No nation has more potential to become the Silk Road Monaco and attract global capital than Montenegro.
There are jewels and there are Silk Road jewels. But these jewels are few and far between on a map that covers so many nations with so many challenges. One of the hidden jewels on this long and winding Silk Road is Montenegro.
In fact, it is hard to find a country in Western, Eastern or Central Europe with the kind of capital inflows of this Balkan nation. Billions of dollars are flooding in from all parts of the world, expanding infrastructure and building a series of luxury Adriatic seaside towns.
For those who watched the Asian Tigers grow from backwater tropical resorts and northern industrial engines to mega-tourist destinations and economic dynamos, Montenegro is déjà vu. Emerging from decades of Cold War cold shoulder and a brutal civil war, this ancient Silk Road crossroads is set to lead the emerging Balkan Tigers into a new era. And, no Balkan market is more friendly towards foreign investment than this 650,000-person sea, lake and mountain paradise which sees a migration of over two million sun worshippers during the summer season.
“Each generation finds its own forgotten place where cultures collide and enjoy the feeling of being different,” remarks Neil Emilfarb, Chairman of Stratex Group, one of the first and still most active foreign investor in the Balkan nation. “There was Marrakech in the 1930s, ykonos in the 1960s, Miami South Beach in 1990s and now Montenegro.”
Over the last few years, the biggest names in the investment world have joined the Montenegro beach party. Egypt, Turkey, Dubai, Qatar, Russia, Azerbaijan, all Silk Road nations in their own right, stepped up with projects destined to bring Montenegro into another league with massive development designed for high net worth crowds. What do they all see? A Silk Road opportunity second to none in a new age Tiger economy set to emerge with a roar in the heart of Europe.
Not one to let a Silk Road opportunity slide, China has taken its stake in a different manner so far, though it may not be long before the world’s largest tourist market finds this enclave. The perennial emperor of Silk Road infrastructure investment entered the market to build and finance an €800 million road project to connect newly developed Montenegro ski resorts. While the rest of the region’s investors chose to go with property development, China sees better value in building the infrastructure that ties developments together and fuels their power needs.
China Road and Bridge Corp. is now building a treacherous 40 km mountain section of Bar-Boljare Highway. Montenegro concluded a Preferential Buyer Credit Loan Agreement with Chinese EXIM Bank in 2014. Of an estimated €809.6 million, €689 million (85% of the funds) will be provided from EXIM Bank to be repaid over 20 years after a grace period of six years and annual interest of 2%, the remaining €120 million coming from the Government of Montenegro. After contractual preconditions were fulfilled this four-year project kicked off in May 2015.
Perhaps the highest profile Silk Road news for Montenegro came earlier this year when rumors were confirmed that controversial former Prime Thai Minister Thaksin Shinawatra bought Hawaii Islands off Budva’s Old Town. Though the initial size of this investment is small compared to others, the plan to build out this exclusive Adriatic island is expected to produce one the world’s most luxurious resorts, rivaling Sveti Stefan just down the coast, the hob-knobbing point of the likes of Brad Pit, Madonna and Rolling Stones.
Silk Road Crossroads
Montenegro is situated between the Western Mediterranean, favored by upscale Northern and Western Euro tourists, and Turkey and other Black Sea locations favored by Eastern Europeans. Its central Adriatic location close to the Ionian Sea and easy accessibility from Aegean and Mediterranean ports makes it an ideal yachting destination. Montenegro remains the only European Mediterranean place in which East and West meet on equal visa terms, where EU, Russians and most Gulf citizens do not require entry visas.
Montenegro has been at the Silk Road crossroads for over 2,000 years. The Greeks, Romans, Venetians, Ottomans, French and Austro-Hungarians have all set their flags in Montenegro over the ages, some for many centuries. More rulers, sultans and emperors have laid claim to this sparkling jewel of the Balkans than one can imagine. In more recent times, the nation has suffered the tribulations of the Cold War era and a civil war that captured the concern of the world. Throughout it all, this proud Montenegrin nation has stood tall, absorbed new cultures and different peoples.
Today, Montenegro is open for business and no nation in the region attracts more attention. Supported by a government open to foreign investment and a tax regime that sets the benchmark at a level of 9%, a flood of interest has been generated in this Dalmation Coast marvel. Watershed developments like Dukley Gardens, Porto Montenegro, Portnovi and Lustica Bay have set the agenda on a multi-billion dollar investment flow that will alter the very nature and demographic composition of this growing Adriatic nation.
Big money has taken the bet that Montenegro will make the grade in a tourist world where competition is tough and opportunities endless. That was the reasoning behind first mover Porto Montenegro. Legend has it that in 2006 Peter Munk, a Canadian billionaire of American Barrack mining fame, circled the country in a helicopter in search of the perfect development destination. Munk’s co-investors in this €300 million investment included some of the wealthiest businessmen – Russian oligarch Oleg Deripaska, Lord Jacob Rothschild of the banking dynasty, and Bernard Arnault, Chairman and CEO of French luxury group LVMH.
Porto, Porto, Porto
Porto Montenegro stands as a testament to the Munk vision, owned as of last year by Investment Corporation of Dubai (ICB). The sale to ICB was a vote of confidence for the Balkan state from a sovereign wealth fund that holds Emirates NBD, UAE’s largest bank, Burj Khalifa, world’s tallest skyscraper, Emirates Airlines and Emirates National Oil. ICB plans to double investment here with a new round of development and has already arranged direct flights to Montenegro with Fly Dubai.
When Munk spotted the abandoned shipyard, he knew it was the perfect place for a super yacht marina. By 2009 the first residence phase was complete with 85 marina berths. Today, there are six residences, 450 award-winning berths and the five-star Regent Hotel, winner of the annual World Luxury Spa Awards in Switzerland. Plans our now afoot for another 900 berths and 900 residential units, more than doubling size.
The theme of Porto Montenegro is simple: serve the super yacht set and make sure this target market has everything required. This has been possible due to the non-EU standing of Montenegro, which provides yacht owners with all sorts of advantages. Duty free oil at a 45% discount is most attractive to yacht owners where fuel flows like water every time the captain hits the throttle. Yacht-friendly legislation allows multiple changes to passenger and crew manifests season wide with pick-up and drop-off flexibility, not to mention a total VAT exemption.
“So much has changed in the last ten years,” recalls Katie Smirnina of Porto Montengero. “When Porto Montenegro was conceived few people understood the vision, even the locals were skeptical. We were the first to make a major luxury development investment, and Montenegro has become the place of choice for those who want to follow. In places like Croatia, EU legislation makes it very hard to compete.”
The Porto Montenegro management team is proud of what is achieved in the national interest and how its vision transformed the country. “Ten years ago no one would take the risk and now this has proven to be most beneficial,” adds Smirnina. “Ten years from now this place will be much different, a super popular destination, more European and less a place where the current adventure seekers set investment trends.”
Smirnina points out Porto Montenegro trendsetters like to buy before the crowds and often have several residences. They prefer a quaint, un-gated community with people that know each other in a relaxed environment and somteimes they buy multiple units. Smirnina believes the current luxury niche is designed to make Montenegro more exclusive and control future crowds. Meanwhile, property prices rise steadily in Porto Montenegro and most units are sold well before their completion.
As part of its super yacht set service Porto Montenegro manages the real estate component. While the country is investor friendly, bureaucracy for property ownership is a factor to overcome with money, time and patience. The fact that Porto Montenegro is 10% owned by the government due to its land contribution makes life easier. “It looks easy, but it is not,” adds Smirnina. “We create a safety bubble for buyers and sellers with a legal and financial team to take care of everything. Prices are higher to reflect this value and a construction quality based in international standards.”
City on the Bay
Across from Porto Montenegro on historic Kotor Bay, Egyptian billionaire Samir Sawiris, Chairman and CEO of Orascom Development Holding AG, has doubled the bet with a billion-dollar Lustica Bay extravaganza. This Egyptian development giant operates 35 hotels with over 8,000 rooms and controls a land bank of 100 million sq. m. From the Red Sea to the Swiss Alps, Orascom has set the bar in chosen markets. With Lustic Bay Orascom is developing a small city to cover 40 sq. m. of Lustica Peninsula.
“Scandanivia is currently the direction of our marketing push, but we see the potential for more China business,” says Artem Arefiev, Senior Channel Management Executive of Lustica Bay, which is moving full blast to develop 7 million sq. m. and the country’s first golf course designed by Gary Player. “We plan to develop only 9% of the territory to save green space and look to build a town of major proportions open to locals and foreigners alike, with different phases set aside for different groups.”
Visionary entrepreneur Sawiris came personally to inspect the large tract of land that faces the open sea on Lustica Bay – it was love at first site. “We feel this is the best piece of land in the country,” adds Arefiev, “and when it comes to building new communities like this Orascom is second to none.”
Though it may take more than a decade, when Lustica Bay is finished it will be a point on the map of some size and importance. Orascom plans to construct affordable housing, seven five star hotels, several residential communities, a police station, an international school and a new four lane expressway. The developer provides a tiered pricing structure to attract local year round residents and high-end yacht owners.
Orascom first entered the mega-development space with El Gouna City, built in the desert on the Egyptian Red Sea coast. El Gouna now houses 24,000 and Orascom has finished nearly a dozen similar projects from Qatar to Switzerland. At the same time as building out Lustica Bay, Orascom is transforming Andermatt, a Swiss mountain village, into a year-round mountain resort, doubling the municipality’s size.
Lustica Bay will not be the only town on the Peninsula. Qatari money is coming in with Blue Horizon as a rival set to open in 2018 under the banner of Qatari Diar, owned by sovereign fund Qatar Investment Authority. Qatari Diar will lay down the communication, road and communal infrastucture to support a five-star hotel and mixed-use units spanning 34,000 sq. m.
In yet another location on the peninsula, NorthStar intends to build the €210 million Montrose project with the first of five phases of construction and infrastructure in progress. Backed by capital from Europe and the Middle East, Montrose is a five-star hotel, branded residence with secluded villas, a marina, a yacht club and boasts world-class conference facilities.
Navigate in another direction on magical Kotor Bay, in the sight line of Porto Montenegro, one comes to Portonovi, flagship of Azmont Investments, the Montenegro based company owned by Azerbaijan Global Investments (AGI). Azmont plans to develop for the mix-used resort and is sure its €650 million investment will attract the attention of those Silk Road mavericks looking for the peace and quiet of a gated community by the secluded bay.
“We learned from similar projects in Montenegro and worldwide to add the specifics that can make Portonovi unique,” remarks Rashad Rasullu, Executive Director of Portonovi Resort Management Company. “These types of projects always entail a different concept and approach. It all depends on the market and your strategy. Portonovi is perceived as a new Montenegrin gem. We created a destination to exceed expectations and provide an experience that will be tomorrow’s new benchmark.”
The 26-hectare Portonovi Resort will comprise 275 properties, from spacious town houses and apartments set in a Mediterranean-style village to villas in landscaped gardens, sleek penthouses and sky villas with infinity pools overlooking the marina. At the same time, Portonovi will be home to the first One & Only Resort in Europe.
‘’We all need to acknowledge the work government has done since the country regained its independence in 2006,” concludes Rasullu. “The entire country is busy working on building the economy, focused on tourism and real estate developments which highlight the beautiful Adriatic coastline. As an investor we want to contribute to this work and our ambition is to place Montenegro on the high-end tourism map.’’
Turkish investors will not be left out of the mix, and recently Istanbul’s powerful Doge Group took a stake in Kotor Bay. At the same time, Merit Group, a publicly-listed Turkish company specialized in entertainment and hotel facilities, is committed to the Balkans and has made Montenegro its regional base. This year it is estimated 200,000 Turks have booked holidays and the direct 1.5 hour Turkish Airlines flights are filling up fast.
Above all, Montenegro needs higher economic growth to attain the level of GDP per capita of EU countries. This growth must be sustainable so reform measures do not cause economic problems and the government hopes to avoid changes that increase short-term economic indicators but threaten the long-term stability of the system.
The Montenegro growth model is based on foreign direct investment to expand tourism, energy, agriculture and industry. Despites being a country of natural potential in an important geo-strategic position on the European continent with a certain degree of political stability and successful Euro-Atlantic integration, prosperity calls for infrastructure to deliver an economic growth rate to erase high deficit levels. Connectivity between different regions is a precondition for international cooperation and strengthens attractiveness as an investment destination.
With foreign tourist consumption composing 20% of GDP, Montenegro cannot realize its development vision as an exclusive destination without modern infrastructure. Undertaking these projects carries risks and Montenegro needs innovative solutions and effective partnerships between the public sector, private companies and donors to exploit the unused potential and provide better living standards.
Important infrastructure projects include: Bar-Boljare Highway, the Adriatic-Ionian corridor, modernization and construction of railways to Serbia and Albania, thermal power plants to connect with grids in Italy and Serbia, Port of Bar development, and improved rural infrastructure. As such, the National Investment Commission adopted a list of 64 priority projects valued at €4.3 billion to be implemented from 2016 to 2025.
The Montenegro model seems to be bearing some results. After anemic growth in 2014, 2015 recorded a real GDP growth of 4.3% as a result of intensive construction activities and record growth rates in tourism. The Government and international financial institutions expect a similar trend in the medium term. Conservative projections of real growth range from 4.1% in 2016, 4% in 2017 to 3% in 2018.
Financial Center Bid
With the grand plan to build an upscale country in place, the next step will be to diversify into new value added sectors to serve the changing nature of the Montenegrin community. Dragan Prelevic of Prelevic Law Firm and an investor in Stratex Group with Neil Emilfarb, feels that if the government plays its cards right it can roll-out the Monte Carlo model with little difficulty, bringing a whole new level of opportunity. Austrians, which now dominate the banking and insurance market, along with their Turkish counterparts, are already anticipating this move with new licenses and branch openings.
“Just take trusts, foundations and pensions for a start, where we have almost no income at the moment,” explains Prelevic. “Austrian companies are 80% owned by private trusts. If they agree to become resident we should make them exempt from taxes. Consider British and Nordic pensioners, if they spend half the year here they can benefit from zero inheritance tax and relief from other taxes. If we are smart we can establish a system that can only greatly enhance current income, not harm it.”
NATO is expected to be an important boost for the bid for financial services business. In 2017, there were positive developments on the road to Euro-Atlantic integration with acceptance into NATO. Membership provides Montenegro long-term stability and security along with significant economic benefits. The experience of others point to membership improving the business environment and attractiveness for investors.
Joining Albania and Croatia in NATO is considered by many to be a smart move. “I look at it as a businessman,” adds Stratex’s Emilfarb. “NATO is a guarantee of laws and safety of money. To be a member you have to improve your laws to the standard. It is like a business club and Montenegro needs to be part of that club.”
The only question mark is where Russian capital is headed with Montenegro’s joining of NATO. The flow of Russian tourists and rubles goes back to the heyday of Yugoslavia. When Italian, German and French tourists exited along with the Club Meds in the 1990s, Montenegro had twice the number of tourists it has today. When the European crowd left the Russians arrived in force in mid-2000s to fill that void and Russian investors of all sorts bought land with an eye towards development.
However, government development regulations were not well formed at that time, and most of the investments made by Russians never reached fruition. When the ruble financial crisis hit, Russian investment slowed substantially, though its tourists still represent a 30% market share, with only Serbia surpassing the flow at 35%. Though feelings have cooled after Montenegro entered the NATO alliance, the influence of the Russian tourists and capital remains important for the country for the moment.
Montenegro’s NATO membership is complementary to the process of integrating into the EU. The issue is whether EU will be a similar benefit. The country is set to become a EU candidate in 2020 or 2021, but the nation is unclear on the advantage for a tourist destination. Few are eager to see more rules and regulations than necessary.
“The present government is keen on attracting investment and that makes people very comfortable here,” concludes Prelevic. “That is an important advantage compared to countries laden with heavy bureaucracy. No one wants to see Montenegro lose one of its key advantages as it fights hard to fulfill a daring dream story.”