Investing in new tourism plant in South Africa – The future of the hotel industry

Katinka SchumannDivisional Executive: Services Industries and Regions

Parliamentary Committee on TourismCape Town, 17-18 September 2013

Overview of performance

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Overview of the tourism industry:Contribution to the economy

• According to the World Travel and Tourism Council (WTTC), the estimated contribution of tourism to South Africa’s GDP, both direct and indirect, was 9.8% (R315.4 billion) in 2012.

• Such a contribution is expected to grow by 1.9% to R322 billion (9.7% of GDP) in 2013 and is forecast to rise by 4.4% p.a. to R493 billion by 2023 (9.8% of GDP).

• The tourism industry’s direct contribution to the economy was estimated at 3.2% in 2012 and is projected to increase at an average annual rate of 4.5% over the next decade.

• International arrivals to SA grew from 3,9 million in 1994 to 9,2 million in 2012. SAs 10,2% growth in foreign arrivals exceeds the global average of 3,9%.

• According to the WTTC South Africa is ranked 28 th in the world according to the size of its tourism industry.

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Overview of the tourism industry:Drivers

• Tourist travel is dependent on economic conditions – for instance, when disposable income growth is stagnant, travelers tend to opt for cheaper accommodation and types of vacation.

• Critical factors also at play from the demand perspective include unemployment, poverty and income inequality.

• Considering the impact of interest rates on household debt, access to credit, and therefore on disposable income and the propensity to spend less on “luxuries” and changes in the cost of capital affect spending patterns on accommodation.

• Relative exchange rates influence foreign visitor arrivals and their spending propensity on domestic tourist activities (including accommodation).

• It is anticipated that for the immediate future the exchange rate will remain at levels that attract foreign tourists and deter domestic travel abroad

• The favourable interest rate environment is also expected to prevail until 2015.

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– Retail tourism generally involves visitors from neighbouring states and other African countries, who come to SA to purchase goods not readily available in their own home markets.

Retail tourism is dominated by personal shopping accounting for 60% of the total retail shopping of 25.9% in 2012.

– Medical tourism has increased progressively over the years, peaking at 4.6% in 2010 and declining thereafter to 3.% in 2012.

– Sports tourism is a growing business in South Africa and a niche market within the broader tourism industry.

More than 10% of all foreign tourists come to watch or participate in a sports event, with spectators accounting for about 60% to 80% of these arrivals.

– Adventure tourism in South Africa is a relatively small but growing niche segment as tourists worldwide increasingly seek alternative and more exciting types of vacations.

Overview of the tourism industry:Foreign tourism – niche segments

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• Gauteng remained the most visited province, with 44.6% of tourist arrivals visiting the province. Despite being the most visited province in 2012, the % of foreign tourists visiting Gauteng has declined by approximately 2 percentage points.

• Mpumalanga moved to 2nd most visited province and the Western Cape slipped to 3 rd place (shares of 15.2% and 14.7% respectively of tourist arrivals visiting these provinces).

Overview of the tourism industry:Foreign tourism (cont.)

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Overview of the tourism industry:Tourist accommodation

• Leading up to the 2010 Soccer World Cup, significant expansion in tourist accommodation occurred, especially in the hotel segment, with 4 300 new hotel rooms. The period following 2010 saw a net increase of only 1 000 new rooms (hotel rooms 300; lodges and B&Bs 600; and guest houses forfeiting 300 rooms).

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• Between 2007 and 2010 the number of overnight stays declined by 1 400 000 in total, with a decline of 1 100 000 in the hotel category. The expanded capacity(+1.6% p.a.) and reduced sales(-2.3% p.a.) resulted in occupancy rates remaining relatively low and overall income per room (room rates) staying relatively flat.

• Post-2010, income for the guest houses and lodges categories recorded substantial growth.

• For all categories, excluding guest houses, occupancy rates(45.8%) have not recovered to pre- economic crisis levels (45.8%).

Overview of the tourism industry:Tourist accommodation (cont.)

2007

2008 2008

2010 2012

2011

2005

2013 2004

200415.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

Total Industry Hotels Caravan Parks& Camping

Sites

Guest housesand guest

farms

Lodges,B&B's& Other (Nec)

Occ

upan

cy R

ate

Occupancies (High, low and current)

Source : StatsSA and IDC calculations

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• It appears that occupancy rates has bottomed out and are steadily increasing, although not yet near pre-recession levels

• Room rates are increasing slowly in nominal terms, however in real terms rates has remained stagnant since 2007 especially in the 3 – 4 star segments

• Conversely capex cost continues to increase and hence business has to operate smarter to remain viable

Overview of the tourism industry:Occupancy and rates: pre-recession to current

The role of the IDC and focus areas

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Vision, mission, objective and values

Valu

esVi

sion To be “the primary driving force of commercially sustainable industrial development and innovation to the

benefit of South Africa and the rest of the African continent”

Mis

sion

The IDC is self-financing national development finance institution whose primary objectives are to contribute to the generation of balanced, sustainable economic growth in Africa and to the economic empowerment of

the South African population, thereby promoting the economic prosperity of all citizens. The IDC achieves this by promoting entrepreneurship through the building of competitive industries and enterprises based on

sound business principles.

Obj

ectiv

e

Passion Professionalism Partnership

Out

com

es

Lead industrial capacity development

Primary: Facilitate sustainable direct and indirect employmentSecondary:• Improving regional equity, including the development of South African rural areas, poorer provinces and industrialisation in

the rest of Africa;• Promoting entrepreneurial development and growing the SME sector• Transformational impact on communities and growing black industrialists• Environmentally sustainable growth• Growing sectoral diversity and increased localisation of production

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What is the IDC offering?

Our purpose is to assist the Tourism Industry to grow sustainably by creating additional capacity, maintain capacity and enhance product offerings to

domestic and foreign tourists (both in SA and the Rest of the African continent). We work in partnership with entrepreneurs, the government (national and regional) and other financiers to ultimately fund bankable business plans that require substantial

capital outlay (i.e. accommodation stock, niche tourism).

How is the Tourism SBU approaching the development of these sectors?

• IDC aligns its activities with industry goals as indicated in the National Tourism Sector Strategy, New Growth Path and National Development Plan

• Proactive development of projects in subsectors through identifying potential projects, project scoping, pre-feasibility and feasibility studies.

• Assessment and funding of applications as received (head office Gauteng, regional offices in every province)

• Support for government programs in some subsectors

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IDC’s participation in the industry to date• Involved since 1993. Investment of approximately

R5 billion facilitated creating about 14 000 direct jobs.

• Current exposure: R2,9bn, plus R720m undrawn to 88 clients

• Exposure in ROA: R1,1bn, plus R0,25 undrawn in Botswana, Ghana, Mozambique, Uganda, Nigeria and Zimbabwe.

• 44% of value and 41% in number to Black owned companies.

• IDC acted as catalyst to draw in commercial funders (with initial focus on accommodation facilities) and will continue to supplement with providing risk funding with additional focus on niche subsectors.

• Historically facilitated successful BEE ownership transactions eg Protea Hospitality, Tourvest and community stakes

• Future direct lending roll-out by should play a role in supporting micro and small and

medium entrepreneurs in the tourism industry.

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Mambedi Country Lodge, Makhado, Limpopo

Premier Hotels Bastion of the Deaf, Newlands, Cape Town

Windtown, Langebaan, Western Cape

43 room lodge3 starConferencing facilities

5 Facilities for hotel development over the past 20 years

3 star Park Inn Hotel, suited to the needs of all categories of disabled

Kite surfing school,Accommodation,Restaurant

Rural, 100% BEE, 61 jobs, SME

BEE participation in one of the propertiesAssisting a smaller operator to increase its footprint

158 jobs, provide sustainable income for Deaf community of SA to reduce dependency on government grants

30 jobs,

5 years operational 20 years Operations to commence 2014 10 months operational

IDC funding: - R5.6 million.

Current exposure: - R280milion

IDC funding:-Loan: R76.5 million-Equity: R15 million -People with Disability fund: R8 million

IDC funding: - R19,7million- R15,2 million loan,- R4,55 million equity (IDC and Staff)

CASE STUDIES

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Budget Resort Destination, Country wide

Skywalk and Cable Car, Mpumalanga

Baviaanskloof mega resort, Eastern Cape

Partnership: - National Department of Tourism

Partnership: -MTPA-Private project promoter-Local communities

Partnership: - Eastern Cape Parks Board

Purpose: to develop a budget resort destination suitable to the lower end of the domestic market with the intention of activating a market segment that is not currently travelling.

Purpose: to enhance existing natural attractions by developing a world class tourist attraction that would be income generating and benefit the local community and create demand for longer stay in the province and thereby benefitting other tourism facilities in the area.

Purpose: The development of various areas within the reserve with suitable accommodation and other facilities to establish a mega reserve.

Stage of development: - Pre-feasibility.

Stage of development:-Skywalk – Pre-implementation.-Cable Car – Feasibility

Stage of development:- Pre – feasibility and SEA completed.

Estimated project size:- Unknown at this stage

Estimated project size:-Skywalk – R100 million-Cable Car – R100 million

Estimated project size:- R100 million

Case Study: Projects currently in development

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Benefits of IDC participation in tourism projects

• Long term investor with risk appetite• Funding suited to the needs of the industry• Able to sustain cyclical ups and downs in the market• Patient approach with distressed clients

• Innovative strategies• Pricing – continuously strive to source concessionary funding for benefit of our clients • Business support – where management shortcomings are identified, pro-active intervention• National approach – seeking better regional spread, focus on rural destination building• Tourism product development – our strategic goal is to create demand where it may not exist•Huge potential for SA Inc participation in Rest of Africa tourism development opportunities with IDC support

Prospects and opportunities

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• Global growth expected to remain subdued in 2013 (current IMF projection at 3.1% vs 3.3% forecast in April).

• The global growth is expected to increase during 2014, especially in important source countries for tourist arrivals to South Africa.

• Growth in Sub-Saharan Africa (68% of South Africa’s international tourist arrivals) is projected to remain strong.

• Increased welfare (GDP per Capita) increases the propensity for travel. (36% of African land arrivals are retail tourism focused and visiting friends or relatives account for 32%)

-2

0

2

4

6

8

10

12

World Advancedecono-mies:

UnitedStates

Euro area Japan Emergingecono-mies:

China India Brazil Sub -Saharan

Africa

SouthAfrica

% C

hang

e (y

-o-y

)

GDP growth around the globe

2010 2011 2012 2013f 2014f

Source: IDC, compiled from IMF data

Demand conditions affecting tourism and travel – Global growth outlook

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Demand conditions affecting domestic tourism and travel outlook

• IDC’s revised medium term forecasts indicate that short-term prospects declined during the six months between March and August 2013, although the long-term (up to 2017) is expected to remain as projected in March 2013.

• In line with expectations, rate of growth in derived demand due to public sector fixed investment activity is likely to slow, whilst private sector investment remains muted.

• Household consumption expenditure is anticipated to remain muted, declining in 2013 and slowly recovering thereafter.

Source : IDC projections

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• Growth in consumer spending slowed sharply during 2012 and the first half of 2013.

• After having recorded a brisk 4.8% expansion in 2011, real household consumption expenditure moderated to 3.5% in 2012 and to 2.3% (quarter-on-quarter) in the first 3 months of 2013.

• Consumer spending on services (including accommodation) slowed rapidly since the first 3 months of 2012. A small turnaround is evident in the first quarter of 2012 albeit at around 1%. This implies that low growth in domestic tourism can be expected.

• Spending on durable goods (such as motor vehicles and other durable equipment) saw its growth declining rapidly over the past year, similarly, spending on non-durable goods (e.g. food, beverage, tobacco, petroleum and pharmaceutical products) also showed a more moderate pace of increase recently.

• In turn, household spending on semi-durable items (e.g. clothing, footwear, household textiles) still grew at a fairly robust pace.

0

2

4

6

8

10

12

14

16

18

Total PCE Durable goods Semi-durablegoods

Non-durable goods Services

% C

hang

e (q

-o-q

)

Real growth in private consumption expenditure

11 Q3 11 Q4 12 Q1 12 Q2 12 Q3 12 Q4 13 Q1

Source: IDC, compiled from SARB data

Demand conditions affecting domestic tourism and travel outlook

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• SA is finding it extremely challenging to make substantial inroads on the employment front.

• Weak job creation and prospects are impacting on household income, spending power and sentiment.

• Job insecurity also heightened by prevailing labour market instability.

• Unemployment rate at 25.6% in Q2 of 2013, or 4.7 million people without work.

• Government (bulk of “community & social services” sector) has been key driver behind the uptick in job creation (+ 389 000 jobs since Q4 2008).

• Compared to Q4 2008, shortfall in private sector employment by Q2 2013 as follows:

– Retail and wholesale trade (-258 000); – Manufacturing (-209 000); – Construction (-108 000). – Catering & accommodation (+47 000)

90

95

100

105

110

115

120

125

Q1 Q22008

Q3 Q4|

Q1 Q22009

Q3 Q4|

Q1 Q22010

Q3 Q4|

Q1 Q22011

Q3 Q4|

Q1 Q22012

Q3 Q4|

Q1 Q22013

Inde

x: 2

008

Q1

= 10

0

Employment trend

Community and social services

Private sector

Total employment

Source: IDC, compiled from Stats SA data

Demand conditions affecting domestic tourism and travel outlook(cont.)

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SA fixed investment outlook

• Private sector investment propensity being restrained by prevailing uncertainty and risks globally and domestically, coupled with spare production capacity.

• Capital spending by public corporations was strong in 2012, having expanded by 9.1%, relative to 1.5% in 2011.

• Investment spending by public corporations (e.g. Eskom and Transnet) has slowed down substantially, although from a very high base. Contractions anticipated in real terms in 2013 and 2014.

• Sub-optimal localisation associated with decelerating public sector capex.

-10

-5

0

5

10

15

20

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Perc

enta

ge

Contribution to growth in fixed investment

Private sector Public corporations

Government Total GFCF

Source: IDC, compiled from SARB data

(% Growth)

Forecast

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• Economic prospects for SA have worsened since start of 2013. IDC’s forecast for GDP growth was lowered (in June) to 2.1%.

• Consumer spending projected to slow down to 2.9% in 2013 (3.5% in 2012) as higher inflation, high household debt levels, moderation in real disposable income growth and adverse labour market developments constrain households’ spending ability.

• Lacklustre investment activity expected in 2013-2014, with stronger growth subsequently.

• Exports likely to remain under pressure in 2013 despite weaker currency, due to weak global demand and strong competitive forces.

• Import values expected to remain relatively strong due to ongoing public sector capex and impact of weaker rand (crude oil, capital goods etc.).

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2012* 2013 2014 2015 2016 2017

% C

han

ge

(y-o

-y)

SA: Economic growth (GDP)

March 2013 forecasts

August 2013 forecasts

SA economic growth prospects

Source : IDC projections

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Prospects and opportunities (cont.)

• The PICC’s Strategic Integrated Projects (SIPs) should create demand for accommodation in and around the geographic areas that are outside of the main metropolitan areas and other tourist areas.

• This demand is further supported by the 69% of tourist arrivals being from Africa land arrivals.

• The SKA and Meerkat projects in the Karoo will require accommodation infrastructure to cater for the visiting dignitaries, scientists and tourists.

• Tourists are increasingly looking for experiences off the beaten tourist track, creating opportunities in rural areas (with local community involvement) to present a uniquely South African experience.

• Lodges, guest houses and similar accommodation are increasingly favoured.

• The targeted infrastructure investment to address spatial imbalances will require the development of suitable tourism infrastructure in order for tourism to add to the economic development of these under serviced areas.

Africa Tourist Land Arrivals

1 618 323

768 727

1 104 404

1 847 974

452 158

200 841

Zambia169 555

Malawi142 063

Source: : Presidential Infrastructure Coordinating Commission Report 2012,IDC calculations based on Annual Tourism Report

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Prospects and opportunities

• Strong growth is anticipated for the tourism sector:

– The WTTC projects growth in foreign tourist arrivals of 4.6% p.a. from 2014 to 2023.

– PricewaterhouseCoopers LLP projects 5% average annual growth in foreign tourist arrivals and growth of 3.4% p.a. in domestic tourism

• The positive outlook is also reflected in the Horwath HTL Hotel Performance Confidence Indicator, with the bulk of hotel managers expecting occupancies to rise, average room rate growth and growth in total revenue at their respective hotels.

• Hotel managers are of the opinion that the corporate business demand market segment will drive much of the anticipated growth, followed by the government and conference/ MICE demand market segments. The wholesale leisure and tour group demand market segments registered the lowest levels of confidence in terms of anticipated growth.

• The tourism sector is expected to perform well, with growth continuing to outpace that of the national economy, thereby increasing the contribution of tourism to national GDP, largely due to the expected:

– Growth in tourism from Asia (China and India) and South America (Brazil, Colombia and Chile);– Growth in business tourism, led by the MICE industry;– Investment in tourism infrastructure;– Intensive marketing of South Africa as a tourist destination.

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Summary of opportunities and challenges for Tourism

• Opportunities– Growth in emerging markets (BRICS and rest of

Africa) an opportunity for International arrivals– Infrastructure projects and other economic

development projects creates demands for business hotels in secondary towns and cities

– Low interest rates to remain until late 2014 creates an opportunity for capital investment.

– Due to the lead times to opening (EIA and construction could take 3-4 years) new developments often miss the peak, due to the cyclical nature of the business. Is it now an opportune time to start planning for the next peak?

– Strong rand (expected in the short term) makes SA more attractive for international travelers, whilst at the same time rendering international destinations unattractive for South Africans, thereby encouraging domestic travel

• Challenges– Household consumption remains under pressure– Consumer spending on luxury goods is down– Corporates / government / entrepreneurs continue to

travel for business, but budgets under pressure, putting achieved rates under pressure

– High unemployment rate

Thank you