The privatization of the hotel and tourism group "Budvanska rivijera" is strategically justified and developmentally necessary because its key hotel products, despite a significant investment cycle in the previous period, are becoming obsolete, do not meet the expectations of the modern guest and are exposed to strong competition from branded products. However, the concept proposed by "MK Group" contains weaknesses because the investment is underestimated and incorrectly stated, the business development plan is without a clear methodology, the ambition of year-round operations is unrealistic, while the financing model needs to be revised because it is based on external debt (credit), which would be repaid largely from the sale of apartments.
This is the assessment of the Zagreb consulting company "Horwath & Horwath", which submitted to the Government's Council for Privatization and Capital Projects a legal analysis of the privatization and restructuring plan of "Budvanska rivijera" presented by "MK Group" last September.
"In essence, the proposed model implies that the investment is initially financed through borrowing, while the planned inflow from apartment sales and hotel operations is used as the dominant source for debt servicing. If there were to be a slowdown in sales, price correction, weaker demand or an unfavorable cycle in the real estate market, the project would face a significant risk of insolvency and refinancing. The level of financial leverage also presents a special challenge. Financing predominantly through debt without a clearly defined and significant investor capital participation increases the overall financial risk of the project, reduces flexibility in managing the development phases and can negatively affect credit conditions. In such a structure, even minor deviations from the planned sales dynamics can have a disproportionately strong effect on the stability of the financial model," the consultant said.
"Vijesti" has access to this documentation, which contains conclusions and recommendations.
The Council commissioned this legal analysis after the plan for HG "Budvanska rivijera" was proposed at the end of September last year by "MK Group", which owns 33,58 percent of the shares, through two models.
The first option is for the Government and minority shareholders to jointly invest in a state-owned company. The second model envisages the formation of two companies - one in which the state would own the hotels “Palas”, “Castellastva”, “Kristal Palas” and “Mogren”, without the MK Group’s share, and the other in which the MK Group would be the majority shareholder and the state the minority shareholder, with ownership of the tourist resort “Slovenska plaža” and the hotel “Aleksandar”. Through this idea, the construction of a new hotel complex with a congress center and a large garage, with a significant share of green areas, is planned on the site of the current tourist resort “Slovenska plaža”, through the concept of an open city. The conceptual design of the “MK Group” is estimated at 700 million euros, and was developed by the renowned architectural firm “Make Architects”, with headquarters in London and offices in Shanghai and Hong Kong.
Investment deviation of 31 million euros
"Considering that "Budva Riviera" has extremely valuable location and spatial resources, but that in its current form it does not realize its full market and financial potential, and that key hotel products are in the declining phase of their life cycle, we conclude that privatization is developmentally justified and strategically rational. Maintaining the status quo in the long term leads to a gradual erosion of competitiveness, rising maintenance costs and pressure on profitability, while renovation in the existing dimensions would carry a high investment risk with an uncertain return compared to modern competition," is the final recommendation of the Croatian company.
It is further indicated that the MK Group's development vision based on the concept of a mixed-use resort is generally aligned with market trends and can represent a quality framework for the transformation of the location, but the proposal in its current form contains key shortcomings.
"The investment is underestimated and partially misstated (including a significant deviation estimated at around 31 million euros), the business plan is not supported by a clear methodology and operational assumptions, the financing model is high-risk because it relies predominantly on debt, and the ambition of year-round operations is not convincingly supported by a content program and phasing of development," it says in the final recommendations to the Privatization Council.
Install instruments to protect state interests
It is recommended that the Government continue the privatization process with conditional support for the proposed concept, but exclusively with strictly defined corrections and protective mechanisms - verification and revision of the total investment value, mandatory minimum capital participation of investors, submission of a revised business plan with a transparent methodology, as well as a clearly defined phased development plan with deadlines and measurable obligations.
"In addition, it is necessary to incorporate instruments to protect the state's interest (bank guarantees, investment obligations in phases, termination clauses and independent monitoring of implementation) to ensure that privatization results in real portfolio transformation and long-term development benefits, rather than increased project and fiscal risk for the state," the final recommendations state.
The first report from the Croatian company was submitted on November 19th of last year, after which an updated study was requested.
The recommendation to the Council, as it is emphasized, is that "privatization is strategically justified and developmentally necessary."
"The analysis of the existing portfolio unequivocally shows that the key hotel products of the "Budva Riviera" are in the declining phase of the life cycle. Although a significant investment cycle has been implemented in previous years, the dominant part of the portfolio is physically and functionally outdated, does not meet the expectations of the modern guest, is exposed to strong competition from newer, conceptually integrated and branded projects, and generates a relatively low margin compared to industry standards. Operating results, although positive, indicate limited potential for further growth without structural transformation of the product. Further maintenance of the existing business model would require significant capital investments with questionable returns, especially if modernization were carried out within the existing dimensions and concept," the amended study states.
It is emphasized that the complete renovation of the tourist resort "Slovenska plaža" and the hotel "Aleksandar" in the existing dimensions would entail extensive infrastructure interventions (moisture, installations, facades, drainage), restructuring of a large number of small and fragmented accommodation units, redefining the concept of an open resort, and developing new facilities that are currently lacking.
"However, even with significant investments, the question remains whether such a product could reach the level of differentiation and price competitiveness compared to modern four- and five-star resort projects in the region. In other words, the risk of investing significant funds without a proportional increase in value and profitability is high. In this context, privatization represents a developmentally rational solution, because the state's interest in taking on high investment risk is questionable," the study states, adding that the competitive environment in Budva is expanding and rapidly moving towards modern "mixed-use" concepts of a higher standard.
Weaknesses of the MK Group model
As it is emphasized, the proposed model of the MK Group based on the concept of a mixed-use resort is in principle aligned with contemporary trends in the development of larger projects in Mediterranean destinations that have strong leverage to transform destinations, the need for revenue diversification, integration of the hotel and residential segments, and increasing the market value of the location through phased development.
"Such a model has the potential to raise the qualitative level of the destination, to generate additional sources of financing through the residential component, to enable the repositioning of "Slovenska plaza" and the "Aleksandar" hotel in a higher market segment. From a strategic perspective, the concept is developmentally acceptable and in line with the long-term interests of the destination," the consultancy says. However, the key weakness of the MK Group proposal is that the submitted business and investment model contains serious shortcomings.
"The investment was underestimated and incorrectly reported. The analysis shows that the total investment value is underestimated, partially methodologically inconsistent, with an established difference of approximately 31 million euros compared to the realistically estimated volume. Such a deviation poses a serious risk to the project's implementation and calls into question the reliability of the overall financial model. The business plan lacks a clear methodology. The following shortcomings were noted: lack of a transparent projection methodology, absence of detailed operational assumptions (ADR, occupancy, seasonality, segmentation), unclear dynamics of the ramp-up period, and inconsistency of revenues with market benchmarks. Revenue projections are underestimated in certain segments, but without a clear methodological basis, which further complicates the evaluation. Without operational elaboration, the business plan does not enable a quality assessment of - cash flow sustainability, debt servicing capacity, long-term profitability of the project," the study states.
The financing model, as it is emphasized, needs to be revised.
“The proposed financing model is based almost entirely on external debt with the assumption that the debt will be serviced from cash flow generated predominantly by the sale of apartments and the operation of hotel facilities. Such a structure carries several systemic risks: dependence on the dynamics and success of the sale of the residential component, exposure to real estate market cycles, risk of illiquidity in the event of a delay in the sale, increased financial leverage without adequate own capital participation. In its current form, the financial structure can be assessed as high-risk. The ambition of year-round operations is unrealistic. The vision of year-round operations is not supported by a clear program of content that has the ability to generate year-round demand, elaborated through a phased development plan, stronger demand generators activated in the final stages of the project, supported by market evidence of real demand in the off-season. Without a strong infrastructure of supporting content that has the power to extend and/or maintain year-round demand, year-round operations remain a declarative ambition,” the study emphasizes.
Instead of “Slovenska plaža” a mixed-use resort
The MK Group initiative, as stated in the document, envisages the transformation of the existing location into a mixed-use resort with the aim of repositioning Budva from a highly seasonal destination into a year-round active urban tourist center.
"Such an approach is generally in line with the strategic documents of the city's development, which affirm Budva as an urban center based on the synergy of tourism, culture, business facilities and quality public space. The concept of building two high-class hotels (5*), apartment units, a large proportion of which are branded, a MICE center (a space or complex intended for business and organized gatherings) and F&B (food and beverage) retail facilities, with an emphasis on architectural quality, public spaces and integration into the urban fabric, corresponds to the ambition of attracting guests with higher purchasing power and raising the overall standard of the destination. However, a more detailed analysis of the relationship between the program mix, the configuration of accommodation types, targeted hotel brands and the central demand generator indicates certain conceptual challenges," the document states.
The initiative lists as reference brands international luxury chains that are recognized in the market and whose business model is primarily focused on longer stays, wellness and luxury family trips, while their congress and mass business segment is generally secondary, and therefore difficult to apply in the proposed project.
"At the same time, the MICE/multievent center is positioned as a key "anchor" of the project and the main generator of year-round demand. In international practice, the successful positioning of MICE destinations implies a hotel infrastructure that is operationally and functionally adapted to the needs of congress guests: a high share of standard rooms suitable for single-use, efficient check-in and check-out processes, strong logistical support, direct connection to congress venues and a focus on business infrastructure. In this context, luxury brands do not necessarily represent optimal support for the MICE segment, because the structure of their accommodation units, organization of space and target guest profile are not primarily aligned with the needs of the congress market," the amended study emphasizes.
The Council collects additional analyses from state institutions
Last month, after a session at which the analysis of a Croatian consultant was presented, the Council for Privatization and Capital Projects announced that the initiative to restructure the "Budvanska Riviera" would depend on additional expert analyses and consultations with the relevant institutions and local self-government.
It was assessed that maintaining the "status quo" leads to a gradual loss of competitiveness in the market, which "unequivocally requires finding a long-term investment model in order to fully realize the potential of this tourist complex."
"Recognizing the importance of tourism for Montenegro and the necessity of modernizing key tourism capacities, the Government, taking into account expert analyses and the interests of the local community, will decide on a potential arrangement, which will have to meet all economic and environmental standards, while respecting the interests of shareholders, employees and all residents of Budva and Montenegro," the Council announced at the time.
"Vijesti" is awaiting a response from the Privatization Council by when they plan to collect additional analyses from the relevant institutions and when a decision on a potential arrangement could be made.
They would build "congress apartments"
The Croatian consultant states that an additional aspect is the dominant share of branded tourist apartments in the overall capacity structure.
"Although the apartment product has a clear market logic, in the "leisure segment" and longer stays, it is not a standard or preferred form of accommodation for MICE guests, who, due to the short duration of stay, business protocol and organized group accommodation, generally prefer hotel rooms with full service and high operational efficiency. The introduction of the category of so-called "congress suites" represents an additional conceptual element, but such a product is not widely recognized as a standardized model in international MICE practice, which may limit its market acceptance. Consequently, there is a risk that the hotel-apartment structure will not be fully aligned with the ambition for the MICE segment to be the main driver of year-round business," the document emphasizes.
In such a scenario, as it is emphasized, luxury hotels and apartments could achieve optimal results in the summer season and the leisure segment, while the congress and business segment, as a key element of extending the season, would remain insufficiently supported by an adequate type and volume of accommodation.
"In conclusion, although the development concept in its spatial and urban ambition is appropriate for the location and long-term transformation of Budva, additional conceptual alignment between the MICE function, selected hotel brands and the structure of accommodation capacities represents an important prerequisite for realizing the full potential of year-round business and stable market positioning," the document states.
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