Postcard from Greece: 17 Million Phantom Tourists
4 August 2013
The past three months have been extremely busy, marked by the typically frantic travel and deadline scramble as we try to wrap things up before a few days off in August. One of our key projects is a large hotel investment in Athens. It’s a useful occasion to comment briefly on how the current tourism season is going.
Hotels in Athens are hit by the traditional summer season slump, as tourists increasingly bypass the city to the island hotspots. Hotelliers across Greece are complaining that the vaunted 17 million tourists extolled by Greek Minister of Tourism Olga Kefaloyianni are turning into phantom tourists for the majority of the country.
The current Greek tourism product depends overwhelmingly on a few magnet destinations: Santorini, Mykonos, certain areas of Crete, Corfu, Kefalonia, Lefkada and Halkidiki. The season, if defined as a period where hotel occupancy exceeds 65%, now lasts 3 months. The government, rather than contributing rationally to development, is riding a temporarily rising tide.
As is obvious to everyone, the international tourist industry has changed. Seasonal low-cost airlines and tour operators are now flying direct point-to-point flights from major source markets to Greek islands. Most of these tourists are typically low-cost and/or all-inclusive, meaning that most of the value stays outside Greece.
This is not to say that higher arrivals are not needed: they are. But the structural balance of the Greek tourist product remains problematic for a number of reasons.
Every single hotel feasibility study we do points to low occupancy, even among 5* brand name hotels. Most Greek island hotels now close at least 6 months per year, along with the entire destination. This makes investment returns difficult to achieve.
Greece has an over-supply of hotels, particularly small 20-30 room hotels that were developed using EU subsidies. These hotels have high occupancy (above 70%) from about July 10th – September 15th; otherwise they are empty.
On an annual basis, if one assumes 365 days of operation, most occupancy in island hotels was below 20-25% in 2012. If one assumes 183 days of operation, most occupancy is about 45-55%.
A highly seasonal tourism product distorts social security spending. Hotel employees work 12-14 hours per day in the summer, and then enter the unemployment rolls in the winter (even if they find informal work). This socialises the cost of a poor tourism development policy. The Greek government reaps tax income in the summer; it pays out in social spending in the winter.
However, employment taxes and unemployment benefits are increasingly distorted by the fact that many seasonal tourism employees are imported migrant labour. Hotels rely on cheap staff, often provided by labour agencies, from Bulgaria, Romania and other locations. This staff is sometimes, though rarely, fully declared. As a result, social insurance contributions are low and the true cost of tourism is further socialised, i.e. passed on to other segments of the economy and society to pay.
Tax revenues are also lacking. Many hotels and tour operators are now paid offshore or in other countries given that source market operators dominate the sector.
SDOE, the Greek tax police, are intensifying their audits in summer resorts. Restaurants, hotels and nightclubs have all come under audit. A recent audit of a Greek island nightclub showed that revenue was three times higher on the night of the audit than the average declared when the audit did not take place. That daily turnover was stated at EUR 40,000, giving an indication of just how well some Greek island nightclubs are doing.
Another positive factor is the reduction of value-added tax (VAT) in the restaurant sector from 23% to 13% on August 1st. All F&B options I’ve visited in Athens this week have reduced their prices proportionally. This is welcome news, but the shortfall in tax revenue will have to be made up from other sources.
The 10% decline in VAT on F&B is vastly outweighed by other government taxes that disproportionally hit the hospitality sector. One new tax that will shortly hit Greek hotel investors is the new Greek property tax: the government has decided to bundle this tax (originally passed in 2008), for 2009, 2010, 2011 and 2012, in a single year.
This will replace the special tax placed on electricity bills, which has already done incredible damage to Greek hotel profitability, because it is a function of square meters. When these square meters produce no income 6 months of the year, that tax hits hard.
The issue of 17 million tourists will continue to haunt Greece. There is little evidence that this incoming tourism is the result of concerted government action. There is overwhelming evidence that this is instead due to political turbulence in Turkey, Tunisia and Egypt. So the question really is, what is the Greek government doing to set out a sustainable tourism development and marketing strategy?
Let me ask the question a different way: when is the last time you saw a Greek tourism advertisement on any major source market media channel, sponsored by the Greek National Tourism Organisation?
The government sees hotels as cash cows. This perception is ironically reinforced by the fact that certain hotels in Athens have been have for years extended various favours to political parties and individual politicians (free rooms, free meals, etc.) Yet it has nothing to do with the real situation in the Greek hotel sector.
Unless Greece can settle upon a long-term tourism development strategy, the roller coaster earnings of the Greek hotel sector will continue. The sector remains attractive to international investors drawn by lower asset prices: over 2,000 of Greece’s 10,000 hotels are for sale. And the trend will accelerate once the 2013 tourist season ends. Buying a Greek hotel is not difficult: earning above 15% net profit per year over time is.
Navigator Consulting Group has implemented 17 Greek hotel investment and restructuring studies. Contact us for more information.