Tourism Minister Michael Refalo recently announced the launching of a bank loan interest subsidy scheme to assist operators of licensed hotel accommodation establishments with 100 bedrooms or less to refurbish their properties. Around 150 establishments, ranging from guesthouses to five-star establishments, fall within this category.
Government will be subsidising two percentage points of the rate of interest agreed to between lending banks and the owner/operators of a property. The amount borrowed for refurbishment purposes would be capped at Lml50,000 for the owner/operators of licensed properties who intend to undertake refurbishment projects, while for those who wish to refurbish as well as add facilities and small extensions, the limit of a bank loan taken for such purposes is set at Lm250,000.
Projects can also include the introduction of environment-friendly methods as well as systems which cater for the conservation and recycling of energy and water resources.
According to Dr Refalo, government policy direction, along controlled development scenario parameters, calls for upgrading and proper maintenance of properties rather than an expansion of the accommodation sector. "We are witnessing a hardly perceptible but gradual revolution in our hotel inventory. During the last three years despite the coming on stream of hotels which have placed thousands of new beds on the market, total bed stock has decreased by 200 beds."
Dr Refalo said that in recent years a number of owners of hotels and complexes had decided to re-focus their investment to other areas, such as retirement homes, office and apartment blocks. "Our aim is to maintain a constant inward flow of investment to improve bed stock and assist those who wish to leave the leisure sector to find alternative venues for their properties. Government is offering one last chance to operators who need to upgrade their properties and bring them into line with visitor demands and expectations."
In a nutshell, the Tourism Ministry is urging specific small and medium-sized establishments to keep in touch with changing times and thus upgrade their product. Commendably, the scheme has also been extended to include any green strategies which entrepreneurs might wish to introduce as part of their refurbishment plans.
What strikes me particularly, however, are the minister's words that Government is "offering one last chance" to those establishments that are lagging behind. The offer, albeit undoubtedly a positive initiative, may thus also be interpreted as a veiled warning. Either improve your product offer, may be the underlying message, or else be ready to move out of the accommodation sector and seek new business pastures.
Within the context alluded to by the minister, it would be opportune to ponder upon the implications of accepting or declining this "last chance" to upgrade. In so doing, it is best to take into account the geographic context of certain hotels falling within the 100-bedroom limit.
A number of small properties within an urban or country setting are household names in tourism circles and certainly among the most established hotels in the Maltese Islands. The Castille Hotel in Valletta, for instance, is a 40-room three-star hotel which blends comfort with a rich historical character in the heart of Valletta. It is quality-oriented, and attracts a clientele of business and leisure visitors whose primary objective is not the sun and sea experience.
Gozo's Ta' Cenc Hotel, on the other hand, is a five-star establishment located on the outskirts of the village of Sannat. It has around 85 rooms and suites in total, and is located in a country setting that allows visitors to experience the "get away from it all" factor through excellent service, a relaxing environment and leisure walks along the spectacular cliffs. Moreover, it has extensive, landscaped grounds which increase the quality value of the overall product.
Such establishments, although not necessarily representative of all hotels within an urban and country setting, offer a diverse product which facilitates the marketing of the hotel as a distinct property. The subsidy may come in useful should they decide to strengthen their position through the introduction of new products and services.
As things stand, their distinctiveness however also allows them to have a competitive edge over other properties, especially mainstream small and medium-sized seaside hotels that lack that distinctive touch, thus offering an identical product based on resort clichés.
Such resort hotels compete against several other similar establishments located within a square kilometre or so, giving rise to a cutthroat situation due to tour operator pressures. Indeed, hoteliers often have a painful choice to make: either lower their room rates or lose out on business to a neighbouring hotel offering the same type of product.
It is the latter type of hotels, the indistinctive properties, that stand to gain most from the ministry's initiative. Paradoxically, the ministry's subsidised rate is however unlikely to appeal to these entrepreneurs across the board. Non-liquidity, cost-cutting initiatives, coupled with a potentially unattractive return on investment following refurbishment, might encourage a prudent approach from those owning hotels with no distinctive character. This in view of the fact that it is not always viable to upgrade such properties when overall supply exceeds demand, knowledgeable also of the fact that many small hotels do not have the land area to increase beds and facilities unless planning regulations are relaxed.
It is therefore a vicious circle which ultimately leads on to one direction, the overcapacity problem. The influential Malta Hotels and Restaurants Association (MHRA) claims, as quoted in the Tourism Ministry's "Carrying Capacity Assessment" (CCA), that for the accommodation sector to be viable, a 65 per cent occupancy rate must be attained.
Yet the same CCA document is sceptical about attaining such levels: "With the current stock of beds, the additional beds to be placed on the market by 2003 and the proposals for further beds, through extensions or new accommodation projects, will make this benchmark improbable to achieve, particularly in view of the current and envisaged market trends".
Anthony Chircop, president of the MHRA, agrees that there is an overcapacity problem. He stresses however that "this does not necessarily mean an excess of good quality beds, since a number of beds on the market are quite useless. Some beds are actually detrimental to the industry since they are sold at very discounted rates even in the peak season, with their rates serving as lead prices for tour operators to acquire beds in better properties at the same discounted rates.
"The fact that some of the hotels in the lower categories offer an aging product however does not mean that they should be discarded by the authorities. If need be, Government should assist them even further so as to encourage such properties to seek new business pastures".
A situation prevails, therefore, whereby authorities are conscious that there is excess capacity but are not willing to shun off new quality investment, notwithstanding its potential impact on the profitability of existing establishments. In this regard, the private sector too recently voiced its concern, albeit from a different angle.
When asked whether the Maltese hotels are as profitable as other establishments elsewhere, Corinthia Hotels International managing director David Woodward did not mince words. "The Maltese hotels are at the lower end of the profitability scale because the occupancy rates are not as high as those of, for example, Budapest and Prague. The cost of operation, including payroll overheads, is also higher" (The Times, April 10).
While stating that the Corinthia Group operates in a market segment which differs from that of the majority of small scale hotels, the above statements are still food for thought about the problems afflicting the local hotel industry. Indeed, oversupply might be hindering the sustainable growth of the industry.
Although Dr Refalo pointed out that current bedstock has decreased by 200 beds, it is worthwhile mentioning that the very same CCA report acknowledges that supply of beds will still grow from 41,456 in 2000 to 49,500 by 2003. This massive 19 per cent increase over three years stifles the minimal decrease in beds mentioned by the minister and means more problems for the existing aging or indistinctive hotels in view of the arrival of modern or refurbished properties on the market.
In this light, the "one last chance" notion implies that in the absence of corrective action, some of the existing accommodation units will be feeling the pinch and that they heavily risk dying a natural death over the coming few years. Dr Refalo's extended arm is up for grabs by all concemed, but I doubt whether he will have sleepless nights if some of them go bust.