Prices and investment fall as slump hits Adriatic

REUTERS: 20 April 2009

SKOCIDJEVOJKA, Montenegro (Reuters) - Developers hope the stunning cliffs rising above the clear waters of the Adriatic in central Montenegro will entice investors to put millions into luxury apartments in an ambitious holiday development.

Yet the site, a former military base, remains a cluster of shelters and bunkers littered with old army supplies, and no one is rushing to lay down 8 million euros (7 million pounds) for a villa, or rather less for an apartment.

At the same time, hotels and restaurants along what was once the Yugoslav coastline are cutting prices in the biggest downturn since the aftermath of the Balkan wars of the 1990s.

"I must admit I am worried. This is the worst crisis year," Montenegrin Prime Minister Milo Djukanovic told Reuters. "It is hard to believe that any industry, including the tourist industry, can do business with the same intensity."

A few months ago, leaders in the Balkans forecast they would escape the worst of the world recession.

Now, many say they are next in line after the United States and the rest of Europe and a poor summer tourism season could deliver a severe blow to Montenegro and Croatia, which briefly fought during Yugoslavia's violent demise in the 1990s.

Both rely more on tourism revenue as a percentage of their gross domestic product than any other European countries, accounting for about a quarter of their economies, according to the World Travel and Tourism Council. Both economies are likely to be in recession this year.

Lower revenue could delay or reduce billions of dollars in expected leisure investment for years to come and have a serious effect on the balance of payments, while making foreign loans from institutions such as the International Monetary Fund and commercial banks all the more pressing.

MADONNA AND THE STONES

Since opening in 2006, the upmarket 322-room Hotel Splendid outside Budva, Montenegro's main coastal city, has lured the rich and famous, including Madonna and the Rolling Stones.

Now, co-owner Zarko Radulovic is cutting room rates by 30 percent and offering bargains such as round-trip flights from Serbia's capital Belgrade and two nights' stay for 240 euros.

His Montenegro Stars Hotel Group expects to make no profit this year, but Radulovic, who is president of the Montenegrin Hotel Association, is concerned that 2010 could be even worse.

"I hope 2011, 2012 will be better," he said.

In the walled medieval city of Dubrovnik, Croatia's leading hotel firm Valamar, which operates 39 properties, says it is on schedule to open a $46-million (31.5 million pounds), 401-room hotel by May.

"In some of our properties we expect a demand decrease and we are compensating it with a large variety of creative packages," said board member Zrinko Kamber.

Many hotels and restaurants are talking about cutting prices by 10 to 20 percent. Croatia is suspending visa requirements for some nationalities and cutting tourism taxes.

"We will be hit," Montenegro Tourism Minister Predrag Nenezic said. "I'd be happy with minus 5 percent revenue."

Croatia has similar hopes, although some expect 20 percent less revenue, which would force it to re-adjust its budget.

INVESTORS' EXPECTATIONS

Investors also want bargains. Egyptian billionaire Samih Sawiris, chairman of Orascom Development, is considering an investment in the Lustica peninsula at the entrance to Kotor Bay, where Venetians once sheltered their navy.

In an interview, Sawiris said he hoped Montenegro would use the slowdown to control recent excesses as Russians and others flooded the market to build and to buy. Many billboards in Russian and English still advertise apartments and investment deals.

"Montenegro right now is much better because this overheating that was starting to take place and deflect the people's and government's attention from proper (building) code development is now gone," he said on Wednesday.

Heavy discounting could complicate Montenegro's plans to differentiate itself from Croatia by moving up market. To weed out budget tourists who avoid restaurants, Montenegro inspects cars, letting in only a day's supply of food.

"Croatia clearly has gone for mass tourism," said Peter Munk, founder of Barrick Gold and lead investor converting a former naval port into a yacht complex in Tivat, Montenegro. "Montenegro has taken a much more careful approach."

His Porto Montenegro development plans to open its first yacht berths and housing this summer but could slow if demand slackens.

Investing large amounts in uncertain times is also in prospect for Amanresorts, the upmarket hotelier restoring Sveti Stefan, an island with 15th-century stone houses where stars such as Sophia Loren and Elizabeth Taylor once stayed.

They originally expected to spend 20 million euros but rebuilding costs for the island and two adjacent properties have soared to 80 million euros, said project manager Jean-Pierre Barratin.

Closed in 2007, Sveti Stefan still has a long way to go. A recent tour showed rooms stripped bare and little building work in progress.

The first section, a six-room mainland villa, opened in December. Italian Prime Minister Silvio Berlusconi recently stayed there but, at between 400 and 750 euros a night, bookings are modest.

However, company officials say the future is bright.

"Montenegro and Croatia, in my view, have the best and most beautiful coastline in Europe," said Adrian Zecha, founder of Amanresorts. "It is still unspoiled compared to the western Mediterranean coastline, which is overbuilt."

Many renowned Adriatic destinations are crying out for investment. Korcula, Croatia's most heavily populated island with a medieval walled core, still has lacklustre Yugoslav-era state hotels and past privatisation efforts have failed.

"Without new serious investment, I think our tourism will stagnate," said Korcula Mayor Mirko Duhovic. "Montenegro has opened the door to investors, they are much more liberal, which has led to a boom in investment."

Even as they prepare for tougher economic times, residents take comfort in knowing things can hardly be worse than during the wars in the 1990s. "If we survived the crisis in 1991, we will survive this crisis," Dubrovnik Mayor Dubravka Suica said.

(Additional reporting by Aleksandar Vasovic in Podgorica)