprised of the medieval Cornji grad and Donji grad. The city boasts many museums and theatres as a world cultural center, and is driving more tourism with an increase in the number of events and business conferences.This Baroque capital is becoming more popular as a weekend destination for European visitors, mostly due to newly introduced low-cost direct flights by a variety of European airlines. The drive to increase tourism dollars has even culminated in the creation of a seasonal New York-Zagreb flight. These infrastructural developments make travel to Zagreb, and Croatia as a whole, increasingly accessible.Medieval Cathedral in Zagreb (.jpg)New Government Incentives Drive Investment: Croatia had a well-developed tourism sector before separation from Yugoslavia, attracting about 10 million visitors per year. However, war dissuaded tourism and froze infrastructure development. Tourism also endured a shock during the global recession. Today; the Croatian government is spearheading a strong drive to reboot the tourism industry by offering incentives to both foreign and domestic investors.After deep recession in 2009, Croatia is trying to rebuild itself through investment, specifically in the tourism sector. This is to be achieved through attractive market-oriented government policies. The overall GDP of Croatia actually contracted 0.5% during the first quarter of 2012; hence the government drive to make up for losses through foreign investment. The budget deficit is high and public debt is rising fast.This move towards a more market-oriented system is being achieved through legal reform in order to create a more business-friendly environment. In the background of Croatia’s moves towards market deregulation is its impending EU membership. Croatia’s regulations on business should be looking more like those of current member-states in order to prepare for economic integration.One of the government’s recent moves to attract foreign investors was a loosening on some regulations to preserve the waterfront. Instead of this restriction on coastal overdevelopment, the government is putting into place permissions for building mixed-use resorts in the coastal zone. High-end mixed-use resorts and nautical marinas on prime locations on the Adriatic coast offer strong opportunity for investors and developers. However, it is likely that the government will keep a close watch over land use proposals.Another interesting policy may raise eyebrows at Croatian investment. Under current Croatian laws, there are no differences between domestic and foreign investors as far as legal status. Foreign investors acquire the same rights and come under the same conditions and status as domestic investors.The law of Investment Incentives represents the codification of financial and regulatory incentives in addition to the loosened government regulations referred to above. This law also aims to better integrate policies on investment incentives at the local and national levels. Incentives under this code are divided into six groups: tax incentives, customs incentives, support for job creation costs, support for other workforce training costs, support for technology and innovation, and incentives for large projects.The adjustment to Croatia’s tax policy represented by the Law of Investment Incentives is largely aimed at reducing the tax on corporate profits. It partially accomplishes this by reducing the minimum size of investment, now set at €1 million, down from €1.5 million. In order to receive the maximum benefits, one must invest a minimum of €3 million, down from €8 million. Further, the definition of investment includes rationalization, diversification activities in either setting up a new company or extending an existing one.Corporate Tax Incentives (.jpg)The Law on Investment Incentives also includes regulatory benefits to investors by lowering tariff barriers. Imported Equipment which constitutes part of an investment will not be subject to payment of customs duties.In addition to more traditional investor benefits such as tax and regulations advantages, the Government of Croatia has also included in their investment promotion several stipulations on government aid to certain productive activities. These activities surround job creation, and therefore involve the support of hiring and training new employees which will benefit the Croatian economy in a trickle-up manner. If an investment is made in an area with unemployment over 10%, the investor may receive a government grant up to €1500 to cover up to 10% of the eligible costs.Training costs are defined as those relating to the both trainer and trainee personnel costs, travel expenses, equipment costs, and even counseling with regards to the raining. Aid eligibility is calculated on whether the training is general or specialized; and whether the company for which training is required is small or medium sized or large sized. Small and medium sized companies may receive aid to cover up to 45% of their expenses for general training, and up to 80% of specialized training. For large enterprises, aid may cover up to 35% of general training costs, and up to 60% of specialized training costs.For hotel developers, government incentives also cover some construction costs. Up to €1 million in aid is available for machinery costs for infrastructure improvements, relevant as some resort development involves road construction. €500,000 is possible for costs of construction of new or extension or enlargement of existing infrastructural facilities and installations. However, be warned that Croatian government is keeping watch on environmental friendliness in your operations.A related area for which Croatia is providing incentives is the technology arena. Knowing that hi-tech companies might also be drawn to Croatia to research, develop, and innovate, Croatia might turn into a location where companies can locate to gain competitive advantages. Think marketing on hand-held devices and apps for social networks.New Strategy Drives Hospitality in Croatia: The tourism and leisure sector is expected to grow at a rate of over 8% per year for the next ten years, more than double the expected European sector growth rate and fifth highest in the world. However, with 591 hotels offering 52700 rooms, Croatia is still facing low room occupancy at 42%. As mentioned, it seems the Croatian government is trying to fill this demand gap with infrastructural improvements.Croatia’s history has left a large gap between the kinds of strategy for infrastructure under communism versus the kind of infrastructure needed to drive a new kind of hospitality demand today. The pre-1990s strategy was based on mass tourism, so the development focus was on building low-quality accommodations to quickly accommodate a high demand. Today, the strategy is moving towards luxury multi-purpose resorts. This repositioning as a luxury destination was largely driven by observation of other Mediterranean locations. Therefore, Croatia is focusing on upscale individual travel from Western Europe. Making this move in market positioning requires a large investment, as the Balkan War put Croatian tourism and development on hold from 1990-1995. This change in demand has caused the Croatian market to play a catch-up game in making improvements in terms of both building renovations and transportation infrastructure.A large focus for development in Croatia’s hospitality industry is to modernize hotel amenities while still maintaining the old world charm that Croatia offers. To these modernizing ends, Croatia is experiencing a wave of privatization. There remain 15 government owned hotels that will be privatized and renovated within the year.Also to be modernized are Croatia’s transport networks. This area is of course a must for national investment if the country is to become a stronger tourist destination. There is a planned expansion of Zagreb Airport, a major international hub for the country, to improve the country’s airport infrastructure, scheduled to be completed by 2015. However, roads are well-developed in Croatia. This is extremely important because Croatia receives 20% of its visitors from Germany, who mostly arrive by car. However, air travel is not to be ignored, as Croatia experienced a 38% increase of Japanese tourists this year, indicative of the significance of the airport project.As far as construction as opposed to renovation, the sometimes rough coastal terrain poses high costs that may exclude some hoteliers. Due to this economic barrier to entry, Croatia can expect to see the most growth concentrated in the upper-scale segment of the market. In a change from the individual unbranded hotels that Croatia has known in the past, international players have made footholds in the country. Hilton, Sheraton, Four Points, Westin, and Regent are present in the capital Zagreb; Le Meridien and Hilton are present in Split; and Hilton and Rezidor is present in Dubrovnik; and Kempinski is present in Savudrija, Istria.Park Plaza Medulin (.jpg)Hilton has been present in Croatia since 2005, and remains active in hotel development. The first Hilton in Croatia was the upscale Hilton Imperial Dubrovnik, with the simultaneous construction of the Hilton Marjan Split. The DoubleTree by Hilton Zagreb opened its doors in the Croatian capital this autumn. The hotel offers full service to both business guests and tourists. It also offers some local attractivity, as it is employing mostly Croats.The Hilton DoubleTree Zagreb has 152 rooms, including standard and deluxe sizes, and apartments on the corners. All rooms have a bath and shower, free WiFi and wired high speed internet access, 37 “satellite LCD TV, a coffee and tea station, safe, and iron and ironing board. Rooms feature a glass window wall with the possibility of partial opening. Pleasant and elegant accommodations will be supplemented with a wellness centre and spa, fitness centre, indoor pool and sauna. Guests can also use the 6 halls for business meetings and social events, the largest hall will accommodate up to 250 people. “As a team, we will think intuitively, to go beyond the expected standard and to provide a personal touch that will surprise and delight our guests. I am convinced that the visitors, as well as residents of Zagreb, will immediately recognize this and help us put this hotel on the peak of hospitality services in Zagreb.” – General Manager Karin van den Berg The PPHE Hotel Group opened three hotels in Croatia earlier this year. This was actually a rebranding of the Hotel Medulin, to Park Plaza Medulin, Park Plaza Histria Pula, and Park Plaza Verudela Pula. The rebranded hotels belonged to Arenaturist; Arenaturist is one of Croatia’s leading hospitality groups. It consisting of 14 hotels, five holiday apartment complexes, eight campsites and 52 food and beverage outlets, all located in Istria. The rebrandings were opened as four star hotels, having undergone significant transformation to ensure the standards associated with the upscale Park Plaza Hotels & Resorts brand. PPHE first became a shareholder in the Arenaturist in 2008, winning the management agreement for the entire portfolio of eight hotels.“We recognize Croatia as a popular destination for both corporate and leisure customers and welcome further new developments for us in this region." - Boris Ivesha, President and CEO of PPHE Hotel Group LimitedArqaam Capital, a Dubai investment firm is also investing in the Croatian hotellerie market. They are to build a luxury hotel on the historic Hvar island in Dalmatia within the upcoming year. The project consists of a five-star hotel and 100 villas, the construction of which is to be managed by Kerzner International. This development will add 200 rooms to the market. In addition, this hotel project will be adding to the overall infrastructure with investments in urban development, such as a road bypass. Not only will this project bring an investment of €100 million, but it is also expected to create 250-300 jobs, showing the overall importance of the hospitality industry to the Croatian economy.After looking at the significant portion of the Croatian economy represented by the tourism industry, we can see why the government is making such an effort to attract more business. However, the missing piece of the puzzle is the influx of supply while the low room occupancy suggests that demand is lagging. However, this represents an investment opportunity as well, as demand is expected to increase due to the expected positive influence of EU accession on Croatia’s sale of vacation homes, credit rating and interests. This expected demand increase will real estate prices to increase. Therefore, now would be the right time to invest in Croatia.
