MCC Engineering Ltd. Feasibility study for a resort project in , March 2012

report # DRAFT

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PKF hotelexperts GmbH I Hegelgasse 8 l 1010 Vienna l Austria tel +43 (1) 5120707 l fax + 43 (1) 5120607 e-mail [email protected] l www.pkfhotels.com

managing directors Michael Widmann Dr. Andreas Staribacher l commercial register FN 245617 b PKF hotelexperts GmbH is a member firm of the PKF International Limited network. The network consists of legally independent member firms. PKF hotelexperts GmbH does not accept any responsibility or liability for the actions or inactions on the part of any other individual member firm or firms.

 Table of contents chapter heading page

1 Introduction 11 1.1 Project 11 1.2 Assignment 11

2 Location 12 2.1 Montenegro 12 2.2 Tivat 18 2.3 Project site 21

3 Market 32 3.1 Accommodation facilities 32 3.2 Marinas 38 3.3 Residential market 42 3.4 Other facilities 45 3.5 Relevant market segment 48

4 Product 61 4.1 General 61 4.2 Target groups 63 4.3 Product 67

5 Financial forecast 75 5.1 General 75 5.2 Operated departments 78 5.3 Undistributed operating expenses 82 5.4 Management fees 83 5.5 Fixed charges 84 5.6 Replacement reserves 84 5.7 Net operating income 85 5.8 Key figures development 87

6 Investment analysis 89 6.1 Methodology 89 6.2 Development costs 90 6.3 Debt financing assumptions 91 6.4 Sale of residential units 91

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 Charts/Illustrations

# title page

Chart 1 Location of Montenegro within South-East Europe 12 Chart 2 Passenger and aircraft movements at Airport Tivat 14 Chart 3 Direct flight connection frequency of Airport and Airport Tivat 15 Chart 4 Location of Tivat in Montenegro 18 Chart 5 SWOT analysis macro site (Tivat) 20 Chart 6 Aerial view of project site 22 Chart 7 Map of project site 23 Chart 8 Project site and its current accessibility 24 Chart 9 Project site and its planned accessibility 25 Chart 10 Pictures of the project site 26 Chart 11 SWOT analysis micro site (project site) 28 Chart 12 Assessment micro site (project site) 29 Chart 13 Suitability of micro site for different guest segments 30 Chart 14 Suitability of micro site for different hotel types 30 Chart 15 Development to date of supply of accommodation facilities in Montenegro 33 Chart 16 Selected hotel and resort projects along the Montenegrin coast 34 Chart 17 Development of demand for accommodation facilities in Montenegro 35 Chart 18 Seasonality of demand in accommodation facilities in Montenegro 36 Chart 19 Originating countries of guests in accommodation facilities in the coastal region in Montenegro 37 Chart 20 Marinas and ports in Montenegro 39 Chart 21 Overview of residential units sizes of selected properties 43 Chart 22 Pictures of f&b facilities in Tivat 45 Chart 23 Pictures of Almara Beach Club 46 Chart 24 Pictures of Lido Mar Pool Club (Porto Montenegro) 48 Chart 25 Overview of selected resorts 49 Chart 26 Pictures of Aman Sveti Stefan 50 Chart 27 Pictures of Hotel Splendid Conference & Spa Resort 51 Chart 28 Pictures of Hotel Iberostar Bellevue 52 Chart 29 Pictures of the Queen of Montenegro Hotel 53 Chart 30 Pictures of the Hunguest Hotel Sun Resort 54 Chart 31 Pictures of the Riviera Club Hotel 55 Chart 32 Rack rates of the analysed hotels 56 Chart 33 Visualisations of the Island View Resort 57 Chart 34 Visualisations of Luštica Bay 58 Chart 35 Visualisations of Porto Montenegro 59 Chart 36 Planned facilities of future competitive set 60 Chart 37 Timeline for the development of the hotel 76 Chart 38 Employees per department 77 Chart 39 Payroll and related expenses 78 Chart 40 Rooms revenue development 79 Chart 41 Food and beverage by outlet 80 Chart 42 Food and beverage elements 81 Chart 43 Other operated departments 81 Chart 44 Total operated expenses 82 Chart 45 Undistributed operating expenses 83

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Chart 46 Management fees 84 Chart 47 Fixed charges 84 Chart 48 Income overview 85 Chart 49 Income elements 86 Chart 50 Gross operating profit development 87 Chart 51 Key figures and ratios development 88 Chart 1 Development costs of the resort 90

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 Annexes

# title 1 Forecast 1.1 Stabilised year 1.2 Years 2014 to 2023 2 Investment analysis 2.1 Return on investment analysis – most-likely case 2.2 Return on investment analysis – worst case 2.3 Return on investment analysis – best case 3 Terms and Conditions

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 Abbreviations

Abbr. Definition Measures bn billion(s) cm centimetre(s) h hour(s) km kilometre(s) km/h kilometre(s) per hour m metre(s) min minute(s) sq km square kilometre(s) sq m square metre(s)

‘000s thousand(s) Symbols/signs

€ Euro

# number (absolute figure)

Σ sum

Ø average

% percent

0 less than the half of 1 in the last digit, but more than nothing

- not available

/ no data, since there is no reliable information

. data not available or to be treated confidentially x cell closed, because information is not useful

( ) limited reliability due to uncertain statistical data

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 Abbreviations

Abbr. Definition Beds king king-size bed = double bed (size 200 cm x 200 cm) queen queen-size bed = double bed (size 160 cm x 200 cm) double double bed = double bed (size 140 cm x 200 cm) twin twin bed = two single beds (size 100 cm x 200 cm each)

Others ca. circa e.g. for example etc et cetera

EU European Union

FF&E furniture, fittings & equipment

GDP gross domestic product i.e. that is

MICE meetings, incentives, conferences, events

NATO North Atlantic Treaty Organisation

NRR net room rate

SWOT strengths, weaknesses, opportunities and threats

UN United Nations

UNESCO United Nations Economic, Scientific and Cultural Organization

UNO United Nations Organization

USALI Uniform System of Accounts for the Lodging Industry, Tenth Revised Edition

USP unique selling proposition

VAT value-added tax

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WTO World Trade Organization

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 Classification

The classification of hotels in this study is based on the internal hotel classifica- tion of PKF hotelexperts which is orientated towards the strict international pa- rameters for the classification of hotels (maximum of five stars). The US-Ameri- can classification compiled by the Automobile Association of America and by Mo- bil served as a guideline for this internal classification. Hotels in Montenegro are classified by the Ministry of Tourism. Currently, the Ministry of Tourism is in the final stage of defining a new regulation with regard to hotel classification standards. In general, the Montenegrin hotel classification applies less strict criteria compared to the internal classification of PKF hotelexperts.

 outstanding standard; extraordinarily good service, extraordinarily large (average of 42 sq m, minimum of 36 sq m) and luxuriously equipped rooms; excellent f&b facilities; extensive sports, leisure and spa facilities typical brands: Four Seasons, Mandarin Oriental, Ritz-Carlton

 very high standard; very good service; large (average of 34 sq m, minimum of 30 sq m) and very comfortably equipped rooms; very good f&b facilities; sports, leisure and spa facilities, which are adequate to the type and the site of the hotel typical brands: Hilton, Marriott, Sheraton

 high standard; good service; spacious (average of 26 sq m, minimum of 24 sq m) and comfortably equipped rooms; good f&b facilities; sports, leisure and spa facilities, which are adequate to the type and the site of the hotel typical brands: Courtyard by Marriott, Four Points by Sheraton, Novotel

 simple standard; limited service; relatively small (minimum of 18 sq m) and simple rooms; no or only simple f&b facilities; no or only simple sports, leisure and spa facilities typical brands: Campanile, Holiday Inn Express, Ibis

 very simple standard; no or very limited service; very small (minimum of 12 sq m) and very simply equipped rooms; no f&b facilities; no sports, leisure and spa facilities typical brands: B&B, Etap, Première Classe

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 Ratios

 occupancy occupied rooms divided by the number of available rooms per period

 multiple occupancy factor number of guests divided by the number of occupied rooms per period

 published room rate (= rack rate) published room rate including VAT and – if applicable – breakfast

 net room rate rooms revenue (after deduction of breakfast, VAT and allowances/discounts) di- vided by the number of occupied rooms in each period

=x revenue per available room/revpar (= rooms yield) occupancy multiplied by the average net room rate respectively rooms revenue (excluding VAT, breakfast and allowances/discounts) divided by the number of available rooms per period

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1 Introduction

1.1 Project

MCC Engineering Ltd, Podgorica, is planning the development of a resort (including – amongst others – a marina, various residential units, gastronomic and entertainment facilities, and a hotel) in the upscale segment in the Municipality of Tivat, Montenegro. The project site is directly located on the waterfront, in close proximity to the in Tivat (Airport Tivat), the and .

At the moment of the assignment, the project is in the planning stage. 1.2 Assignment

MCC Engineering Ltd, represented by Mr Predrag Bozovic, awarded the contract to perform consulting services (including amongst others a site and market analysis, a strategy workshop, and a master plan concept) for the planned resort in Tivat with writing from 1 June 2011. As a first step of the overall assignment, a site and market analysis was prepared (October 2011).

We conducted the assignment from June to October 2011. The market research on site was conducted from 14 to 17 June 2011, from 4 to 7 July 2011 as well as from 5 to 7 September 2011. The study respects the site and market circumstances at the time of the site and market research as well as the rele- vant supply and demand.

The audit of the legal terms, in particular the ownership, building, corporate and fiscal terms, is not subject of this assignment. We have prepared the prelimi- nary analysis on the basis of the General Terms and Conditions of Doing Business (see annex 3). When preparing the assignment, we have acted in our position as a neutral expert to the best of our knowledge. The study was exclusively prepared for the client’s use. If it is forwarded to any third party, the above- mentioned General Terms and Conditions of Doing Business shall also apply vis- à-vis this third party. The report (or parts of it) may only be published after the contractor’s prior written approval, which shall not be unreasonably withheld.

Vienna, 15 March 2012

PKF hotelexperts GmbH

Michael Widmann Jeffrey F. Scott Managing Partner Managing Consultant

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2 Location

2.1 Montenegro 2.1.1 General

Montenegro is located in south-eastern Europe bordering to the north- east, Kosovo to the east, Albania to the south-east, the Adriatic Sea to the south-west, Croatia to the west and Bosnia-Herzegovina to the north-west and north. With a population of about 620,000 inhabitants (status 2003, last official census), Montenegro covers an area of about 13,800 sq km.

The following map indicates the location of Montenegro within South-East Europe:

Chart 1 Location of Montenegro within South-East Europe

Montenegro

© PKF hotelexperts sources: google maps; PKF hotelexperts

Montenegro is a democratic republic and gained its independence from Serbia on 3 June 2006, following a referendum held on 21 May 2006. Montenegro is a member of the United Nations Organisation (UNO) as well as an official candidate for membership in the European Union (EU) and the North Atlantic Treaty Organisation (NATO). The capital is Podgorica, located in the south-east of the country.

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2.1.2 Economy

Due to its focus on industrial production as well as the evolvement of tourism in the 1960s, Montenegro’s economic development was rather stable during the communist period (1944-1992). However, following the dissolution of the Re- public of Yugoslavia in 1992 as well as the war period in the Balkans in the beginning of the 1990s, the economy collapsed. In January 1994, the country experienced a hyperinflation resulting in the decision of adopting the German Deutsche Mark (and later on the Euro). Consequently, the privatisation process was accelerated, improving the economic condition of Montenegro. Fur- thermore, significant tax cuts (e.g. in 2009, income tax was reduced from 15 % to 12 % and further to 9 % in 2010) were implemented, which resulted in an in- crease in foreign direct investment.

The GDP of Montenegro amounted to about € 2.9 billion in 2009, correspond- ing to an increase of approximately 123 % compared to 2001 (about € 1.3 billion). The inflation rate decreased from approximately 3.4 % in 2009 to approximately 0.5 % in 2010, while the unemployment rate amounted to ap- proximately 19.7 % in 2010, corresponding to a slight decrease compared to 2009 (approximately 20.3 %). Montenegro does not have its own currency; before the introduction of the Euro, the country used the German Deutsche Mark. Since 2002, the official currency used in Montenegro is the Euro (however, the country is not an official member of the Eurozone). 2.1.3 Traffic

a) air traffic

Montenegro features two international airports. Airport Tivat is situated about three kilometres from Tivat city centre and mainly serves the coastal destinations. Airport Podgorica is located about eight kilometres to the south of Podgorica city centre. Due to its close location (about 26 km linear distance from the border of Croatia and Montenegro), Airport Dubrovnik in Croatia also plays an important role for the country’s general flight accessibility (in particular, for the coastal destinations such as and Tivat).

Airport Tivat provides regular flight connections to ; in 2011, the airport also offered flights to Nuremberg (as of 18 May 2011), , Paris and Zurich. These flights are carried out by Air Berlin, , , Moscovia Airlines and Siberia Airlines. In addition, given its location at the seaside, various charter flights (e.g. to Kiev, Moscow, Prague, Vienna, etc) are offered from Airport Tivat, particularly in summer.

At the moment, the Montenegrin Government is conducting negotiations with the low-cost airline company Ryanair in order to inaugurate flight connections from London and Glasgow to the airports in Tivat and Podgorica; also, easyJet and Wizz Air are expected to introduce flights to these airports in the course of 2012. The inauguration of low-cost flight services should also support counteracting the high seasonality of tourist arrivals and overnights in Montenegro (see chart 18).

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Furthermore, the Government of Montenegro currently prepares the privatisation of the national airline carrier Montenegro Airlines (during 2012, the airline will be offered to investors through a public tender). According to information we received, various companies (e.g. Turkish Airlines, El Al, and Etihad) have already shown their interest in the process.

The following chart shows the development of total passenger traffic and aircraft movements at Airport Tivat between 2001 and 2010:

Chart 2 Passenger and aircraft movements at Airport Tivat total aircraft total passengers/aircraft movements total passeng. mvts. 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Σ Ø '000s '000s 1,000 10 900 9 800 8 700 7 600 6 500 5 400 4 300 3 200 2 100 1 0 0 total passeng.1) 354 308 301 337 377 451 574 571 532 542 4,347 435 aircraft mvts.1) 4.6 4.8 4.6 4.6 5.0 6.5 8.2 9.3 8.5 8.0 64.0 6.4 note 1) in thousands © PKF hotelexperts

sources: Airport Tivat; PKF hotelexperts

In 2010, about 542,000 passengers were registered at Airport Tivat, which cor- responds to a total growth of approximately 53 % compared to the year 2001. The number of aircraft movements increased from about 4,600 in 2001 to about 8,000 in 2010 (approximately 74 %).

Regular flight connections at Airport Podgorica are currently provided from and to Belgrade, Budapest, Istanbul, Ljubljana, Moscow and Vienna. These flights are mainly carried out by Adria Airways, Austrian Airlines, Croatia Airlines, Montenegro Airlines, Jat Airways and Turkish Airlines. Furthermore, as already mentioned, various low-cost airlines (e.g. Ryan air, easyJet, Wizz Air) are planning to inaugurate flight services to Airport Podgorica in the course of 2012.

In 2010, about 651,600 passengers were registered at Airport Podgorica, which corresponds to a total growth of approximately 135 % compared to 2002 (about 277,750). This significant growth resulted in the expansion and renovation of the airport in 2006, which included a new passenger terminal, a refurbishment and extension of the apron and improvements of the taxiway

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system, airfield lighting system and power supply. According to information we received from the Ministry of Sustainable Development and Tourism, a tender process for the privatisation of the airports in Podgorica and Tivat is currently in preparation.

The following table provides an overview of the direct flight connection frequency (on a weekly basis) of the airports in Tivat and Podgorica during summer and winter:

Chart 3 Direct flight connection frequency of Airport Podgorica and Airport Tivat

frequency1) 2) Tivat Airport destination summer winter summer winter Belgrade 37 41 52 28 Budapest 6 3 0 0 Copenhagen 2 1 0 0 Frankfurt 7 4 0 0 Ljubljana 10 6 0 0 London 3 0 0 0 Moscow 9 2 33 5 NIŠ 7 8 0 0 Paris 4 3 1 0 Rome 3 4 0 0 Vienna 20 12 0 0 3 3 0 0 Zurich 8 3 3 0 Σ 119 90 89 33 notes 1) flight connections per week © PKF hotelexperts 2) total number of direct flights coming to Podgorica and Tivat from respective cities sources: airline websites; PKF hotelexperts

The chart above provides an overview of the number of direct flights carried out by Adria Airways, Austrian Airlines, Croatian Airlines, Jat Airways, Malev Hungarian Airlines, Montenegro Airlines, Moscovia Airlines, and . As can be deduced from the chart, the largest number of direct flights per week is offered to and from Belgrade (in summer and in winter). In general, Airport Tivat is rather poorly served by direct flights, especially during winter. However, in summer, more flights are offered between Tivat and Belgrade respectively Moscow compared to Podgorica.

Airport Dubrovnik features flight services carried out by airlines such as Austrian Airlines, British Airways, Croatia Airlines, Dubrovnik Airlines, as well as various low-cost carriers such as easyJet and Germanwings, providing flight connections to – amongst others – Barcelona, Brussels, Dublin, Frankfurt, London, Madrid, Manchester, Moscow, Paris, Vienna, and Zagreb. The number of passengers increased from about 461,300 in 2001 to about 1,270,000 in 2010, representing an increase by approximately 175 %. A new terminal

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comprising a total area of about 36,500 sq m (capacity of about two million passengers per year) opened in May 2010. Long-term expansion plans, which include the construction of a new and the conversion of the current runway into a taxiway, are scheduled to be completed after 2011. b) railway traffic

The railway network of Montenegro consists of about 250 km of railway tracks. The only international railway connection is currently provided between Bar and Belgrade, passing through Podgorica. A local railway connection from Bar through Podgorica, Kolasin, and is also available. c) road traffic

The road network in Montenegro amounts to about 7,600 km, of which about 5,100 km are paved. One of the main traffic axes is the Adriatic European Route (E 65) from to Igalo and further on to Dubrovnik in the west and to Podgorica (and further on to Pristina, Kosovo) in the north. Inaugurated in 2005, the Sozina tunnel, which is part of the E 65, improved the road connec- tion between Podgorica and the coastal region (e.g. Bar, Budva). Another important road connection is the European route E 80 in the south of the country, which provides a connection from Kosovo to Petrovac and Podgorica.

Two major European infrastructure projects are expected to further improve the Montenegrin road network upon completion. A new motorway is envisaged to connect Belgrade and Bar (part of the proposed Pan-European Corridor XI; the Montenegrin section is currently in construction bidding phase while the Serbian section is under construction). Furthermore, the so-called Adriatic-Ioninan motorway is expected to establish a connection between Trieste, Italy and Kalamata, Greece (passing through Slovenia, Croatia, Bosnia and Herzegovina, Montenegro, and Albania). A section of the motorway shall pass near Trebinje (Bosnia and Herzegovina) before entering Montenegro. Passing Podgorica, the motorway is envisaged to enter Albania north of Lake Scutari, and continue south via Tirana. d) ports

The main ports for passenger and cargo are located in Bar, and Zelenika. With a capacity of about five million tons of cargo per year, Bar is the major seaport in Montenegro. Currently, international ferry connections are offered from Bar to Bari and Ancona in Italy, as well as between Kotor and Ancona during the summer. Frequent ferry connections between Kamenari in the Municipality and Lepetani in the provide a shortcut along the , especially for the route from Tivat to Herceg Novi and further to Dubrovnik (and subsequently the airport). Located on the Bay of Kotor, Kotor harbour serves a large number of cruise ships during summer. In 2010, the number of cruise ships entering the harbour amounted to 309, which represents an increase of approximately 19 % compared to 2009 (about 260 cruise ships); the number of passengers increased from 75,128 in 2009 to 145,185 in 2010 (approximately 93 %).

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e) public transportation

The public transportation system in Montenegro mainly consists of local buses, providing connections between all major cities as well as international buses offering connections from and to neighbouring countries (e.g. Bosnia and Herzegovina, Croatia, Serbia, etc). 2.1.4 Tourism

The development of started in the 1960s. However, a major earthquake in 1979 damaged a significant number of hotels in the coastal region. The subsequent reconstruction phase of eight years resulted in a period of rather stabilised tourism development until the 1990s (the dissolution of the Republic of Yugoslavia and the Balkan war period). Montenegro’s declaration of independence from Serbia in 2006, the transition to the free market economy and the privatisation process resulted in an increase in the overall supply of accommodation facilities and, thus, a subsequent increase in the overall demand for tourism. Consequently, due to the potential contribution of tourism to the national economic growth as well as the country’s social development, the government of Montenegro created an investment-friendly environment (e.g. by introducing major tax cuts) in order to attract more foreign direct investment. As a result, existing hotels were privatised and modernised and new hotels were constructed. According to information received from the Agency for Economic Restructuring and Foreign Investments, Montenegro received about € 80 million of foreign investments in tourism through the privatisation process in the period from 2003 to 2006.

In addition, a further hindrance with regard to international tourism development (particularly from Eastern Europe) was eliminated with the mutual visa-free regime between Montenegro and , which came into effect as of November 2008. According to this agreement, Russians who possess a valid passport are able to travel to Montenegro for up to 30 days without any further visa requirements. Furthermore, citizens of Montenegro are able to travel visa- free to member countries of the Schengen agreement as of December 2009.

Demand from tourists in Montenegro is generated by numerous beaches (coastline of about 294 km), four national parks, well preserved historic towns as well as a picturesque, mountainous landscape. Other tourist attractions include UNESCO declared areas such as , the Tara River Canyon (the longest canyon in Europe) and the Bay of Kotor as well as several ski resorts (e.g. Kolasin and Zabljak, located at the foot of the Bjelasica and Durmitor Mountains) for downhill and cross-country skiing.

According to forecasts conducted by the World Travel & Tourism Council (WTTC), travel and tourism in Montenegro will be the fastest growing in the world over the next ten years. The total contribution of tourism to the country’s overall GDP amounted to approximately 15.7 % in 2010 and is estimated to increase to approximately 17.2 % in 2011 and to approximately 36.3 % in 2021.

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2.2 Tivat 2.2.1 Location and expanse

The region of Tivat includes the municipalities of Tivat, Herceg Novi and Kotor. Tivat features a population of about 15,000 inhabitants and covers a total area of about 46 sq km. It is located in the south-western part of Montenegro, in the so-called Boka Kotorska (Bay of Kotor), about 46 km to the south-west of Podgorica.

The following map displays the location of Tivat in Montenegro:

Chart 4 Location of Tivat in Montenegro

Tivat

© PKF hotelexperts sources: google maps; PKF hotelexperts

The coast of Tivat features various little harbours, coves and about 16 beaches with a total area of about 31,200 sq m. The National Park Lovćen (encompassing the Lovćen mountain range as well as historic, cultural and architectural heritage) is located about twelve kilometres to the south-east of Tivat city centre. Other nearby tourist attractions include archaeological sites such as Mala Gruda as well as churches and monasteries, some of which are lo- cated on little islands along the coast (e.g. remnants of the Holy Archangel Michael’s Monastery on the Island of Flowers).

In addition, Tivat offers various sports opportunities such as hiking, cycling, football, basketball, tennis, water polo and scuba diving. Moreover, given its location at the Adriatic Sea, Tivat has – with the completion of the so-called Porto Montenegro project – recently become a nautical destination which will be

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further enhanced by the potential realisation of various other projects which are currently in the planning process (e.g. Luštica Bay; for further details see chapter 3.1.2).

Close to Tivat, situated at the end of the Bay of Kotor and at the foot of Mount Lovćen, Kotor is one of the oldest (founded in the 12th century) and well preserved towns in Montenegro. Kotor is part of the UNESCO list of World Cultural Heritage and considered as the maritime and cultural centre of the re- gion. For this reason, the town is also on many itineraries of Adriatic cruise ships. Main tourist attractions include the ancient town of Perast as well as the Kotor town ramparts (historic fortification walls).

Also located close to Tivat, Herceg Novi is located at the entrance to the Bay of Kotor and at the foot of Mount Orjen (about 40 km from Dubrovnik, Croatia). Being part of the Herceg Novi Riviera, the town of Igalo is recognised as a health destination with natural resources such as healing sea mud called igaljsko blato (Igalo mud) and mineral water springs.

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2.2.2 Assessment

We have submitted the macro site to a SWOT analysis. The results can be summarised as follows:

Chart 5 SWOT analysis macro site (Tivat)  Strengths  Weaknesses . rich historic and natural heritage . limited gastronomic, shopping and . mild Mediterranean climate as well as high entertainment facilities quality of sea and air . rather poorly developed infrastructure (road, . proximity to three international airports (Tivat, communication system, etc) Dubrovnik, Podgorica) . lack of qualitative accommodation facilities . attractive landscape (beaches, mountains, etc) . limited demand generators . UNESCO heritage sites (Bay of Kotor, etc) . limited flight connections at Tivat Airport, . strong marketing and brand of Porto especially during low season Montenegro . limited international recognition as leading tourist destination

. strong seasonality . limited demand from Western European countries

. increase in number of flight connections at Tivat . failure to implement infrastructure improvement Airport (including low-cost flight services) projects due to bureaucracy, funding problems,

. upgrade of Tivat Airport due to privatisation etc . increased focus on the international promotion . strong competition from well-established tourist of the region destinations (e.g. Dubrovnik) . development/upgrade of infrastructure (roads) . failure to implement planned resort projects . further diversification and active promotion of . general economic, political and natural risks leisure time activities (e.g. mountainbiking) . stronger destination marketing efforts . development of gastronomic, shopping and entertainment facilities . numerous large-scale projects in planning could enhance tourism, especially during low season . development of further demand generators (e.g. golf courses, marinas, etc) © PKF hotelexperts Opportunities Threats source:   PKF hotelexperts

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Among the major strengths of Tivat and its surrounding region are the rich historic and cultural heritage (partly listed as UNESCO World Heritage Sites), its mild climate in combination with high sea and air quality, and its attractive landscape (coastal and mountainous areas). Furthermore, the proximity to three international airports and the increasing international recognition of Porto Montenegro can be deemed positive. Although Tivat airport is in close proximity, the limited flight connections, especially during low season, are a major disadvantage. Also, tourism and traffic infrastructure (e.g. gastronomic and entertainment facilities respectively roads and public transportation) is currently in a rather poor condition. In general, there is a lack of demand generators, above all in order to prolong the season (e.g. wellness facilities, golf courses, etc). Resulting from this, Tivat – just as the whole country – faces strong seasonality at the moment. This could be counteracted by, for example, increasing the number of flight connections to Tivat (and Podgorica) Airport. The current negotiations with various low-cost carriers could furthermore enhance tourism in shoulder and low seasons. Other opportunities include the increasing focus on the international promotion of the region (which is also initiated and supported by large-scale resorts respectively planned projects such as Porto Montenegro, Luštica Bay, etc) as well as the envisioned development of further demand generators such as golf courses (e.g. Montepranzo-Bokaproduct), marinas, etc. The strong competition from other, well-established tourist destinations such as Dubrovnik pose a certain risk. Also, a potential failure to implement all planned infrastructure and resort projects could represent a threat with regard to the further development of the area. 2.3 Project site 2.3.1 Location and expanse

The project site (which is in the ownership of the client) covers a total area of about 32,800 sq m and is located in the municipality of Tivat, directly at the Adriatic Sea waterfront. The plot of land is situated to the south of Airport Tivat, to the east of Sveti Marko Island and the Island of Flowers and to the north-east of Luštica peninsula. In total, the project site consists of 25 cadastral lots (of which six lots are partly located on the client’s project site).

In addition, the so-called Solila Bird Area, which ranks among the most important bird wintering and nesting areas in Montenegro, is located to the south of the project site.

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The following chart shows an aerial view of the project site:

Chart 6 Aerial view of project site

project site Airport Tivat Island of Flowers Lustica Peninsula Sveti Marko (Banyan Tree)

© PKF hotelexperts sources: google earth; PKF hotelexperts

The chart above shows the project site’s location in a secluded bay. Various other plots of land are bordering the project site, which are being envisaged to be either acquired or leased by the client.

The buildable area of the project site amounts to about 26,240 sq m (gross floor area). According to the urban parameters prepared by the Ministry of Sustainable Development and Tourism in Montenegro, the plot of land is currently dedicated for the construction of a luxury resort including 109 keys and 328 beds (out of which 30 % are permitted to be stand-alone villas or apartments and 70 % have to be hotel units). Furthermore, according to this urban planning, the buildings are permitted to span over five floors above ground.

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The following map illustrates the urban planning of the project site and the plot of land which is currently owned by the government and which potentially will be leased by the client:

Chart 7 Map of project site

project site owned by government; potential to be leased by the client

© PKF hotelexperts

sources: client; PKF hotelexperts

The project site is currently undeveloped; access to the sea is not provided at the moment.

The plots bordering the project site to the north-west and to the south-east are owned by other development companies (i.e. Trade Unique; dedicated for the development of residential and hotel units). As already mentioned, the plot located to the west of the project site (highlighted in orange; dedicated for the development of hotel units) is owned by the Montenegrin government, and can eventually be leased by the client. For the envisaged marina, a tender process and an architectural competition is currently being prepared.

According to the urban parameters provided by the government, the plot of land is dedicated for the construction of a luxury resort (i.e. five stars according to Montenegrin classification standards) including reception, f&b and catering facilities as well as structures envisaged for sports and recreation. As previously mentioned, out of the total units permitted to being built on the project site (i.e. 109 units), 30 % are permitted to be stand-alone villas and residential units (i.e. 33 units) whereas 70 % must be dedicated for hotel use (i.e. 76 units). In addition, according to the urban parameters, approximately 40 % of the plot must be dedicated as green area (e.g. park); for the development of a five-star hotel, the Montenegrin regulation foresees 100 sq m green area per bed. However, the Ministry of Tourism is currently in the final stage of defining a new regulation with regard to hotel classification standards which is planned to be inaugurated in November 2011.

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2.3.2 Accessibility

At present, the accessibility of the project site by car and public transportation can be deemed as limited. By car, the project site can be reached from the Adriatic European Route (either from the north or from the south) via two small (partly unpaved) roads.

The following chart indicates the current road accessibility of the project site:

Chart 8 Project site and its current accessibility

project site Airport Tivat Island of Flowers Sveti Marko Island access to the project site Adriatic European Route (E65)

© PKF hotelexperts sources: google maps; PKF hotelexperts

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The following chart displays a first sketch (provided by the client) of the planned road development of the project site and its surroundings:

Chart 9 Project site and its planned accessibility

project site

© PKF hotelexperts sources: client; PKF hotelexperts

With regard to air transport, the project site strongly benefits from its immediate vicinity to Tivat Airport. Furthermore, Dubrovnik Airport can be reached within 1.5 hours (by road and ferry), while Podgorica Airport is located about 91 km from the project site (can be reached by car within about 1.45 hours, assuming favourable traffic conditions).

The closest marina to the project site is currently situated in Porto Montenegro; however, the port of Kotor is located in proximity (about 10 km) of the project site (can be reached by car via road E 65 and the tunnel Vrmac, travel time of about 20 minutes).

Currently, the site cannot be reached by public transportation. 2.3.3 Visibility

Due to its direct location on the waterfront, the project site benefits from good visibility from the sea. Furthermore, due to its location in the vicinity to Sveti Marko Island, the Island of Flowers and the Luštica Peninsula, the view from the project site can be deemed very attractive.

Given the somewhat isolated location of the project site and the fact that the road infrastructure providing access to the plot is currently rather limited, the project site cannot be seen from the road at the moment (however, this could be counteracted with adequate signage).

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The following pictures provide an impression of the project site:

Chart 10 Pictures of the project site

© PKF hotelexperts

source: PKF hotelexperts

The picture on the left is taken from a northern point of view and visualises parts of the project site and the surrounding area to the south. The picture on the right provides an aerial view of the client’s plot of land as well as of its surroundings (Sveti Marko, Island of Flowers, Tivat Airport, etc). 2.3.4 Demand generators

Due to its well-preserved historic towns, the UNESCO heritage Kotor Bay and unspoiled nature as well as the attractive Adriatic coastline featuring numerous beaches, the main demand generator for the Montenegrin coastal region (as well as for the client’s proposed resort) is leisure tourism. Along with government support for tourism, planned project developments are expected to increase the number of qualitative accommodation facilities and shall lead to an improvement of the overall infrastructure (e.g. upgrading of the roads, increase in number of flights at the airports in Tivat and Podgorica, etc).

Currently, Budva and its surrounding region is the main holiday destination in Montenegro with regard to tourist demand, supply of accommodation facilities and qualitative gastronomic and entertainment facilities. However, with the development of various large-scale projects (i.e. Porto Montenegro), Tivat and its surrounding area have great potential to become a popular destination positioned in a more upscale segment (e.g. golf, yachting, etc).

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Upon completion, Porto Montenegro is planned to feature – besides a 650 berth capacity marina – restaurants, retail stores, sports facilities, a market area, a nautical museum, two hotels and a substantial number of residential units. Partially opened in June 2009, Porto Montenegro has already become – due to aggressive marketing strategies and branding – a major attraction and demand generator for Montenegro and especially for Tivat and its surroundings. Due to its (envisaged) diverse offering, Porto Montenegro meets demands of various target groups (e.g. yachtsmen and general water sport enthusiasts, golf players (upon completion of the planned golf course, etc). In addition to Porto Montenegro, the planned development of a marina within the client’s resort can be deemed as major demand generator.

Moreover, further development projects which are envisaged to be realised in the surrounding region of Tivat (e.g. Luštica Bay, Sveti Marko Island, Rose and Plavi Horizonti; for further details see chapter 3.1.2) are likely to enhance the tourism attractiveness of the region by offering diversified leisure time facilities in the near future and thus, could also generate demand for the client’s planned resort.

In addition, the region (including the hinterland) offers good conditions for various sports and leisure activities such as cycling, football, hiking, lawn bowling, scuba diving, tennis and water polo. However, adequate promotion and marketing efforts are currently neglected and need to be enhanced. Nevertheless, Tivat (as well as the client’s resort) could – to our judgement – become a popular (more upscale) destination for sports and cultural aficionados (due to the proximity to Kotor and Perast).

Furthermore, the airport in Tivat can be deemed – to our judgement – a main demand generator for the client’s proposed resort (with regard to accessibility as well as potential other co-operations). Benefiting from the closest possible location next to the airport, the client’s proposed resort could, for example, offer flight trainings and skydiving and could organise air shows, etc. In general, we deem the features of the project site’s landscape ideal in order to generate demand from sports enthusiasts (ranging from watersports such as sailing, waterskiing, diving and (kite-)surfing, etc to extreme or adventure sports such as skydiving, mountainbiking, climbing). Depending on the diversification of leisure time facilities offered by the client’s proposed resort, we deem that demand could be generated from boat crews (from boats mooring at the client’s proposed marina as well as at other marinas such as Porto Montenegro).

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2.3.5 Assessment

We have submitted the micro site (project site) to a SWOT analysis. The results can be summarised as follows:

Chart 11 SWOT analysis micro site (project site)  Strengths  Weaknesses . direct location on the waterfront . rather limited gastronomic, shopping and . attractive, unspoiled landscape in the entertainment facilities in vicinity surroundings . limited visibility from roadside . in vicinity to Airport Tivat and good access to . limited accessibility by car and public transport two further international airports (Podgorica . strong seasonality and Dubrovnik) . noise pollution due to nearby airport . location in vicinity to historic towns (Kotor, . bordering plots are owned by other developers Budva) . rather limited size of plot of land for a large-scale . close proximity to Sveti Marko Island and resort development Island of Flowers . attractive views from the project site . close proximity to Porto Montenegro . potential synergy effects due to further . fierce competition due to planned developments developments in the surrounding area on neighbouring plots and/or in the vicinity (e.g. Sveti Marko, Luštica Peninsula) (Island View Resort, etc) . further development of Tivat Airport . potential delays in development due to (e.g. increase in capacity, number of flights, bureaucracy inauguration of low-cost airlines, etc) . over-development of the area . potential to develop Tivat as high-quality . increase of noise and air polution if Tivat Airport tourist destination is further developed . mitigation of seasonality . general project-related risks . acquisition of bordering plots of land . general political, economic and natural risks . potential synergy effects with Porto Montenegro . extension of Tivat Airport © PKF hotelexperts Opportunities Threats source:   PKF hotelexperts

The project site benefits from its direct location on the waterfront, in a secluded bay, in close proximity to various attractions such as Sveti Marko Island, Porto Montenegro and the Island of Flowers. Picturesque views from the project site and unspoiled landscape in the surroundings as well as its close proximity to the historic towns of Kotor and Perast further enhance the project site’s attractiveness. Furthermore, the project site is situated in vicinity to the airport in Tivat and offers rather easy access to two further international airports (Podgorica and Dubrovnik). Further developments in the area could enhance the

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project site’s attractiveness and could, on the one hand, generate possible synergy effects. On the other hand, these projects could represent fierce competition and therefore, constitute a certain threat. For this reason, it will be of utmost importance to create a complementary touristic offer (with a defined unique selling proposition (USP)) in and around Tivat in order to attract diverse guest segments (by closely co-operating with development managers of planned projects such as Luštica Bay, Rose, Sveti Marko, Porto Montenegro, etc) rather than realising equal facilities. Furthermore, the micro site currently features rather limited visibility from the roadside (however, this could be counteracted with adequate signage). Also, the current lack of gastronomic and entertainment facilities in the vicinity can be regarded as a weakness but is expected to improve in the course of the development of various projects (e.g. planned golf courses as part of Luštica Bay and Porto Montenegro, etc).

In the following, we have assessed the micro site with regard to various impor- tant criteria:

Chart 12 Assessment micro site (project site) criteria assessment

name -- - o + ++ visibility accessibility by car . accessibility by public transportation . general accessibility . image . view from the project site . attractiveness of surrounding area . environmental situation . security . cleanliness . tourist attractiveness . shopping facilities in the surrounding area . gastronomic facilities in the surrounding area . entertainment facilities in the surrounding area . . © PKF hotelexperts

source: PKF hotelexperts

Given its direct location on the waterfront surrounded by unspoiled landscape, the view from the project site can be deemed very good. Also, the attractiveness of the surrounding area, the visibility and the tourist attractiveness of the project site, the environmental situation and cleanliness can be assessed positively. However, accessibility of the project site is currently rather limited. In addition, a lack of shopping, gastronomic and entertainment facilities in the project site’s surrounding area exists at the moment.

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The following chart illustrates the suitability of the micro site for different guest segments:

Chart 13 Suitability of micro site for different guest segments guest segment suitability of project site for demand by particular guest segment travel purpose category -- - o + ++ business business travellers fair/congress attendees1) . conference/seminar attendees2) . participants of incentives . airline crews . leisure individual tourists . group tourists . weddings . miscellaneous long-stay guests . notes 1) attendees of events which do not take place at the hotel . © PKF hotelexperts 2) attendees of events in the hotel source: PKF hotelexperts

Due to the picturesque surroundings and the diversity of leisure-time offerings and the vicinity to the airport in Tivat, the project site is very well suited for participants of incentives and airline crews. The micro site also lends itself for individual tourists, group tourists and wedding guests. Given the lack of qualitative congress and fair facilities in Tivat and the surrounding region, the project site is less suitable for business travellers and fair and congress attendees.

The following chart shows the suitability of the project site for different hotel types:

Chart 14 Suitability of micro site for different hotel types hotel type suitability of project site for particular hotel type type category1) -- - o + ++ resort five star (luxury) four star (upscale) . three star (mid segment) . two star (economy) . one star (budget) . motel . serviced apartments . all-suites-hotel . notes 1) according to PKF, based on international standards .© PKF hotelexperts

source: PKF hotelexperts

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Given the project site’s attractive location directly on the waterfront, it is well- suited for a hotel development in the mid- or upscale segment (three-star or four-star category, according to international standards). Due to the (planned) luxury hotel developments in the immediate vicinity (e.g. Porto Montenegro, Plavi Horizonti, Banyan Tree, etc), we would currently abstain from developing a resort in the luxury segment at the given plot of land (in order to avoid a potential over-development in this segment and in order to address different guest segments).

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3 Market

3.1 Accommodation facilities 3.1.1 Overview

As part of this assignment, we have analysed supply and demand of accommo- dation facilities in Montenegro. With regard to the hotel development which is foreseen to be part of the overall resort development, hotels of the international four-star category located in vicinity to the client’s envisaged hotel (see 3.2 Rele- vant market segment) are considered potential competitors to the client’s hotel project. However, due to the absence of high-quality resorts in Tivat and its surroundings, various planned projects (e.g. Luštica Bay, Islandview Resort, Porto Montenegro, Sveti Marko Island, etc) were added to the existing competitive set of the client’s resort development.

In the following, supply and demand of accommodation facilities in Montenegro are analysed:

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3.1.2 Supply

The following chart displays the development of supply of accommodation facili- ties in the coastal region in Montenegro from 2001 to 2010:

Chart 15 Development to date of supply of accommodation facilities in Montenegro accom. beds accommodation facilities/beds total total fac. 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Σ Ø # '000s 600 600 540 540 480 480 420 420 360 360 300 300 240 240 180 180 120 120 60 60 0 0 accom. fac. 253 262 273 335 343 358 369 401 430 308 x 333 beds ('000s) 87 77 79 117 120 131 145 157 174 166 x 125 beds per fac. 345 294 289 349 351 366 393 391 404 540 x 372 © PKF hotelexperts

sources: Ministry of Tourism Montenegro; PKF hotelexperts

During the period from 2001 to 2010 the supply of accommodation facilities in Montenegro developed as follows:

. number of accommodation facilities increased from 253 to 308, resulting in a growth of 55 facilities (approximately 22 %)

. number of beds in accommodation facilities rose from about 87,000 to about 166,000, representing an increase of approximately 91 %

. average number of beds per accommodation facility increased from 345 to 540 (approximately 57 %).

Please note that, according to information provided to us by the Ministry of Tourism in Montenegro, facilities classified as private rooms, private houses and apartments were not included in the total number of accommodation facilities but were included in the number of beds. In addition, the significant decrease between 2009 and 2010 can be ascribed to a change in the data gathering process.

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During the process of conducting our research, we were provided with informa- tion regarding several hotel and resort projects.

The following projects – which are, to our judgement, among the most relevant with regard to the client’s envisaged resort development – are currently known by us:

Chart 16 Selected hotel and resort projects along the Montenegrin coast hotel/project category rooms realisation opening chance name/operator location stars1) number phase year % Tre Canne Aparthotel2) Budva 4 275 construct. 2013 100 The Regent Porto Montenegro Tivat 5 80 construct. 2014 100 Plavi Horizonti2) Luštica 5 230 planned 2014 80 Banyan Tree2) Sveti Marko/Tivat 5 234 planned 2015 60 Luštica Bay3) Luštica 3-5 2,861 planned 2020 60 Harmonija Apart Hotel2) Becici/Budva n.a. 120 construct. n.a. 60 Hestia Resort Budva 4-5 52 construct. n.a. 60 Wyndham Resort2) Budva 5 341 planned 2014 60 Island View Resort2) Krtole 3-4 n.a. planned n.a. 60 Rose Development2) Luštica 4-5 n.a. planned n.a. 60 Ada Bojana Island Ulcinj n.a. n.a. planned n.a. 20 Astra Montenegro Becici/Budva 4-5 n.a. construct. n.a. 20 Becici Project/Capital Estate Becici/Budva n.a. n.a. planned n.a. 20 Hotel Park Herceg Novi n.a. n.a. planned n.a. 20 Jaz Beach Budva n.a. n.a. planned n.a. 20 Kempinski Reževići 5 n.a. planned n.a. 20 Mamula Island coast of Luštica Pen. n.a. n.a. planned n.a. 20 Porto Montenegro Tivat 4-5 n.a. planned n.a. 20 Royal Montenegro Grand Resort2) Skocidevojka 5 220 planned n.a. 20 Sol Meliá Valdanos/Ulcinj 5 700 planned n.a. 20 Stella del mare resort2) Maljevik Bay n.a. 300 planned n.a. 20 Velika Plaza/Capital Estate Ulcinj n.a. n.a. planned n.a. 20 notes 1) according to PKF, based on international standards © PKF hotelexperts 2) including residential units/apartments 3) including seven hotels (1,190 rooms) sources: interviews; PKF hotelexperts

The above chart may not be complete. Furthermore, not all projects are subject to public knowledge, and sometimes details (operator, financing, etc.) are un- clear. According to our experience, not all planned hotels will be implemented, and delays in the development are common. To account for this fact the probability of an implementation for a certain project is 100 %, a relatively certain 80 %, a probable 60 %, a project with limited probability 40 %, and an uncertain project 20 %. The most relevant future project developments are described in more detail in 3.3 Relevant market segment.

With regard to future project developments as listed above, it can be observed that the majority of the projects feature – in addition to a hotel and various other facilities – a real estate component (i.e. serviced apartments, residential units for outright sale, etc). Although realisation of all projects can be deemed improbable, it can be expected that further (high-end) hotel groups and brands

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are entering the Montenegrin market in the near future (e.g. Hilton, Raffles, Four Seasons, Radisson, Banyan Tree). 3.1.3 Demand

The following chart displays the development of demand for accommodation fa- cilities in Montenegro from 2001 to 2010:

Chart 17 Development of demand for accommodation facilities in Montenegro arrivals/ Ø length arrivals1)/overnight stays1)/Ø length of stay2) total overn.st. of stay 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Σ Ø m nights 10.0 10.0 9.0 9.1 8.0 8.2 7.0 7.3 6.0 6.4 5.0 5.5 4.0 4.6 3.0 3.7 2.0 2.8 1.0 1.9 0.0 1.0 arrivals1) 0.6 0.5 0.6 0.7 0.8 1.0 1.1 1.2 1.2 1.3 9.0 0.9 overn.stays1) 4.0 3.7 4.0 4.6 5.2 5.9 7.3 7.8 7.6 8.0 58.0 5.8 l.of stay2) 7.2 6.8 6.6 6.5 6.4 6.2 6.4 6.6 6.3 6.3 x 6.5 notes 1) in millions © PKF hotelexperts 2) in nights sources: Ministry of Tourism Montenegro; PKF hotelexperts

During the period from 2001 to 2010, the demand for accommodation facilities in Montenegro developed as follows:

. number of arrivals increased from about 0.6 million in 2001 to about 1.3 million in 2010 (approximately 116 %)

. number of overnight stays rose by about four million, from about four million in 2001 to about eight million in 2010 (approximately 100 %)

. the average length of stay decreased from 7.2 nights in 2001 to 6.3 nights in 2010 (approximately 13 %)

With regard to demand for accommodation facilities in Tivat, an increase in both, arrivals and overnight stays could be identified in the period from January to May 2010 compared to the same period in 2011. The number of arrivals increased from about 6,800 in 2010 to about 9,800 in 2011, which represents an increase of about 3,000 arrivals (approximately 44 %). In the same period,

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the number of overnight stays in Tivat increased from about 22,800 in 2010 (January to May) to about 55,100 in 2011 (January to May) which represents an increase of about 32,300 nights (approximately 142 %).

The following chart shows the high seasonality of demand in accommodation facilities in Montenegro in 2010:

Chart 18 Seasonality of demand in accommodation facilities in Montenegro arriv. Ø l.- arrivals1)/overnightstays1)/Ø length of stay2) total ov.st. of stays Jan. Feb. March April May June July August Sept. Oct. Nov. Dec. Ø '000s nights 3.0 8.0 2.7 7.3 2.4 6.6 2.1 5.9 1.8 5.2 1.5 4.5 1.2 3.8 0.9 3.1 0.6 2.4 0.3 1.7 0.0 1.0 arrivals1) 0.01 0.01 0.01 0.02 0.07 0.11 0.30 0.41 0.16 0.02 0.01 0.01 0.09 overn. st.1) 0.03 0.04 0.05 0.08 0.35 0.78 2.05 3.12 0.96 0.10 0.05 0.03 0.64 l. of stay2) 5.33 5.19 5.76 4.49 5.20 7.17 6.74 7.56 6.00 5.16 4.99 4.15 5.64 notes 1) in millions © PKF hotelexperts 2) in nights sources: Statistical Office of Montenegro; PKF hotelexperts

The chart above clearly indicates the distinct seasonality in Montenegro. While demand reaches its peak during July and August (followed by September, June and May), January, February, March, April, October, November and December are characterised by rather weak demand. As part of the Montenegro Tourism Development Strategy to 2020 (presented by the Ministry of Montenegro), the prolongation of the season by diversifying hotel products (e.g. through wellness and congress offerings, the development and enhancement of specific products, the establishment, promotion and marketing of tourist attractions, etc) is among the main goals of the future strategy in order to create an all-year-round destination.

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The following table provides an overview of the most important feeder markets for accommodation facilities in the coastal region in Montenegro:

Chart 19 Originating countries of guests in accommodation facilities in the coastal region in Montenegro country of origin overnight stays1)

name #2) %

national 870.6 11.4 international Serbia 2,050.4 26.8 Russia 1,210.3 15.8 Bosnia and Herz. 722.9 9.5 Kosovo 409.3 5.4 France 225.3 2.9 Italy 191.8 2.5 Albania 181.2 2.4 Hungary 179.1 2.3 other 1,602.3 21.0 Σ 6,772.7 88.6 Σ total 7,643.3 100.0

notes 1) data for 2010 © PKF hotelexperts 2) in thousands sources: Statistical Office of Montenegro; PKF hotelexperts

In 2010, approximately 11.4 % of all overnight stays in the coastal region were attributable to Montenegrin guests. The most important foreign feeder markets were Serbia, accounting for approximately 26.8 % of total overnight stays, followed by Russia contributing to approximately 15.8 %. Other important countries of origin were Bosnia and Herzegovina (approximately 9.5 %), Kosovo (approximately 5.4 %), France (approximately 2.9 %) and Italy (approximately 2.5 %).

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As mentioned before, due to enhanced marketing efforts (e.g. Tourism Master Plan) of tourism organisations and the government’s support for tourism devel- opment, overall demand is expected to increase in upcoming years with an ex- pected improvement of the touristic infrastructure (particularly regarding the development of qualitative accommodation facilities). Further marketing efforts are expected to be implemented to extend the season, especially along the coast (by product diversification, etc). In addition, the promotion of the country as year-round destination with a focus on both skiing and mountain tourism (besides summer tourism) was recently inaugurated. Also, the planned privatisation of the airports in Tivat and Podgorica as well as the envisioned privatisation of Montenegro Airlines and the inauguration of low-cost airline services could lead to an extension of the airports and thus, to an increase of flights and tourists. 3.2 Marinas 3.2.1 Montenegro

As part of the envisaged resort development, the client also plans to develop a marina on the given plot of land. According to information we received, the marina shall provide between about 250 to 300 berths. In the following, existing marinas of Montenegro, which may stand in competition with the client’s envisaged marina, are analysed.

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The following map provides an overview of the existing marinas and ports in Montenegro:

Chart 20 Marinas and ports in Montenegro

Marina Bar Marina Budva Port of Kotor Porto Montenegro (Tivat) Port of Herceg Novi

© PKF hotelexperts sources: google maps; PKF hotelexperts

In the following, the above-listed marinas are described in more detail:

a) Marina Bar

The so-called A.D. Marina Bar, located in Bar, is a year-round port of entry and consists of an industrial harbour (serving general cargo, bulk cargo, and containers, as well as ferry connections and yacht storage) and a marina with about 900 sea berths and about 250 places ashore (equipped with a 250-tons travel live and a 50-tons crane). The marina features eight jetties out of which five offer moorings, electricity and water.

In addition, the OMC Yacht Club Jadran in Bar, a co-operation between the Marina St. Nicola, the charter company Bojana and a sailing school, provides about 1,500 places ashore. The OMC Yacht Club Jadran does not feature any sea berths. Water and electricity, lifting and lowering services, phone and radio connections and equipment for servicing and securing maintenance are offered in the yacht club.

b) Marina Budva

The marina in Budva features 330 berths for yachts up to 65 metres. It is located in the old town and features mooring, electricity and water service.

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Furthermore, a gasoline and diesel station as well as a nautical shop are provided at the marina. c) Port of Kotor

Located at the end of the Bay of Kotor, the marina – which is part of the port – offers 30 berths for yachts up to 30 metres. The marina provides water and power supply, garbage disposal, a gas station (duty-free fuel) and a parking lot. The berths are provided on a daily, monthly or annual basis.

As already mentioned, Kotor harbour serves a large number of cruise ships in summer. Between 2009 and 2010, the number of cruise ships entering the harbour increased by approximately 19 % while the number of passengers increased by 93 %.

A small marina, Marina Prcanj, is located to the north-west of Kotor and offers 20 winter and ten summer moorings. Water and electricity is provided at 20 ports. d) Porto Montenegro

Located in the Bay of Kotor, the former naval base Porto Montenegro currently provides 184 secure berths ranging from 12 to 150 metres. Upon completion, the marina is envisaged to feature about 650 berths out of which 130 will be dedicated to superyachts (greater than 24 m). Facilities provided at Porto Montenegro include fuel berths, a marina club, electricity and water as well as wireless LAN availability. In addition, duty-free fuel, onsite customs and immigration and reduced VAT on marine services are offered at the marina. As already mentioned, in addition to the marina, Porto Montenegro is planned to feature respectively already features residential townhouses, two hotels, an international school, a nautical museum, various retail outlets, a fresh food market, restaurants, bars , cafés, a casino and a golf course.

According to information we received, in 2011, marina occupancy amounted to approximately 80 %. Currently, the marina offers 184 berths; in autumn 2012, construction of the second phase is expected to start and completion is foreseen for 2014. This will increase the marina’s capacity up to 370 berths. Finally, the third phase of the marina development is planned to be started in 2016 and shall be completed until summer 2018. e) Port of Herceg Novi

The marina which is part of the port of Herceg Novi features 40 berths for yachts up to 25 m. The pier offers electricity and water supply which are charged separately, in addition to berth charges. Fuel services are also available at the marina. The harbour in Herceg Novi also features a basin for swimming and water polo.

The port of Zelenika is located about 4 km to the east of Herceg Novi and provides customer clearance.

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In addition to the above-mentioned existing marinas, various projects in Tivat and the surroundings (e.g. Luštica Bay) include marina developments, which may further enhance the importance of Tivat as nautical destination. 3.2.2 Mediterranean and Adriatic

In the course of our market analysis, we also investigated several existing marinas and planned marina projects in Croatia. Given that Croatia is already a well-established nautical destination, Croatian marinas could also be used as reference for the client’s envisaged marina (which is planned to be part of the overall project). In general, marinas in Croatia can be differentiated between those which are privately owned and operated and those which are operated by the Adriatic Croatia International Club (ACI).

However, also further Mediterranean countries dispose of marinas (partly integrated into a mixed-use resort development) which could be relevant for the client’s planned project.

In the course of our (desktop respectively on-site) market investigation, we could identify the following marinas respectively marina projects on the Mediterranean which could, amongst others, serve as reference for the client’s envisioned project (decision criteria were amongst others their location (Mediterranean), their positioning (upscale segment and/or part of a mixed-use development such as, for example, Portopiccolo in Trieste, Italy) as well as their capacity and range of facility/service offerings (e.g. maintenance and repair facilities, water and electricity, fuel station, etc):

capacity berths1) depth boat range name location # m m Puerto Portals Spain 670 3 8-80 Marina Frapa Croatia 600 6 12-80 Portopiccolo Italy 100 7 30 Marina Lav Croatia 75 3 40 Port Adriano2) Spain 404 7 6-16 ACI Marina Jezera Croatia 230 7 8-17 Marina Ibiza Spain 379 3 55 Sani Marina Greece 215 3 25 Karpaz Gate Marina Cyprus 300 4-6 65 notes 1) including dry berths © PKF hotelexperts 2) extension by 82 berths for yachts from 25 to 80 m sources: marina websites; PKF hotelexperts

Although most of the above-listed marinas feature larger capacities compared to the client’s envisaged marina project (which is foreseen to feature between about 250 to 300 berths), we particularly deem Portopiccolo in Italy (mainly due to the overall concept and the upscale marketing) as well as Puerto Portals and Port Adriano in Spain (mainly due to their design (the latter was partly

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designed by Philippe Starck) and additional offerings such as shopping and f&b) to serve as best-practice examples when it comes to successful marina developments. 3.3 Residential market 3.3.1 Supply

Following a boom in the residential property market between 2006 and 2008 (which was driven by a constant increase in demand due to favourable tax conditions and few bureaucratic conditions), the Montenegrin residential market was also severely hit by the global economic crisis in 2008. Many developments under construction or in planning were stopped or put on hold due to financing issues as a consequence of the crisis. As an example, the Russian Mirax group started construction of the so-called Astra development, a hotel and apartment complex located on the seaside south of Tivat in 2008. While already half of the entities (total area of the complex: about 94,000 sq m) were sold, the further development is – according to information provided to us – now been put on hold due to financing and permission problems. As of January 2012, construction of the project has not yet resumed.

With regard to the geographical focus of the Montenegrin residential real estate market, a distinction has to be made between the northern (i.e. Tivat, Kotor, etc) and the central coastal areas (i.e. Budva, Becici, etc). The country’s touristic centre Budva, has witnessed a substantial number of (large scale) developments in the past years. With the majority of new developments continuing to focus on this region and Budva especially, a certain degree of oversupply seems likely. This trend is also assumed to reflect in the unit prices achievable for new projects. Based on this trend and the price range currently observable for new products, we would rather consider Budva a real estate market with a mid-range price level (with respect to residential units).

On the other hand, Tivat region has seen rather limited development activities until now, with the exception of the Porto Montenegro project. However, this project must not be considered the norm and the achieved prices must be put into perspective as they incorporate – to a certain degree – reduced fees for the marina berths. Furthermore, it needs to be understood that the amenities and facilities (e.g. the marina, high-end retail outlets, the nautical museum, etc) – created in conjunction with the residential development – as well as the intense branding and marketing activities of Porto Montenegro, have a strong influence on the success of the project.

Nevertheless, the project could play an important role for the establishment of a high-end image of a whole micro destination (Bay of Kotor). The envisaged up- scale developments within the region (e.g. Luštica development, Plavi Horizonti, Rose Development, Banyan Tree, etc), the eventual realisation of the envisaged golf course projects and the imposed requirements on new developments by the government could further be beneficial for the area and should have a positive effect on the real estate market in general. However, the respective price levels need to be derived on a project-by-project basis, as they strongly depend on the

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delivered building quality, the overall concept and the additional services and facilities that support the residential units.

Currently, residential pricing per sq m (asking prices) lies – on average – between about € 2,500 and € 6,500 per sq m (dependent on the location, the range of additional services offered, the availability or integration of further infrastructure such as marina, golf course, casino, hotel, etc). According to information we received, the price per sq m can reach up to about € 10,000 for penthouses in integrated upscale resorts (e.g. Porto Montenegro).

With regard to sizes, the majority of residential units measure between about 60 sq m and 80 sq m while only a minor share measures above 150 sq m. The following chart visualises the various sizes of residential units offered by various residential properties which have already been completed or are still in the planning respectively construction phase:

Chart 21 Overview of residential units sizes of selected properties unit size1) units

sq m # %

20-40 25 5 40-60 89 17 60-80 210 41 80-100 83 16 100-150 78 15 150-200 18 3 >200 12 2 Σ 515 100

notes 1) including data from Porto Montenegro, Tre Canne, Tivat Heights, Harmonia, and Island © PKF hotelexperts View Resort sources: interviews; project websites; PKF hotelexperts

With regard to the Royal Montenegro project (which is listed in chart 16), there are currently no details concerning the number of planned residential units; however, according to information we received, the project is planned to include – amongst others – an upscale hotel with about 220 rooms as well as various residences and villas ranging from 120 sq m to 550 sq m. In addition, no details could be made available about the so-called Stella del Mare resort project which is planned to be developed close to Bar (Maljevik Bay). According to preliminary results, the project is envisioned to include a 150-room hotel and two private villas. Given that hardly any information on these two projects could be collected, it can be deemed that a foreseeable realisation of the projects is rather unlikely. However, the projects Tre Canne, Porto Montenegro, and Plavi Horizonti are likely to be implemented in the near future.

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With regard to the residential component which is part of Porto Montenegro, three of five complexes have already been completed (in total 74 units, of which three have not been sold so far). In spring 2012, the apartment complex Milena will be completed (nine units, of which seven have been sold). In summer 2012, the fifth apartment complex (i.e. Tara; 47 units) is expected to be completed. 3.3.2 Demand

As mentioned previously, the Montenegrin government adapted an investment- friendly policy resulting in enhanced foreign direct investment. This was espe- cially observed in the real estate market (particularly in coastal areas) with ap- proximately 51 % of total foreign investment being dedicated to property pur- chases in 2007. With the beginning of 2008, approximately 3 % of land along the Montenegrin coast and approximately 19 % of the total coastal residential stock belonged to foreigners. However, while sales prices for residential units were rapidly increasing in the years 2006 and 2007 (e.g. almost € 3,000 per sq m in Tivat in the second half of 2007), a drop in prices has been registered since 2008 (decrease by approximately 50 % in Tivat in the second half of 2009 compared to the same period in 2007), a development which is attributable to the global economic downturn, on the one hand, and an unbalanced market situation (supply outweighing demand) on the other hand.

Nevertheless, since an upward development in the global economic situation is anticipated in the short to mid-run (partly already being observed), increasing demand from foreigners for acquiring residences (and buy-to-let units) can be expected. Furthermore, the so-called citizenship-by-investment respectively economic citizenship programme is currently being discussed. This would imply that individuals who invest € 500,000 (partly invested in the country and partly contributed to the state budget) are eligible to obtain a Montenegrin passport and, thus, hold dual citizenship. This opportunity would be of particular interest to markets such as Russia as this would allow the holder visa-free travel throughout the EU. However, the proposed programme is receiving substantial opposition from the EU and would constitute a major obstacle for the targeted EU membership (as of January 2012, the programme remained suspended).

According to information we received during our market investigation, the most important markets with regard to the sale of residential units are Russia (above all with regard to off-plan sale), Serbia, Great Britain and Ireland, Germany, Austria, Switzerland and Italy. Demand from the local market can be deemed negligible. Furthermore, a slight distinction can be made with regard to the geographic distribution: while Russians are still the predominant market for residential properties in the region around Budva, a shift from the Eastern to the Western European market took place in Tivat and its surroundings.

When it comes to the buyers’ motivations, the majority (approximately 70 %) is interested in acquiring the property for its own use (as second home, for lifestyle), approximately 20 % is interested in acquiring and subletting apartments and approximately 10 % is solely buying for investment purposes (prevailingly smaller units). In general, Russians are less keen on subletting their apartments but rather acquire residential property for their own usage. Furthermore, our market investigation revealed that there is currently a lack of

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professional management agencies providing additional services to residential property owners or lessees (e.g. housekeeping, laundry service, rental service, maintenance, etc). 3.4 Other facilities 3.4.1 Food and beverage (f&b) facilities

Currently, the offer of f&b facilities in Tivat and the surrounding region is rather limited and lacks diversity. In addition, according to information we received during our market investigation, various restaurants are closed during winter (due to a lack of demand). Nevertheless, several modern f&b outlets such as Restaurant Prova (located along the marina in Tivat) and Restaurant One (part of Porto Montenegro) have enhanced the supply of gastronomic facilities in the region.

Among the major challenges of f&b facilities in Montenegro is the lack of qualified staff which results in inconsistency in the level of service. However, it is expected that the supply of f&b facilities will increase in the near future (especially with regard to the envisaged project developments on Luštica Peninsula, etc).

The following pictures visualise various f&b facilities situated along the promenade in Tivat:

Chart 22 Pictures of f&b facilities in Tivat

© PKF hotelexperts

source: PKF hotelexperts

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In addition to the above-mentioned f&b facilities, the so-called Almara Beach Club, a rather attractive beach bar in Oblatno (about 16 km non-linear distance from the project site) also includes a restaurant and cocktail bar. The club is decorated in a modern style and features baldachins, generously-sized sun beds and beach chairs.

The following pictures provide an impression of the Almara Beach Club:

Chart 23 Pictures of Almara Beach Club

© PKF hotelexperts

source: PKF hotelexperts

3.4.2 Sports facilities

Given the mild Mediterranean climate, the coastline of about 294 km and four national parks as well as several ski resorts (e.g. Kolasin and Zabljak, located at the foot of the Bjelasica and Durmitor Mountains), Montenegro offers various al- ternatives for sports aficionados (e.g. sailing, cycling, skiing).

Furthermore, Tivat region offers perfect conditions for sports such as cycling, sailing, scuba diving, and tennis. However, as already mentioned, marketing and promotion strategies with regard to sports tourism need to be enhanced. Main sports facilities in Tivat include the Župa sports hall and the so-called Serbia and Montenegro Army Club, offering an indoor space for sports such as bowling, billiards, table tennis and a gym as well as several tennis courts. Other sports grounds in Tivat include the football stadium of Arsenal Football club, various sports grounds for indoor football and bocce.

As mentioned above, the project of Porto Montenegro includes – amongst others – a yacht club, a sports club and – potentially in the near future – an 18-hole

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golf course (the government released a tender process for the lease of the so- called Montepranzo-Bokaproduct land plot, which is foreseen to be developed by Porto Montenegro). Currently, the Crew Club within Porto Montenegro offers tennis courts, a fitness centre, a bowling alley and a squash court. In addition, in the course of the Luštica Bay project, the development of two marinas, an 18- hole-golf course as well as tennis courts is envisaged (in addition to residential and hotel units as well as further facilities). 3.4.3 Entertainment facilities

Currently, a lack of entertainment facilities such as discotheques, bars, etc exists in Tivat. The closest discotheque is located in Kotor, while no facilities regarding night life exist in Tivat. Both Kotor and Tivat offer an indoor cinema while also an open theatre is provided in Tivat during the summer months.

Other events taking place in Tivat during summer include the Lastva festivities, Boat angling competitions, Tivat Cultural summer (featuring exhibitions and theatre performances as well as masque balls and carnivals in winter). Furthermore, Kotor features one casino located outside the old town.

With its opening in June 2011, the so-called Lido Mar Pool Club (part of Porto Montenegro) is the newest addition to the entertainment offer in Tivat. The outdoor swimming pool (infinity-style), which measures about 65 m in length, also features an eight metre sculpture (so-called 8 possibilities) by the Spanish artist Jauma Plenso. In addition, it is also planned to open a high-end casino as part of the Porto Montenegro project. Other facilities which are planned to be developed as part of the Porto Montenegro project (e.g. a sports club, a golf course, etc) are expected to enhance the supply of entertainment facilities in the region.

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The following picture visualises the Lido Mar Pool Club of Porto Montenegro:

Chart 24 Pictures of Lido Mar Pool Club (Porto Montenegro)

© PKF hotelexperts

sources: PKF hotelexperts; Montenegro Marine Services

With regard to shopping facilities, a lack of retail outlets in Tivat exists at the moment. The closest shopping centre (however, rather small-scale) is located in Kotor (Kamelija Kotor). Furthermore, Porto Montenegro provides various retail outlets featuring fashion brands, wine and delicatessen, books, furniture, etc.

In addition to the above-mentioned entertainment facilities, there are various casinos (e.g. Avala Resort & Villas, Budva, Queen of Montenegro, Becici, Maestral Resort & Casino, Przno, Hotel Cattaro, Kotor and Hotel Crna Gora, Podgorica). 3.5 Relevant market segment 3.5.1 General

In order to draw conclusions with regard to the positioning of the planned resort, we have analysed the local hotel market in close proximity to the project site. Furthermore, given that there is a lack of high-quality resorts in Tivat and the surrounding region, we also investigated various planned projects which will – to our judgement – be partly better comparable to the client’s planned resort development. The current hotel market in Tivat and its surroundings (i.e. Tivat, Kotor and Herceg Novi) is mainly dominated by upscale, boutique-oriented hotels with a reduced number of rooms (e.g. in Kotor) and rather outdated and old-fashioned resorts (e.g. in Herceg-Novi).

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a) existing competitive set

In the following, we compiled a sample which includes – to our judgement – some selected hotels respectively resorts which can – to a certain extent (e.g. with regard to positioning, product, concept, micro location, target groups, etc) – be considered as part of the competitive set of the client’s planned resort.

The following table provides an overview of the existing competitive set resorts:

Chart 25 Overview of selected resorts category rooms single double suites 2) total # name stars1) # # # # 1 Aman Resort 5 0 40 18 58 2 Hotel Splendid Conference & Spa Resort 5 0 303 19 322 3 Hotel Iberostar Bellevue 4 0 514 64 578 4 The Queen of Montenegro Hotel 4 0 222 14 236 5 Hunguest Hotel Sun Resort 4 0 229 0 229 6 Riviera Club Hotel 4 0 168 12 180 total Σ x 0 1,133 90 1,223 Ø x 0 189 15 204 notes 1) according to national classification © PKF hotelexperts 2) incl. apartments, studios, etc sources: hotel directories/ brochures; hotel web sites; hotel staff

In the following, the analysed resorts are described in more detail (please note that all distances are non-linear):

. Aman Sveti Stefan

The Aman Sveti Stefan is a five-star beach resort (according to national classification), located in Sveti Stefan, about 37 km to the south-east of the project site. The resort is managed by the hotel group Aman Resorts. With the completion of phase one, the resort opened in 2009, featuring eight suites in the historic Villa Milocer on the mainland. The second phase of the development includes the incorporation of the historic 15th century island of Sveti Stefan located about 140 m off the mainland and accessible either via boat or a narrow access bridge. The project embraces the conversion of the existing old houses into about 50 suites (of which 23 are currently already completed and in operation). Full completion of the second phase is foreseen for the end of 2011. Currently, the Aman Sveti Stefan features three restaurants, including a beach café, a lobby and a library. The island features a so-called piazza with a variety of restaurants, a wine bar, shops and a bakery. The suites are equipped with balcony, bathtub, hairdryer, mini bar, telephone, TV and wireless LAN. At the moment, the resort provides two beaches. The Aman Sveti Stefan entails a very upscale and modern design, providing an exclusive atmosphere in accordance to the natural and cultural heritage. Given its recent opening, the resort is in an overall good condition and shows no signs of wear and tear.

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The following pictures provide an impression of the Aman Sveti Stefan:

Chart 26 Pictures of Aman Sveti Stefan

© PKF hotelexperts

source: PKF hotelexperts

. Hotel Splendid Conference & Spa Resort

Opened in 2006, the Hotel Splendid Conference & Spa Resort is a five-star re- sort, which is part of the local hotel group Montenegro Stars Hotel Group. Fea- turing 322 rooms, including 19 suites, the resort is located about 30 kilometres to the south-east of the project site. Furthermore, the resort offers seven food and beverage outlets and a casino. The wellness facilities of the resort feature three indoor swimming pools, a fitness area, various saunas, a steam bath and treatment rooms. The conference facilities of the resort include a conference hall with a capacity of about 780 people and three meeting rooms. Hotel Splendid also has two outdoor swimming pools and a sandy beach. All guest rooms feature air-conditioning, flat-screen TV, hairdryer, mini bar, a safety deposit box, telephone and hard-wired internet access. In general, the resort is in a very good condition and shows no signs of wear and tear.

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The following pictures provide an impression of the exterior and a standard room of the Hotel Splendid Conference & Spa Resort:

Chart 27 Pictures of Hotel Splendid Conference & Spa Resort

© PKF hotelexperts

source: PKF hotelexperts

. Hotel Iberostar Bellevue

Completely renovated in 2006, Hotel Iberostar Bellevue is a four-star resort ho- tel, located in Budva, about 22 km to the south-east of the project site. Operated under the Iberostar Hotels & Resorts brand, the property is the only resort along the coast which offers all-inclusive packages. The resort comprises of three buildings, each having a reception. The total number of rooms counts to 578, including 64 suites. The resort offers a sandy beach area with sun beds, two swimming pools and a garden covering an area of about 40,000 sq m. Furthermore the Hotel Iberostar Bellevue offers eight food and beverage outlets (all buffet-style). Various sports such as basketball, beach volleyball, table tennis, tennis, boat paddling and water skiing are available at the resort. Furthermore, the resort offers shows and dance entertainment six nights a week. All guest rooms feature air-conditioning, a bathroom, hairdryer, telephone and satellite TV. In general, the resort is in good condition and shows minor signs of wear and tear.

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The following pictures provide an impression of the exterior and a standard room of the Hotel Iberostar Bellevue:

Chart 28 Pictures of Hotel Iberostar Bellevue

© PKF hotelexperts

sources: PKF hotelexperts

. The Queen of Montenegro Hotel

The four-star resort The Queen of Montenegro Hotel opened in 2006 and fea- tures 236 rooms, including 14 suites which were added in 2008. The resort is located about 30 km to the south-east of the project site (in Becici). The property offers an outdoor swimming pool which is connected to the indoor swimming pool and a wellness area featuring a sauna, steam bath and several treatment rooms. The resort features six food and beverage outlets and a ca- sino. The conference facilities of the resort include two meeting rooms with a capacity ranging from 44 to 95 people, one smaller conference room with a ca- pacity of about 29 people and a banquet hall covering a size of about 300 sq m. All guest rooms are equipped with air-conditioning, flat-screen TV, hairdryer, mini bar, hard-wired internet connection, safety deposit box and telephone. The resort is in a good condition, showing minor signs of wear and tear. However, the property The Queen of Montenegro Hotel is not located directly at the beach and therefore does not offer direct beach access.

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The following pictures provide an impression of the exterior and a standard room of the Queen of Montenegro Hotel:

Chart 29 Pictures of the Queen of Montenegro Hotel

© PKF hotelexperts

source: PKF hotelexperts

. Hunguest Hotel Sun Resort

The Hunguest Hotel Sun Resort is a four-star resort, and is operated by the Hungarian hotel chain Hunguest Hotels since 2003. Located about 24 km to the north-west of the project site (assuming to take the ferry between Lepetane and Kamenari), the resort features 229 hotel rooms, allocated in five buildings. The resort offers a concrete-covered beach and two outdoor swimming pools. The food and beverage outlets offered at Hunguest Hotel Sun Resort include three restaurants and two bars. Furthermore, the resort provides a conference room with a maximum capacity of about 150 people (theatre style). Additionally, the Hunguest Hotel Sun Resort features several sports court for basketball, handball and tennis. The wellness facilities include a Jacuzzi, several saunas and a solarium. All rooms are equipped with air-conditioning, hard-wired internet access, hairdryer, mini bar, safety deposit box, telephone and cable TV. Although, the resort was renovated two years ago, it is outdated and old- fashioned. Additionally, severe signs of wear and tear were observed in some parts of the resort.

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The following pictures provide an impression of the exterior and a suite of the Hunguest Hotel Sun Resort:

Chart 30 Pictures of the Hunguest Hotel Sun Resort

© PKF hotelexperts

source: PKF hotelexperts

. Riviera Club Hotel

The four-star Riviera Club Hotel is located about 30 km to the north-west of the project site (assuming to take the ferry between Lepetane and Kamenari). The privately owned hotel is under renovation since 2009 and presently features 180 rooms (240 rooms upon completion). Riviera Club Hotel offers a sandy beach, a small pier for boats and an outdoor swimming pool. The food and beverage outlets of the resort include a main restaurant, an à-la-carte restaurant on the beach, a pool bar and a lobby bar. Furthermore, the Riviera Club Hotel features one conference room with a maximum capacity of about 160 people (theatre style). Covering an area of about 80 sq m, the spa area comprises a small gym, a treatment room and a sauna. All guest rooms feature air- conditioning, a balcony, hairdryer, mini bar, safety deposit box, telephone and flat-screen television. Given that the resort was recently renovated, it is in an overall good condition. The guest rooms feature a modern design.

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The following pictures provide an impression of the exterior and a suite of the Riviera Club Hotel:

Chart 31 Pictures of the Riviera Club Hotel

© PKF hotelexperts

source: PKF hotelexperts

3.5.2 Demand

Due to the fact that the analysed hotels situated along the Montenegrin coast represent a rather heterogeneous set of competitive properties, combined with the peculiarities of the different coastal towns, a clear demand structure for the whole region is difficult to detect. With regard to seasonality, highest demand is registered during summer (analogue to the data as listed in chart 18), in particular in July and August. However, given the increasing offer of qualitative conference facilities in some of the analysed hotels, a certain share of demand is attracted by the competitive set hotels from business travellers during April, May, September and October. Nevertheless, the coastal region’s demand is mainly leisure oriented. Therefore, the predominant share of demand is derived from – above all during high season – the leisure traveller segment (90 % to 100 %). The majority of guests along the Montenegrin coast is of foreign origin; less than 15 % of demand is allocated to domestic clientele. With regard to international travellers, a certain differentiation can be made: according to information provided to us, Budva in general and luxurious hideaways in specific (e.g. for couples on a honeymoon) are generally preferred destinations for Russians while in Herceg Novi, a certain share of demand is attributable to Northern European countries (i.e. Denmark, Norway, Sweden). Furthermore, Serbia is also an important country of origin, particularly in the cities of Kotor and Tivat (most important feeder market in Tivat). Within the whole coastal region, the has become an important feeder market in recent

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years, followed by France and Italy. The average length of stay of guests staying in the competitive set hotels amounts to about five days. 3.5.3 Occupancy

Similar to the region’s demand structure, a reliable statement applicable to all analysed properties is difficult to make due to the heterogeneous character (particularly with regard to size and positioning) of the hotels. Furthermore, two of the competitive set hotels (Aman Sveti Stefan and Club Hotel Riviera) became only recently fully operational and are therefore still in the ramp-up phase. However, it can be deduced that overall high occupancy levels (between 90 % and 95 %) are achieved during the summer months (from June to August). During the rest of the year, hotels of the competitive set which also cater to the business segment (i.e. conference participants) generate occupancy levels of approximately 50 % to 65 %, hotels which are purely dedicated to the leisure guest segment register – if not at all closed –lower occupancy. Overall, the average yearly occupancy level of the analysed hotels varied between approximately 40 % and 80 % (weighted average approximately 56 %). 3.5.4 Rates

The following table gives an overview of the rack rates of the analysed hotels:

Chart 32 Rack rates of the analysed hotels rack rates1) 2) single room double room suite room hotel name low (€) high (€) low (€) high (€) low (€) high (€) Aman Sveti Stefan 700 1,000 700 1,000 800 3,000 Hotel Splendid Conference & Spa Resort 49 74 49 74 350 7,000 Hotel Iberostar Bellevue3) 75 149 100 192 150 288 The Queen of Montenegro Hotel 74 152 53 105 79 141 Hunguest Hotel Sun Resort4) 46 72 46 72 221 364 Riviera Club Hotel 75 147 90 162 118 278 Ø 170 266 173 268 286 1,845 notes 1) including breakfast 4) half board © PKF hotelexperts 2) low season: 1 October 2010 - 1 May 2011, high season: 1 July-25 August 3) all inclusive rate per room sources: hotel web sites; hotel staff; PKF hotelexperts

The table above shows that the Hotel Splendid Conference & Spa Resort, with € 7,000 per suite (i.e. presidential suite), has the highest rack rate within the competitive set. However, Aman Sveti Stefan offers the highest rates for a single and double room while a wide range of rates are offered at the Hotel Splendid Conference & Spa Resort, including € 49 for a single/double room in low season. Nevertheless, Hunguest Hotel Sun Resort, with € 46 per single room and double room, offers the lowest rack rates among the analysed hotels in the same period (even though half board is included in the price).

During our market investigation, data regarding the average net room rates could not be collected from all hotels (given that some of the selected hotels fail to evaluate this performance figure). In addition, as mentioned before, two of

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the competitive set hotels (Aman Sveti Stefan and Club Hotel Riviera) opened only recently. Due to the fact that a rather heterogeneous set of hotels was ana- lysed, a wide range of average yearly net room rates could be detected.

b) future competitive set

As already mentioned, we deem the following projects (at least to a certain extent) to be among the major future competitors for the client’s planned resort:

. Island View Resort

Located at Krtole, a small village within the Bay of Kotor, the More Real Estate Group currently envisages the development of the so-called Island View Resort (about 4 km from the client’s project site). The Island View Resort is planned to include luxury apartments ranging between 45 and 110 sq m. In addition, it is envisaged to offer the following services: concierge, reception, childcare, babysitting, spa treatments, sauna, steam bath, wellness, fitness centre, apartment cleaning, laundry service, etc.

The following pictures provide a visualisation of the planned Island View Resort:

Chart 33 Visualisations of the Island View Resort

© PKF hotelexperts

sources: More Group International Real Estate; PKF hotelexperts

. Luštica Bay

The envisaged project development at Luštica Bay, located on the Luštica Peninsula (municipality of Tivat), covers an area of about 7 sq km. According to information received, the development is supposed to be completed within the

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next ten years. The project includes seven hotels in the three to five-star segments featuring a total capacity of about 1,190 rooms, about 1,126 apartments, about 545 villas and townhomes, an 18-hole golf course, two marinas, a conference centre, a Thalasso therapy centre, several restaurants and retail outlets, kindergartens, schools, sports facilities and medical services. Developed by the joint venture of Orascom Development and the Montenegrin government, Luštica Development AD, the first phase of the project, including a marina, public areas, one hotel as well as the 18-hole golf course is scheduled to be completed by 2013.

The following pictures provide a visualisation of Luštica Bay:

Chart 34 Visualisations of Luštica Bay

. Porto Montenegro

Developed by Adriatic Marinas d.o.o., Porto Montenegro is a mixed-use project, covering an area of about 24 ha on the Adriatic coast (to the north of Tivat Airport). The overall project – upon full completion – is planned to include a yacht marina with a capacity of about 650 berths, a substantial number of residential units, a yacht and a sports club, an international school with playground, a nautical museum as well as shops, restaurants and an open market area. The first hotel project within Porto Montenegro was recently announced to be operated by Regent Hotels & Resorts (positioned in the upscale, boutique-oriented segment) and is envisioned to include about 80 units, including about 35 guest rooms and 45 serviced apartments (partly featuring rooftop terraces and private pools). Furthermore, the Regent Porto Montenegro is planned to feature a café and brasserie, a fine-dining restaurant, a cigar lounge, meeting facilities, a spa and two swimming pools. A further hotel

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development is foreseen within the overall project, to the north respectively to the north-west of the planned boutique-oriented hotel. Further developments within Porto Montenegro are planned to include a joint-venture golf-course development (18-holes) on a plot of about 75 ha, in close proximity to Tivat Airport and a small high-end casino.

The following pictures provide a visualisation of Porto Montenegro:

Chart 35 Visualisations of Porto Montenegro

© PKF hotelexperts

source: PKF hotelexperts

. Plavi Horizonti

The existing hotel complex Blue Horizons, situated in the Przno valley on the Luštica peninsula (a bay which is called Plavi Horizonti), was recently acquired by Qatari Diar Real Estate Investment Company. It is planned to develop a luxury resort (including a hotel with about 150 keys, about 80 residential units (out of which about the majority are envisaged to be stand-alone villas), etc) until 2014. According to information we received, Quatari Diar plans to inaugurate construction in November 2011 (i.e. clearance of the site). The resort is envisioned to be operated by an internationally-renowned hotel operator

. project development Rose

Situated on the north-eastern edge of the Luštica peninsula, the envisaged project development in Rose covers a total area of about 54 ha, of which about 100,000 sq m is buildable area. According to information we received, it is planned to build two to three hotels in the luxury segment, a small marina and about 80 villas, which will be serviced by the hotel.

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. Sveti Marko/Banyan Tree

On the Island of Sveti Marko (located to the west of the client’s project site), the hotel group Banyan Tree signed a contract to operate an upscale island resort project (the so-called 6-star Island Resort), including about 74 villas (measuring between 300 and 700 sq m), about 100 bungalows (measuring between 100 sq m and 145 sq m) and about 60 hotel rooms (measuring between 70 and 100 sq m). Further planned facilities include meeting facilities, various f&b outlets, sports facilities, a casino, a spa, a private beach with water sports centre and a helipad. The project is envisaged to be developed by Metropol Group of Companies. The total area of the project amounts to about 307,000 sq m. The construction is planned to start in February 2012 and the first phase is scheduled to be completed in 2015.

The following table summarises the planned facilities of the above-mentioned projects:

Chart 36 Planned facilities of future competitive set hotel marina residential conf. fac. sports fac. retail units # name # rooms # of berths # yes/no yes/no yes/no 1 Island View Resort no no 100 no yes no 2 Luštica Development1) 1,190 120 1,671 yes yes yes 3 Porto Montenegro 80 650 900 yes yes yes 4 Plavi Horizonti2) 150 no 80 n.a. n.a. n.a. 5 Rose Development n.a. n.a. 80 n.a. n.a. n.a. 6 Sveti Marko/Banyan Tree 60 n.a. 174 yes yes n.a. Σ 1,480 770 3,005 x x x notes 1) including seven hotels © PKF hotelexperts 2) detailed information was not made available to us sources: interviews; PKF hotelexperts

According to information we received, all of the above-mentioned projects are planned to be developed as mixed-use projects, which include accommodation facilities as well as gastronomic, entertainment and shopping facilities. Furthermore, a marina (and in most cases a residential) component also stands as a common element among these projects. Therefore, we would recommend a close co-operation with other projects in order to avoid fierce competition but rather benefit from synergy effects which can be created through offering complementary products.

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4 Product

4.1 General

As already described in chapter 2, the project site’s overall quality, which is predominantly characterised by its favourable location on the Bay of Kotor waterfront and its proximity to the historic cities of Kotor, Perast and Budva clearly qualifies for a development of a resort in the upscale segment (four to five stars, according to international classification). This recommendation is also supported by the envisaged development of a marina within the overall resort development. The project site also benefits from attractive views (mountain and sea vistas). Furthermore, the plot of land owned by the client is in immediate vicinity to the airport in Tivat (which represents a certain disadvantage, on the one hand (e.g. noise and air pollution) but an advantage on the other hand (easy and fast accessibility from the airport).

Taking into account that various luxury resort projects are currently in planning and under construction in Tivat and its surroundings (e.g. Luštica Bay, Banyan Tree, Plavi Horizonti, etc), we would generally recommend a positioning in the four-star segment in order to being able to clearly differentiate the client’s resort from the afore-mentioned developments. A differentiated positioning would also allow the client’s proposed resort to cater to certain niches of the market (e.g. sports aficionados).

As revealed during our market research, the Montenegrin coast is subject to very strong seasonality. While very high occupancy rates are achieved in the months of July and August, fewer guests can be attracted to the region in the shoulder seasons (spring and autumn) and despite the overall mild climate, particularly low occupancy rates are registered during winter (see chart 18). Thus, it is of utmost importance create a resort which aims to prolong the short summer season and which focuses to become a year-round destination.

Furthermore, Montenegro and its coastal region still lack a certain luxury image compared to other, more mature regions of the Mediterranean (e.g. Southern France, Southern Spain). However, due to the rich cultural heritage and the picturesque landscapes along the Montenegrin coast, we could envision the area to become a hotspot for the upscale traveller segment in the long-run, thus, being able to compete with other well-reputed coastal regions of the Mediterranean. Still, the development of such reputation and image is expected to take several years, particularly with regard to the development of upscale gastronomic, entertainment, and retail facilities. This is also why we would currently abstain from a positioning in the luxury segment.

In addition, the planned resort will have to rely on certain Unique Selling Propositions (USPs) in order to distinguish itself from the already existing, traditional beach resorts in Montenegro and the above-mentioned planned projects. Subsequently, USPs would also contribute to attract international niche tourist markets.

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In the following, we briefly provide a definition of the potential USPs of the envisaged resort:

. Location – Air, Water & Earth

Being located at the waterfront of the Bay of Kotor, providing access to a marina and a beach for sunbathing at the same time as well as having an international airport within walking distance, the location of the planned resort is a USP itself and should therefore be promoted adequately. Given that the resort is in immediate vicinity to the airport, co-operations with regard to various extraordinary offerings and experiences should be aspired to be provided by the resort (e.g. flight simulations, sky diving, flight classes, private charter services, fly-and-cruise-packages, etc). The waterfront location enables the resort to integrate a marina on the one hand and to offer watersports and sunbathing facilities on the other hand. The international airport in Tivat, which is within walking distance of the project site, is a unique feature and could – especially for boat or berth owners – prove attractive (e.g. accessibility by plane).

. Design & Architecture

An innovative and contemporary design and architecture represents an attractive contrast to the rich flora and unspoiled nature on the plot of land on the one hand and would be a fancy distinguishing feature to the already existing beach resorts on the other hand (benefit from the so-called glamour of simplicity). Therefore, the design and architecture of the resort should be used to reflect the uniqueness of the location in order to create a further USP.

. Sustainability

Responding to the current trend and increasing interest with regard to the topic of sustainability (e.g. sustainable initiatives become increasingly a basis for the decision-making process when it comes to the selection of destinations for vacations), the resort should focus on sustainable and energy-efficient construction and operation. Clearly, this could be a competitive advantage and supports the overall strategic goal for tourism development of the Montenegro Ministry of Tourism and Environment: By applying sustainable development principles and objectives, Montenegro will create a strong position of a global high quality destination…etc.

. Fun, Action & Adventure

Providing ideal conditions for any kind of sports (be it biking, tennis, waterskiing, diving or sailing), the resort could also take advantage to serve as centre for extreme sport-aficionados and adventure tourists onshore, in the air and on the water. Extreme sports offers, which could attract this guest segment, include, for example, sky diving, sky surfing, wingsuit flying, mountain biking, mountain boarding, climbing, jet skiing, water skiing and wakeboarding, speed boating, scuba diving, surfing, etc. Ideally, a co-operation with already well- established and internationally reputable brands such as Red Bull, Ferrari, Oakley, etc could be envisaged in order to organise special events (e.g. airshows, speed boat races, etc) and would further support the strength of the resort’s USP. Furthermore, the focus on sports and adventure could attract

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a wide range of target groups (e.g. participants of incentives, professional athletes, extreme sports-aficionados and non-professional athletes who want to experience something extraordinary). 4.2 Target groups

According to the Touristic Masterplan for Montenegro, which was prepared on behalf of the Federal Ministry for Economic Cooperation and Development and published by the German Investment and Developing Company (DEG), Montenegro’s main target market are domestic as well as international (prevailingly Western and Northern European as well as increasingly Eastern European) leisure tourists during the summer months. Also, culture and nature- affine tourists are increasingly important for Montenegro’s tourism, given that Montenegro offers a wide variety of unusual and authentic experiences. Igalo, with its healing mud, also attracts health-conscious or cure-seeking guests. Mountain hikers in summer and skiers in winter also represent a potential target group in Montenegro. According to the Montenegro Tourism Development Strategy to 2020, the Bay of Kotor provides ideal conditions to attract guests interested in bathing, culture, sports and health.

With regard to the client’s resort project, a clear distinction has to be made between the target market for the hotel and residential units. Moreover, in order to counteract seasonality, a focus on the right guest segment for the different seasons should be in place.

In the following, we have assessed the various guest segments which will – to our judgement – be of relevance for the client’s planned resort. 4.2.1 Hotel

a) leisure travellers

Due to the attractive waterfront location on the Mediterranean Sea, leisure travellers are currently the most important target segment for Montenegro and thus, are also expected to be a significant guest base for the client’s envisioned hotel. In general, we expect the leisure traveller segment at the proposed hotel to be young-at heart, active and lifestyle- as well as sports-oriented. With regard to the income level, we expect that the planned hotel will first and foremost be able to attract Western Europeans with middle to upper income and Eastern Europeans disposing of a high income.

A peak of leisure travellers can be expected during high season (i.e. July and August); however, due to the envisaged offering of the hotel (wellness, sports, etc), it should be expected that leisure guests increasingly travel off-season, depending on their various interests and the general accessibility (flight connections, development of motorways, etc). Given the current accessibility (limited direct flights, etc) and the rather long distances to the various countries of origin (Western Europe, Russia, etc), we expect a rather high average length of stay (in general, Montenegro is not a destination for weekend- and short- trips).

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In order to provide a more precise definition of the distinctive characteristics and needs of the various target groups, we divided the leisure traveller segment into the following sub-segments which are expected to be of particular relevance for the client’s envisioned hotel:

. sports-aficionados and adventure tourists

Given the opportunity to engage in various sports activities, ranging from water sports (e.g. sailing, water ski, diving) to sports onshore (e.g. biking, hiking, tennis, etc), sports-aficionados (individuals and groups) are considered to make up a significant share of the guest mix. Furthermore, due to the unique location next to the airport in Tivat, the proposed hotel could offer extraordinary sports such as sky diving, wingsuit flying, etc. We deem the group of sports-aficionados to range from rather young people (aged between 18 and 35) to the so-called best-agers. By tendency, we expect more males to be part of this target group than females. Furthermore, this group can be characterised by its desire to escape the everyday life by experiencing something completely different during their vacation. Moreover, a division can be made between professional athletes respectively extreme sportsmen and sports-interested tourists respectively beginners. Therefore, it would be important to provide various degrees of difficulty for the various offerings (e.g. beginners’ courses).

. couples and families

Due to the attractive waterfront location at the Bay of Kotor and the vicinity to the historic cities of Kotor, Perast and Budva, the envisaged hotel should actively target couples (e.g. honeymooners) and – however, to a lesser degree – families with children. Additional facilities of the resort itself (e.g. adequate wellness and spa area, diversified sports offer, access to a beach, etc) would prove attractive to couples and families. In order to meet the different demands within this guest segment (i.e. romantic ambience for honeymooners, amenities for children such as a children’s pool), the indoor wellness and spa area (especially the sauna and steam bath area, treatment rooms and relaxation area) should only be opened to adults in order to guarantee adequate restfulness (access for children could be restricted to the indoor pool area or to a dedicated children’s zone/area). Given that we expect families and children to play a minor part of the overall guest mix and due to the fact that the majority of families with children travel during peak season (while demand from couples can also be anticipated during the off-season), we do not foresee major complications with regard to the distinctive needs of these guest segments.

. leisure groups

Particularly in the shoulder season, leisure groups are expected to play an important part for the planned resort. Taking into account the envisaged size of the hotel and the upscale positioning, we would recommend to focus on rather small leisure groups (e.g. between about 30 to 60 people). We anticipate that demand could be especially generated from sports clubs or professional athletic teams (e.g. soccer clubs, tennis clubs, etc) who organise training camps at the hotel. However, also non-professional athletic groups could be attracted by the hotel’s diverse sports offer (e.g. mountain bikers, triathletes,

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etc). The availability of twin-bed rooms would prove attractive for this guest segment.

. wedding guests

Taking into account the picturesque surroundings and attractive views of the project site, the planned hotel would, according to our judgement, be a suitable spot for weddings. Given the availability of orthodox churches in the vicinity and the overall attractiveness of Montenegro for Russian clientele, this feeder market could play a vital role. In order to promote the hotel accordingly, a strategic alliance with a well-reputed Russian agency (organising wedding ceremonies and receptions abroad) as well as a co-operation with a specialised wedding planner should be envisaged. b) marina guests

Due to the envisaged integration of a marina providing between about 250 and 300 berths, guests generated by the marina are expected to be an important guest segment for the planned hotel (however, we expect less demand to be generated for the hotel compared to the resort’s real estate component from this target group). It can be expected that both guests and owners of yachts as well as crew members are likely to generate demand for the proposed hotel (also based on the fact that especially guests and crew members often prefer staying on the mainland). Furthermore, in case the marina is used as starting or end point of tours (which could be well-marketed due to the vicinity of the airport), guests might arrive earlier before and stay longer after a cruise. It will be of utmost importance to offer – in addition to special marina facilities and services such as maintenance, sanitary facilities, electricity and water supply, etc – retail facilities (e.g. shop selling newspapers and magazines, etc) and a high-quality bakery, for example, in order to cater to this clientele. c) airline crews

Due to the immediate vicinity of the planned hotel to the airport Tivat, we deem airline crews to be a potential guest segment, provided that the envisaged development of the airport and the increase of international flight connections are implemented. In addition to airline crews generating demand due to a stopover, airline companies could also be targeted with regard to flight trainings, educational purposes, meetings, etc. Again, the immediate vicinity to the airport would enable to attract this guest segment. d) business guests

Given the current absence of large companies in the surrounding area, we envisage individual business guests to only account for a minor share of the hotel’s overall guest mix. However, we could imagine certain demand to derive from small business groups or management teams holding a board meeting who prefer an attractive setting but similarly enjoy a certain hideaway character (no large city in the vicinity) of the location. In addition, due to the envisaged diversity of the sports offerings (including team sports such as basketball, beach volleyball as well as fun sports such as waterskiing and banana riding),

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we deem the proposed resort particularly suitable for incentive groups and team-building seminars. 4.2.2 Residential units

With regard to the sale of the planned real estate component of the resort (i.e. stand-alone villas and residential units in town houses), we deem the planned integration of a marina within the overall resort development favourable. Buyers of residential units could, for example, encompass captains of larger yachts as well as crew members disposing of a higher level of income (also from yachts mooring at the neighbouring Porto Montenegro) and yacht owners (real estate could be sold in combination with berths). With regard to the feeder markets we expect that residential units could be sold to international buyers disposing of higher income from Serbia (Belgrade), Russia (Moscow, St Petersburg), and (Kiev) as well as from the UK, Germany, and Switzerland.

With regard to the feeder markets, we deem the following foreign countries of particular importance for the client’s envisaged resort:

. Serbia

Given the fact that Serbia is a landlocked country and still shares strong cultural ties with Montenegro, we expect Serbia to be among the main feeder markets for the client’s planned hotel. Especially, the capital Belgrade with about 1.6 m inhabitants and various secondary cities such as Novi Sad and Niš represent an attractive target markets for the proposed hotel and the envisaged real estate components. The general good accessibility to Montenegro and thus, to the client’s proposed resort (currently, about 52 direct flight connections during summer and 28 direct flight connections during winter are provided between Belgrade and Tivat) can be regarded as further advantage. In addition, the new motorway between Belgrade and Bar (the Serbian part is already under construction) will facilitate road access between Serbia and Montenegro. Serbians disposing of a higher income will – to our judgement – be an attractive clientele for the planned hotel but also for the real estate components (provided that a good and competitive price-value relationship is offered).

. Russia and Ukraine

During the last years, the number of Russian tourists steadily increased in Montenegro and is likely to further grow in the upcoming years. Subsequently, we expect Russians to generate significant demand for the client’s proposed hotel and real estate components. To our judgement, Russians disposing of middle and higher income (most likely from cities such as Moscow and St Petersburg) are an attractive segment in order to sell residential units of the resort off-plan. According to statistical data from Savills Montenegro, Eastern European countries rank first when it comes to the nationality of buyers of real estate in Montenegro. In addition, in 2010, about 33 direct flight connections were offered during summer and five during winter between Moscow and Tivat which is favourable in order to successfully promote the resort to the Russian market. Although accounting only for approximately 2.1 % of total overnight

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stays in 2010, Ukraine will – to our judgement – be a major target market for the client’s resort (this however, strongly depends on the development of the airport in Tivat and Podgorica and the establishment of adequate flight connections in the future). Also, Russians could be successfully addressed during winter (attributable to the mild climate in Montenegro) and could therefore support the resort to become a year-round destination.

. Western Europe and United Kingdom

Among the Western European countries, we deem the United Kingdom, Hungary, Germany, Switzerland, and Austria to be among the main target markets for the client’s envisaged resort (prevailingly for the hotel component). This can be explained by the increasing interest and curiosity from these countries in Montenegro and the already well-established flight connections to major cities (e.g. Frankfurt, Budapest, Vienna, Rome, Zurich). Furthermore, the inauguration of flights from and to Germany and the UK provided by low-cost airlines (Ryan Air, Easy Jet) is currently envisaged and would further boost tourist arrivals from these countries. With regard to the real estate component of the proposed resort, we deem the United Kingdom as already established buyer market in Montenegro. Although interest with regard to Montenegro real estate transactions from the UK has been decreasing in the last few years (according to statistical data from Savills Montenegro), we deem the combination of the resort with the marina and the availability of flight connections between London and Podgorica as advantageous in order to successfully target this market with regard to the sale of real estate. 4.3 Product 4.3.1 Overview

We would consider the following unit mix as optimal for the client’s plot of land (without consideration of any limitations set by third parties):

. 120 hotel units:

 90 standard rooms with about 28 to 32 sq m

 20 junior suites with about 40 to 48 sq m

 eight deluxe suites with about 56 to 64 sq m

 two penthouses with about 80 to 96 sq m

. 20 apartments (each about 72 to 96 sq m) – flexible combinations (vertically or horizontally); one/two-bedroom apartments

. 14 town houses each featuring about two apartment units with about 96 to 128 sq m (total: about twelve units); two-bedroom apartments

. six stand-alone villas with 156 to 256 sq m; three-bedroom apartments

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. option for further extension

The residential components should be offered for freehold sale; whereas hotel units could optionally be offered in form of a buy-to-let model; to apply a buy-to- let model, the standard rooms and junior suites could be combined in order to offer an attractive, sellable unit size (about 80 sq m). These units would still serve as separate hotel rooms but could for example be combined with connecting doors or a common entrance area. The buy-to-let model could be well-fitting for buyers that also acquire a berth at the marina; they do not necessarily see the unit as vacation home but as basis for their sailing turns and as hassle free investment. Even smaller units (32 to 48 sq m; relating to the relative boat size) could be positioned on the market. To our judgement, the integration of 54 residential units still allows for a low building density which we consider as very important to distinguish the resort from other, over-developed destinations along the Adriatic coast. In total, the 54 residential units would account for about 8,000 sq m of gross buildable area, which represents approximately 30 % of the currently allowed gross buildable area (i.e. 26,235 sq m).

Also, the hotel could – in a second phase and at a later stage – be extended by about 60 units (dependent on the actual demand).

Furthermore, the resort should feature:

. various f&b-outlets

. sufficient meeting facilities

. an indoor-/outdoor spa and wellness area

. adequate sports facilities

. other facilities (shop, bakery)

. a dedicated beach area

. a marina 4.3.2 Hotel

The hotel building should not feature more than three floors (excluding ground floor; about 40 units per floor) and should be well integrated into the sloping landscape. Design and layout will be elaborated based on the outcome of the workshop. Due to the strong seasonality the hotel should feature separate utility circuits in order to be partially shut off during low season (one or two floors).

a) rooms

We would recommend the following key features with respect to the hotel rooms:

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. attractive and high-quality furniture and equipment

. all units should be furnished with high-quality beds, blankets, pillows and bed- clothes; they should be prevailingly equipped with king-size beds (200 cm x 210 cm; better 210 cm x 210 cm), partly with twin beds (two separate beds, possibly with zipping lines)

. some of the rooms should feature interconnecting doors or common entrance areas (suite plus standard room) in order to cater to families; special beds and other child-related furnishing and equipment should be provided upon request

. sufficient and comfortable seating possibilities (e.g. pull-out couch and arm- chairs); larger units (starting from junior suites) should provide a separate sleeping and living area

. all rooms should provide a terrace or a balcony

. bathrooms with a separate bathtub and a large glass-enclosed walk-in shower (deluxe suites/penthouses could additionally feature a Jacuzzi and a sauna; furthermore various massage treatments could be offered to be carried out in the suites); sophisticated power shower system with rain shower head, large (heated) mirrors, premium guest supplies, integrated sound system

. separate WC unit

. complimentary hard-wired high-speed internet access and wireless LAN availability throughout all guest rooms and public areas of the hotel

. all rooms should be equipped with state-of-the-art multimedia/entertainment system (large flat-screen in the sleeping rooms; in larger suites also in the living room; international cable or satellite connection, video and music on demand, wireless keyboard, dolby surround audio system; iPod plug-in device)

. CD/DVD player in all rooms

. in-room safety deposit box (adequate for notebooks)

. writing desk with adequate lighting and comfortable seating, high-quality sta- tionary, sufficient and conveniently arranged power outlets (for notebooks, mobile phones, etc)

. individually adjustable air-conditioning (heating and cooling); windows should be operable

. wardrobe with drawers and sufficient hangers (deluxe suites and penthouses should provide walk-in closets)

. adequate fire and life safety measures (i.e. smoke detectors, signage, etc) according to local regulations

. all rooms should be equipped with mini bar and high-quality espresso and tea makers (complimentary in suites)

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. if buy-to-let model is applied, suites should feature a fully equipped kitchenette b) food and beverage

With regard to f&b outlets, we would recommend offering a variety of services in order to cater to different guest segments:

. main restaurant

We envision the integration of a main restaurant located in the main building. The main restaurant should serve breakfast, lunch and dinner (prevailingly local and Mediterranean cuisine), possibly as part of the half/full-board service. It should provide a minimum capacity of about 120 to 150 seats. The restaurant should feature a generous garden/terrace and provide sea view. It should be divided into different zones, which might also be closed down during low season or for social gatherings

. à-la-carte restaurant

In addition to the main restaurant we recommend the integration of an à-la- carte/fine-dining outlet with an additional capacity of about 30 to 40 seats. The à-la-carte restaurant should only offer dinner and should feature a distinguished interior design. Emphasis should be put on creating privacy and an intimate seating for the guests (movable partitions, special tableware and hollowware). The restaurant should offer a selection of national (Mediterranean) and international cuisine and provide a high-quality selection of international and national wines (preferably in a walk-in wine room). The fine-dining restaurant could also be used as an alternative breakfast outlet (à-la-carte) in times of excess demand and for private functions and events (e.g. weddings, birthdays, etc).

We would recommend locating the main restaurant either on the ground floor or on the first floor, providing access to a terrace overlooking the sea. The à-la- carte restaurant could form part of the main restaurant but must be clearly dividable. Both restaurants should also be able to attract external guests.

. casual restaurant/bakery/coffee shop Furthermore, we could envision a casual restaurant mainly offering snacks throughout the day (about 50 to 60 seats); the outlet could be located at the promenade and be combined with a cafe/bakery (about 20 seats; offering fresh pastries) and a little grocery store; the outlets should be in a separate building but should feature a common back of house/kitchen area. The outlets could again be used for restaurant overflows or special events at the promenade (e.g. candle-light dinners accompanied by live music or private party events).

The hotel should additionally feature a lobby bar and a pool bar serving mainly beverages and small snacks. Ideally the lobby bar is located close to the main restaurant. In the evening, the lobby bar should be used as a lounge bar.

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c) wellness and spa area

We recommend including a high-quality wellness and spa area to mitigate seasonality.

The area should include:

. an indoor swimming pool (preferably connecting to an outdoor area) in form of a infinity pool with sea view

. sufficient, spacious relaxation areas with nice views

. several treatments rooms (massage, wellness, beauty, etc) with outside terrace or garden

. special treatments: mud from Igalo, two/three private spas, dietician

. a fitness centre with high quality equipment and a personal trainer

. a steam bath and several saunas with a Jacuzzi

Furthermore, we recommend including two to three private spa suites with a little terrace/garden. The wellness area should be easily accessible for hotel guests as well as for the external guests. It could either be operated directly by the hotel group or rented out to a renowned external operator (e.g. Banyan Tree, Six Senses). A total floor space for the indoor wellness area of about 1,500 sq m (including fitness) seems adequate. d) meeting and conference facilities

We would recommend providing meeting facilities offering one main conference centre (about 150 sq m) which should be dividable into two to three smaller sections in order to offer maximum flexibility. The conference room could also be used for banquets and other events such as weddings, presentations, congresses, company events, seminars etc. In addition, we could envisage including two to three boarding rooms (for up to 25 persons each) for smaller meetings, manager seminars, trainings, etc.

All conference rooms should offer natural daylight (option to be blacked out) and should be equipped with air-conditioning, state-of-the-art presentation, audio-visual equipment and high-speed internet access. In addition, the conference area should feature a spacious and attractive foyer (preferably with access to a terrace) for coffee breaks as well as a separate wardrobe. The foyer should also provide a buffet area with a short connection to the kitchen. We recommend situating storage rooms (e.g. for chairs, tables, etc) adjacent to the large conference room. The public toilets should be located in the vicinity of the conference and meeting facilities (as well as close to the main restaurant).

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4.3.3 Residential

The residential units should allow for various flexible combinations, to be able to divide and/or combine the different apartment types either horizontally and vertically. This improves the flexibility and provides various sellable options which can be adopted according to market requirements.

With respect to the residential components, we would give the following basic recommendations:

. There should be two to three different design schemes (colour, material, artwork, etc) to leave a choice for the potential buyer. The interior design and furnishing should be offered as a package price and in form of a modular system, in order to leave the potential buyer with various options. The owner should be allowed to personalise the apartment.

. The units should be designed fully equipped with kitchen, fridge, microwave, dishwasher, but also with china- and glassware, cutlery and other necessary kitchen equipment. Storage facilities should also be provided in form of (wall- mounted) cupboards and shelves.

. The kitchen could be integrated in the living/dining room which should (whenever possible) provide sea view and a (garden) terrace/balcony.

. The dining/kitchen area should feature a dining table for four to six people (with possible extension), a wall-mounted flat-screen TV, a pull-out couch (transformable to a bed), a couch table and a movable/flexible seat and a working desk with all necessary technical features/outlets.

. The master bedroom should feature a twin-bed (200 cm x 210 cm), a walk-in wardrobe, a wall-mounted flat-screen TV and should be connected to the master-bathroom.

. The second/third bedroom should feature two single beds (100 cm x 210 cm) which can be connected to a twin bed (e.g. with a zipper), a wall-mounted flat- screen TV and a wardrobe.

. The master bathroom should be equipped with a walk-in shower, a bathtub, a vanity stand; WC/bidet can be inside but must separated and closable by doors; the second bathroom should have the same features at a smaller scale but with a separate WC unit.

. Washing machines are not necessary as long as the hotel is offering laundry service. Two to three washing machines and dryers might be installed in the cellar of the hotel building.

. All apartments should feature a view-protected terrace (with sea view) or a garden terrace.

. One parking lot is required per unit (garage parking nearby).

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. Separate counters for electricity, water, gas should be installed in each unit.

. Air-conditioning should be provided in each unit.

. The stand-alone villas should be equipped with an external video security control system.

. All units should feature free high speed, wireless internet access.

The upscale units (villas) should include the following additional facilities:

. higher quality of equipment and furnishing

. more spacious terrace; terrace should possibly feature a Jacuzzi and a conservatory/wintergarden

. additional sauna with view and/or access to terrace

. a fireplace should be integrated in the living room

. separate kitchen and dining area

. walk-in wardrobes

. best views and locations

. personal pool (optional) 4.3.4 Other facilities

In the following, we would like to provide our recommendations of various other facilities which should be offered by the envisioned resort:

a) sports facilities

We recommend a strong focus on water sport activities and on fun-sport activities in combination with the nearby airport. This combination should serve as one of the main USPs of the resort and must be adequately promoted and operated. We envisage – amongst others –the following activities:

. sailing school

. jet ski

. windsurfing

. water-ski/wakeboard

. speedboat rental/rides

. boat excursions

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. sky diving

. paragliding

. flight simulator

. flight school

In addition, there should be fitness, aerobic facilities, bicycle rental and the possibility to offer guided hiking/rafting/mountain biking tours. b) beach area

The following facilities should be included in the beach area:

. beach bar including lounge area

. sun terraces with high-quality sunbeds, sunchairs and visually-attractive sunshades

. clubbing zone

. water sports centre

. beach volleyball field c) marina

The marina facilities should be situated on the plot which is currently owned by the government and which could potentially be leased by the client. This area should encompass the following amenities:

. direct car access

. reception area

. storage facilities

. changing rooms, shower and WC

. laundry, dry-cleaning

. fuel, water supply, electricity, waste area

. crane, boat access

. maintenance

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5 Financial forecast

5.1 General 5.1.1 Systematics

The financial forecast used in this study is based on the standard work Uniform System of Accounts for the Lodging Industry (USALI, Tenth Revised Edition). Ac- cording to the therein included requirements, this financial forecast is struc- tured by operating departments.

All amounts displayed are net amounts excluding value-added tax. All data pro- vided refer to – unless otherwise noted – a so-called stabilised year, i.e. the first year after a period of rate and occupancy increases and other adjustments on the price basis 2012 (that is regardless of inflation). However, it is expected that payroll and related expenses do not stabilise in percentage-terms during the forecasted period. Therefore, the year ten of the financial forecast is – technically speaking – the stabilised year.

The financial forecast depends partly upon assumptions. The forecasted income reflects the, in our opinion, most likely future development from today’s point of view. External circumstances such as economic crises may have a considerable impact on the financial performance.

The stated values are partly subject to rounding. In some cases, rounding dif- ferences may apply since calculations were conducted upon exact figures, but rounded figures are displayed.

The report at hand closes with the adjusted net operating income, which is the net operating income minus assumed replacement reserves (see 5.6 Replacement reserves). It does not take into account the following positions, which depend on financing and investment:

. interest expense

. depreciation and amortization

. loss or gain on the disposition of assets

. income taxes 5.1.2 Timeline

The financial forecast reflects a so-called stabilised year (see Annex 1.1) as well as the first ten years of operations (2014 to 2023; see Annex 1.2), whereas the first five operating years (2014 to 2018) were partly forecasted individually, and the following years (2019 to 2023) were projected on the basis of the values of the year 2012 and taking into account an annual inflation rate of 2 %. Due to

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the expected increase of payroll and related expenses, some percentage values continue to change even after the so-called ramp-up phase. Please note that the forecast for a representative year is based on 365 days.

For the financial forecast we assumed the following parameters:

. price basis: year 2012

. inflation: 2 % per annum (basis: estimate by PKF hotelexperts)

. opening date: 1 January 2014 (basis: estimate by PKF hotelexperts)

. in the following, all figures are based on the stabilised year (year 2023) if not noted differently

. ramp-up phase (the period after opening during which rate, occupancy, and re- newal reserves might change beyond inflation): five years/2014 to 2018 (basis: estimate by PKF hotelexperts)

. stabilised year: 2023 = first full business year at the end of the ramp-up phase and at the – theoretically-assumed – end of the increases of payroll and related expenses during the forecasting period; on the price basis of 2012 (without consideration of inflation)

Please note that the forecast at hand does not include any income from the sale of the residential units; however, additional revenue deriving from tenants and owners of the residential units (e.g. laundry, f&b outlets, spa and wellness area) as well as certain costs (e.g. housekeeping, maintenance, security) were considered in the financial forecast.

The timeline is illustrated schematically in the following chart:

Chart 37 Timeline for the development of the hotel 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 forecast period 11) 2 3 4 5 6 7 8 9 10

analysis 1 development phase

planning 1 1

construction 1 1 1

pre-opening 1 operational phase

opening 1

start-up 1 1 1 1 1 1

stability 1 1 1 1 1 1 1 1 1 1 1 1 1 1 notes 1) opening on 1 January 2014 © PKF hotelexperts

source: internal calculations

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5.1.3 Human resources

The total number of employees amounts to 119 according to an individual staffing schedule (including staff for management, maintenance and service of residential units). Apprentices and trainees are counted as full-time employees. Part-time and temporary workers have been accounted for on the basis of full- time equivalents. The most important staff ratios (with respect to hotel only) in a stabilised year are presented below:

. 0.99 employees per available room (basis: 120 rooms)

. 1.84 employees per occupied room (basis: 120 rooms x 54 % occupancy = 64.8 occupied rooms on average)

. 1.02 employees per guest (basis: 120 rooms x 54 % occupancy x 1.8 multiple occupancy factor = 117 guests on average)

The 119 employees are allocated as follows:

Chart 38 Employees per department department employees schematic representation name symbol # % symbol

rooms 32 27 food and beverage 54 45 other operated departments 11 9

rentals and other income 0 0 2 2 2 2 2 2 2 2

total operated departments 97 82 2 2 2 2 2 2 2 2 2 2

2 2 2 2 2 2 2 2 2 2

administrative and general 11 9 2 2 2 2 2 2 2 2 2 2

sales and marketing 4 3 2 2 2 2 2 2 2 2 2 2

property operation and mainten. 7 6 2 2 2 2 2 2 3 3 3 3

utilities 0 0 3 3 3 3 3 3 3 total undistributed expenses 22 18

0

total 119 100

0

0 0 0 0 0 0 0 0 0 0

© PKF hotelexperts

source: internal calculations

Data for salaries, wages, and bonuses is partially derived from comparable hotels as well as internal databases of PKF hotelexperts.

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In total, the surcharges amount to 52 %. A summary of payroll and related ex- penses of the hotel is presented in the following chart:

Chart 39 Payroll and related expenses department employees sal. and w. payroll and rel. exp. 1) share per empl./m. per empl./m. total/year dep. revenue name #2) € € € '000s % rooms 32 541 822 316 6 food and beverage 54 650 988 640 12 other operated departments 11 455 729 106 2 rentals and other income 0 x x 0 x total operated departments Σ 97 x x 1,062 20 Ø 1 592 912 x x administrative and general 11 1,327 2,294 266 5 sales and marketing 4 975 1,482 71 1 property operation and maintenance 7 486 738 62 1 utilities 0 x x 0 x total expense centres Σ 22 x x 399 7 Ø 1 995 1,651 x x total Σ 119 x x 1,461 27 Ø 1 666 1,049 x x notes 1) including employee benefits (approximately 52 % of salaries and wages) © PKF hotelexperts 2) including apprentices and trainees source: internal calculations

Some services (e.g. room cleaning) will presumably be outsourced to third par- ties and therefore be carried out by external staff. Potential cost advantages, which may apply, have not been taken into account in our calculation. 5.2 Operated departments 5.2.1 Rooms

According to our forecast, rooms revenue presumably develops as follows:

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Chart 40 Rooms revenue development available rooms occupied rooms net room rate1)2) revenue per day per year per year before disc. after disc. rooms # # % # € € € '000s 2012 108 2013 110 2014 1 120 43,800 40 17,520 112 101 1,816 2015 2 120 43,800 46 20,148 115 109 2,249 2016 3 120 43,920 50 21,960 117 117 2,631 2017 4 120 43,800 52 22,776 119 119 2,784 2018 5 120 43,800 54 23,652 122 122 2,949 2019 6 120 43,800 54 23,652 124 124 3,008 2020 7 120 43,920 54 23,717 127 127 3,076 2021 8 120 43,800 54 23,652 129 129 3,129 2022 9 120 43,800 54 23,652 132 132 3,192 2023 10 120 43,800 54 23,652 134 134 3,255 total Σ x 730,600 x 488,897 x x 45,264 Ø 200 73,060 67 48,890 x 93 4,526 notes 1) for the years 2012 to 2013 theoretical rate increases © PKF hotelexperts on the price basis of 2012, taking into consideration an annual inflation of 2 % 2) discount refers to opening discounts source: internal calculations

The calculation of the departmental income of the rooms department is based on the following assumptions:

. payroll and related expenses: 12 % of departmental revenue (see 5.1.3 Human resources)

. other expenses: 8 % of departmental revenue (basis: estimate by PKF hotelexperts)

Departmental income from rooms department in a stabilised year is contained in 5.2.5 Total operated departments. 5.2.2 Food and beverage

According to our forecast and based on our recommendations for the gastro- nomic concept, food and beverage revenue will develop as follows:

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Chart 41 Food and beverage by outlet house guests guests per day revenue usage internal external total per guest/m. per year % # # # € € '000s main rest. breakfast 80 93 10 103 10 377 lunch 0 0 0 0 0 0 dinner 60 70 10 80 20 584 other 0 0 0 0 0 0 Σ 140 163 20 183 14 961 casual rest. breakfast 0 0 0 0 0 0 lunch 30 35 5 40 15 219 dinner 20 23 0 23 19 162 other 0 0 0 0 0 0 Σ 50 58 5 63 16 381 á-la-carte rest. breakfast 0 0 0 0 0 0 lunch 0 0 0 0 0 0 dinner 15 17 5 22 26 213 other 0 0 0 0 0 0 Σ 15 17 5 22 26 213 bakery/café breakfast 15 17 3 20 8 60 lunch 10 12 2 14 11 55 dinner 0 0 0 0 0 0 other 15 17 10 27 9 90 Σ 40 47 15 62 9 205 poolbar breakfast 0 0 0 0 0 0 lunch 10 12 5 17 12 73 dinner 0 0 0 0 0 0 other 30 35 5 40 12 175 Σ 40 47 10 57 12 248 lobby bar breakfast 0 0 0 0 0 0 lunch 0 0 0 0 0 0 dinner 0 0 0 0 0 0 other 25 29 2 31 10 114 Σ 25 29 2 31 10 114 banquets breakfast 0 0 0 0 0 0 lunch 0 0 0 0 0 0 dinner 4 5 1 6 45 93 other 4 5 1 6 21 43 Σ 8 9 2 11 33 136 minibar other 20 23 x 23 5 43 total breakfast 95 111 13 124 10 437 lunch 50 58 12 70 14 347 dinner 99 115 16 131 22 1,052 other 94 110 18 128 10 465 Σ 338 394 59 453 14 2,301 © PKF hotelexperts

source: internal calculations

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The table above shows that approximately 87 % of food and beverage revenue are generated by internal guests (hotel guests) and approximately 13 % are generated by external guests.

Revenues generated from the rental of meeting rooms, audio visual equipment, etc are not displayed separately but have been accounted for in the food and beverage revenues.

The following chart displays the food and beverage revenue mix as well as the respectively allocated costs:

Chart 42 Food and beverage elements revenue cost of sales payr. and r. e. other exp. result

€ '000s € '000s € '000s € '000s € '000s food 1,510 423 549 121 418 beverage 791 190 91 63 447 Σ 2,301 613 640 184 864 notes © PKF hotelexperts

source: internal calculations

Departmental income from the food and beverage department in a stabilised year is contained in 5.2.5 Total operated departments. 5.2.3 Other operated departments

The calculation of departmental income from other operated departments in a stabilised year is presented in the following chart:

Chart 43 Other operated departments revenue cost of sales payr. and r. e. other exp. result

€ '000s € '000s € '000s € '000s € '000s telecommunications 12 0 0 8 4 health club/spa 197 39 60 4 94 other operated departments 215 76 46 13 80 Σ 424 116 106 26 177 © PKF hotelexperts

source: internal calculations

Among the other operated departments are guest laundry, transportation, a business centre, a retail store/newsstand, and sports rental.

Income from the operated departments in a stabilised year is contained in 5.2.5 Total operated departments.

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5.2.4 Rentals and other income

We did not assume any income from rentals and other income. 5.2.5 Total operated departments

The following chart displays the revenue mix and results of the operated de- partments (see 5.2.1Rooms to 5.2.4 Rooms and other income):

Chart 44 Total operated expenses figures share per day per year dep. revenue total revenue € '000s € '000s % % rooms revenue 7 2,618 100 49 ./. payr. and r. exp. 1 316 12 x ./. other expenses 1 209 8 x = dep. inc. (loss) 6 2,093 80 x food and beverage revenue 6 2,301 100 43 ./. cost of sales 2 613 27 x ./. payr. and r. exp. 2 640 28 x ./. other expenses 1 184 8 x = dep. inc. (loss) 2 864 38 x other operated departments revenue 1 424 100 8 ./. cost of sales 0 116 27 x ./. payr. and r. exp. 0 106 25 x ./. other expenses 0 26 6 x = dep. inc. (loss) 0 177 42 x rentals and other income revenue 0 0 0 0 total revenue 15 5,344 x 100 ./. cost of sales 2 728 x 14 ./. payr. and r. exp. 3 1,062 x 20 ./. other expenses 1 419 x 8 = dep. inc. (loss) 9 3,134 x 59 © PKF hotelexperts

source: internal calculations

5.3 Undistributed operating expenses

The calculation of undistributed operating expenses is based on the following assumptions (estimate by PKF hotelexperts):

. payroll and related expenses: 22 employees, of which eleven in administration and general, four in sales and marketing, and seven in property operation and maintenance (see 5.1.3 Human resources): approximately 5 % of total revenue

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. other expenses: approximately 16 % of total revenue, consisting of 3 % for ad- ministration and general, 4 % for sales and marketing, 3 % for property op- eration and maintenance, and 6 % for utilities

The calculation can be summarised as follows:

Chart 45 Undistributed operating expenses figures share per day per year total revenue € thous. € thous. % administrative and general payroll and related expenses 1 266 5 other expenses 0 160 3 Σ 1 427 8 sales and marketing payroll and related expenses 0 71 1 other expenses sales 0 0 0 marketing 0 0 0 Σ 1 214 4 Σ 1 285 5 property operation and mainten. payroll and related expenses 0 62 1 other expenses 0 160 3 Σ 1 222 4 utilities other expenses 1 321 6 total payroll and related expenses 1 399 7 other expenses 2 855 16 Σ 3 1,254 23 © PKF hotelexperts

source: internal calculations

5.4 Management fees

Since we assumed that the hotel will be managed by a third party (hotel group or individual operator), we included a line item called management fees in our forecast in order to provide for the remuneration for the operator. We assumed the following management fees: base fee in the amount of 3 % of total revenue; incentive fee in the amount of 8 % of GOP (gross operating profit after deduction of the base fee); resulting in management fees of approximately 6 % of total revenue.

The calculation of the management fees is presented in the following chart (es- timate by PKF hotelexperts):

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Chart 46 Management fees figures share per day per year gr. op. profit total revenue € '000s € '000s % % base fees 0 160 9 3 incentive fees 0 138 7 3 management fees 1 298 16 6 notes 1) incentive fees calculated as xx% of adjusted GOP © PKF hotelexperts

source: internal calculations

5.5 Fixed charges

The calculation of the fixed charges (including rent, property and other taxes, and insurance) is presented in the following chart (estimate by PKF hotelexperts):

Chart 47 Fixed charges figures share per day per year gr. op. profit total revenue € '000s € '000s % % rent 0 0 0 0 property and other taxes 0 53 3 1 insurance 0 53 3 1 total fixed charges 0 107 6 2 notes © PKF hotelexperts

source: internal calculations

We assumed property taxes and insurances to amount to approximately 2 % of total revenue from the first operating year on. This amount has to be reviewed once the project is implemented. 5.6 Replacement reserves

Besides regular repair and maintenance costs, the hotel will require larger in- vestments for the replacement and renewal of FF&E. We assumed that a re- placement reserve (FF&E) will be funded on a yearly basis in the amount of 1 % of total net revenue in the first full year of operation, 2 % of total net revenue in the second year of operation, 3 % of total net revenue in the third year of operation, 4 % of total net revenue in the fourth operating year and 5 % of total revenue in the fifth operating year and thereafter; for the building, no reserve was assumed.

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5.7 Net operating income

The following chart summarises the calculation of the adjusted net operating in- come:

Chart 48 Income overview figures share per day per year gr. op. profit total revenue € '000s € '000s % % revenue 15 5,344 x 100 ./. total departmental expenses 6 2,209 x 41 = operated departments income (loss) 9 3,134 x 59 ./. total undistributed operating expenses 3 1,254 x 23 = gross operating profit 5 1,880 100 35 base fees 0 160 9 3 incentive fees 0 138 7 3 ./. total management fees 1 298 16 6 = income before fixed charges 4 1,582 84 30 rent 0 0 0 0 property and other taxes 0 53 3 1 insurance 0 53 3 1 ./. total fixed charges 0 107 6 2 = net operating income 4 1,475 78 28 reserve for ff&e 1 267 14 5 reserve for building 0 0 0 0 ./. total replacement reserves 1 267 14 5 = adjusted net operating income 3 1,208 64 23 notes 1) © PKF hotelexperts

source: internal calculations

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The following chart gives an overview of all elements of the calculation of the adjusted net operating income in a stabilised year:

Chart 49 Income elements revenue cost of sales payr. and r. e. other exp. result

€ '000s € '000s € '000s € '000s € '000s operated departments rooms 2,618 316 209 2,093 food and beverage 2,301 613 640 184 864 other operated departments 424 116 106 26 177 rentals and other income 0 0 total operated departments 5,344 728 1,062 419 3,134 undistributed operating expenses administrative and general 266 160 427 sales and marketing 71 214 285 property operation and mainten. 62 160 222 utilities 321 321 + total undistributed expenses 399 855 1,254 = sum 5,344 728 1,461 1,274 1,880 = gross operating profit 1,880 base fees 160 incentive fees 138 ./. total management fees 298 = income before fixed charges 1,582 rent 0 property and other taxes 53 insurance 53 ./. total fixed charges 107 = net operating income 1,475 reserve for furniture, fittings and equipment (ff&e) 267 reserve for building 0 ./. total replacement reserves 267 = adjusted net operating income 1,208 © PKF hotelexperts

source: internal calculations

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5.8 Key figures development

The development of the gross operating profit over the forecasting period (2014 to 2023) is displayed in the following chart:

Chart 50 Gross operating profit development revenue exp. operated departments undistribut. operating exp. gross operating profit

€ '000s € '000s %1) € '000s %1) € '000s %1) 2014 1 4,137 1,993 48 1,215 29 929 22 2015 2 4,841 2,179 45 1,272 26 1,390 29 2016 3 5,436 2,314 43 1,331 24 1,791 33 2017 4 5,715 2,406 42 1,370 24 1,939 34 2018 5 6,018 2,488 41 1,413 23 2,117 35 2019 6 6,138 2,544 41 1,442 24 2,151 35 2020 7 6,278 2,609 42 1,477 24 2,192 35 2021 8 6,386 2,660 42 1,504 24 2,222 35 2022 9 6,514 2,720 42 1,536 24 2,258 35 2023 10 6,644 2,782 42 1,568 24 2,295 35 total Σ 58,106 24,695 x 14,128 x 19,284 x Ø 5,811 2,469 42 1,413 24 1,928 33 notes 1) of total revenue; potential differences are subject to rounding © PKF hotelexperts

source: internal calculations

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Summarising, the following chart gives an overview over the development of the financial key figures (occupancy, net room rate, revenue, gross operating profit and adjusted net operating income) over the forecasting period (2014 to 2023):

Chart 51 Key figures and ratios development key ratios (per room) revenue gross operating profit adjusted net operating inc. occupancy net rate % € € '000s € '000s %1) € '000s %1) 2014 1 40 101 4,137 929 22 588 14 2015 2 46 109 4,841 1,390 29 935 19 2016 3 50 117 5,436 1,791 33 1,219 22 2017 4 52 119 5,715 1,939 34 1,280 22 2018 5 54 122 6,018 2,117 35 1,360 23 2019 6 54 124 6,138 2,151 35 1,380 22 2020 7 54 127 6,278 2,192 35 1,405 22 2021 8 54 129 6,386 2,222 35 1,421 22 2022 9 54 132 6,514 2,258 35 1,442 22 2023 10 54 134 6,644 2,295 35 1,462 22 total Σ x x 58,106 19,284 x 12,491 x Ø 51 125 5,811 1,928 33 1,249 21 notes 1) of total revenue; potential differences are subject to rounding © PKF hotelexperts

source: internal calculations

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6 Investment analysis

6.1 Methodology

Based on our financial projections and the product concept for the client’s proposed resort development outlined in chapters four and five, we conducted an investment analysis for the overall project, including the sale of all residential units. Therefore, we derived an estimate of the total development costs, made assumptions on the debt financing terms for such a project and included different sales scenarios for the residential units in order to derive the internal rate of return (IRRs) for the overall project and the return on equity investment (see attachment 2). Given the very early project stage, the results should only be regarded as a rough indication of the feasibility of the project and must be revised continuously and on a regular basis as the project progresses.

In the following, the results of the investment analysis for the various sales scenarios (with respect to the average achievable sq m price for the sale of the residential units) are summarised:

a) best case: average sales price of 3,750 €/sq m (gross floor area)

. total internal rate of return: 12.80 %

. leveraged internal rate of return (equity): 14.06 %

b) most-likely case: average sales price of 3,250 €/sq m (gross floor area)

. total internal rate of return: 9.44 %

. leveraged internal rate of return (equity): 9.56 %

c) worst case: average sales price of 2,500 €/sq m (gross floor area)

. total internal rate of return: 5.20 %

. leveraged internal rate of return (equity): 4.43 %

In the following section, the assumptions for the investment are summarised (these figures are based on information provided by the client and on estimates by PKF hotelexperts, which are derived from comparable projects).

Considering that the project will partly be financed by a bank loan, corresponding debt financing terms have been assumed. Debt financing terms depend considerably on the situation in the capital market, the client’s relation- ship with lending institutions and the quality of the project. We have based our calculations on debt financing terms which are assumed to be available for the envisaged project at the time of reporting.

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6.2 Development costs

The following chart illustrates the estimated development costs for the envisaged project which include site purchase costs, site clearance costs, con- struction costs of the hotel, ff&e, os&e, pre-opening expenses, technical services assistance fee for the hotel, construction costs of the residential and parking components, basic fit-out of the residential units, professional fees, contingency, and interest during construction. The estimated investment costs are based on a total room count of 120 units for the hotel component and 54 residential units, equalling 8,800 sq m GFA for the residential component (including terraces, balconies and gardens which were considered as sellable area with a factor of 0.5).

The following chart provides an overview of the development costs of the envisaged resort:

Chart 1 Development costs of the resort overall pro- costs costs/ percent. ject costs per room sq m of total € € € % site clearance cost 500.000 4.167 41 1 site purchase cost 10.000.000 83.333 821 26 building costs (hotel) 4.870.104 40.584 400 13 HVAC (hotel) 3.043.815 25.365 250 8 finishing (hotel) 3.043.815 25.365 250 8 building costs (parking) 875.000 7.292 72 2 buidling costs (apartment) 3.416.000 28.467 400 9 HVAC (apartments) 1.708.000 14.233 200 4 finishing (apartments) 2.135.000 17.792 250 6 cost for outside areas (pool, terraces etc.) 1.250.000 10.417 103 3 furniture, fixtures & equipment (hotel) 1.800.000 15.000 148 5 furniture, fixtures & equipment (apartment) 224.000 1.867 18 1 professional fees 2.291.008 19.092 188 6 contingency 739.702 6.164 61 2 pre-opening, TSA, os&e 960.000 8.000 79 2 interest during construction 908.911 7.574 75 2 developer's profit 908.911 7.574 75 2 estimated total development cost 38.674.267 322.286 3.176 100 ©PKF hotelexperts

sources: information provided by the client; PKF hotelexperts

We consider the above mentioned investment costs per room/unit to be broadly in line with usual levels of achievable costs for such a development.

Our estimates are based on comparable development projects in the market under consideration and in other destinations. Given that the client is the developer, we have also accounted for a developer’s profit during the development phase in our calculations.

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6.3 Debt financing assumptions

The debt financing assumptions prevalent in the market for the client’s resort development (hotel and residential components) at the time of reporting are summarised in the following:

. equity: 50 % of the total investment

. bank loan: 50 % of the total investment

. 10 % interest rate (first equity than debt; debt financing required for construction; assumed interest period for development phase: three years for equity and one year for debt)

. loan term (operation): we assumed a variable annuity corresponding to the chosen sales scenario (year 1: 60 %, year 2: 30 %, year 3: 10 %); we further assumed that due to the cash flow from the sale of the residential units, the loan will be amortized within a period of three years. As the running yield from hotel operation is lower than the 10 % interest rate, there would be a negative leverage effect. Therefore, it is beneficial to redeem the loan as quickly as possible.

. growth inherent capitalisation rate (for the calculation of the residual value): 11 % for the hotel component

Corporate taxes have not been reflected in our calculations.

Based on the development costs, we have assumed that the amount of approximately € 18,178,000 will be financed with debt, which equals about 50 % of the total development costs of the proposed resort development (including the cost of land). It was furthermore assumed that the remaining costs would be financed by equity, which corresponds to approximately € 18,178,000. 6.4 Sale of residential units

We assumed, that the maximum buildable area (8,000 sq m of GFA, excluding terraces) is used to full extent. Furthermore, in addition to the gross floor area, we have assumed an average terrace size of 20 % with respect to the size of each unit. The terraces were considered as sellable area with a factor of 50 %. In total, the sellable area of all residential units amounts to about 8,800 sq m. As the sale of the units is the main value driver for the resort (from a developer’s perspective) we would also suggest also offering the hotel units for sale. As the legal support for this option is unclear at the time of reporting, our calculation does not reflect this opportunity.

For the sale of the residential units we assumed that 60 % of the available space is sold in the first year after completion, 30 % in the second year and 10 % in the third year. Please note, that no off-plan selling was assumed, as this would lead to price reductions and the major part of the cash flow (excluding a

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certain down-payment to reserve the unit) would anyhow be due after completion.

In order to mitigate the risk of predicting future sales prices, we have developed three sales scenarios with regard to achievable sq m prices. We assumed the following average sales price per sq m (gross floor area):

. best case: 3,750 €/sq m

. most-likely case: 3,250 €/sq m

. worst case: 2,500 €/sq m

An agent’s fee of 2.5 % for external service providers was assumed. In addition to the revenues from the sale of the residential units, an average service fee of 3,000 €/year per unit was accounted for. This fee covers the resort management, maintenance of the units, reduced prices for spa and wellness etc. The respective costs (human resources, cost of goods, etc.) are reflected in the operational forecast of the hotel (see annexes 1.1 and 1.2).

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