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Title: Investing%20in%20new%20tourism%20plant%20in%20South%20Africa%20


1
Investing in new tourism plant in South Africa
The future of the hotel industry
  • Katinka Schumann
  • Divisional Executive Services Industries and
    Regions

Parliamentary Committee on Tourism Cape Town,
17-18 September 2013
2
Overview of performance
3
Overview of the tourism industryContribution to
the economy
  • According to the World Travel and Tourism Council
    (WTTC), the estimated contribution of tourism to
    South Africas 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 industrys 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 28th
    in the world according to the size of its tourism
    industry.

4
Overview of the tourism industryDrivers
  • 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.

5
Overview of the tourism industryForeign tourism
niche segments
  • 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.

6
Overview of the tourism industryForeign tourism
(cont.)
  • 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 3rd place (shares of
    15.2 and 14.7 respectively of tourist arrivals
    visiting these provinces).

7
Overview of the tourism industryTourist
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 BBs 600 and guest houses
    forfeiting 300 rooms).

8
Overview of the tourism industryTourist
accommodation (cont.)
  • 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).

Source StatsSA and IDC calculations
9
Overview of the tourism industryOccupancy and
rates pre-recession to current
  • 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

10
The role of the IDC and focus areas
11
Vision, mission, objective and values
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
Vision
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.
Mission
Lead industrial capacity development
Objective
  • Primary Facilitate sustainable direct and
    indirect employment
  • Secondary
  • 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

Outcomes
Passion
Professionalism
Partnership
Values
12
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

13
IDCs 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.

14
CASE STUDIES
Mambedi Country Lodge, Makhado, Limpopo Premier Hotels Bastion of the Deaf, Newlands, Cape Town Windtown, Langebaan, Western Cape
43 room lodge 3 star Conferencing 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 properties Assisting 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)
15
Case Study Projects currently in development
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
16
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

17
Prospects and opportunities
18
Demand conditions affecting tourism and travel
Global growth outlook
  • 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
    Africas 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)

19
Demand conditions affecting domestic tourism and
travel outlook
  • IDCs 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
20
Demand conditions affecting domestic tourism and
travel outlook
  • 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.

21
Demand conditions affecting domestic tourism and
travel outlook(cont.)
  • 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)

22
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.

23
SA economic growth prospects
  • Economic prospects for SA have worsened since
    start of 2013. IDCs 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.).

Source IDC projections
24
Prospects and opportunities (cont.)
  • The PICCs 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.

Source Presidential Infrastructure
Coordinating Commission Report 2012, IDC
calculations based on Annual Tourism Report
25
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.

26
Summary of opportunities and challenges for
Tourism
  • 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
  • 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

27
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