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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
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Overview of performance
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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.

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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.

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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.

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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).

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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).

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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
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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

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The role of the IDC and focus areas
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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
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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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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.

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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)
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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
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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

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Prospects and opportunities
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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)

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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
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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.

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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)

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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.

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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
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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
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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

• 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

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Thank you