By Julian Nabil
Egypt’s hospitality sector is taking an upward trend after the Central Bank of Egypt (CBE) decided to float the local currency, making the country cheaper than ever and more appealing to tourists, accordingly increasing demand from international investors and tourists. Invest-Gate gives an overview on the sector pre-and post the devaluation of the EGP.
“The EGP floatation has affected the hospitality sector in terms of costs and services prices. The devaluation led to increased costs, thus leading to a rise in the prices of services offered yet still reasonable for tourists,” Chairman of Egyptian Experience, a real estate developer, and British Egyptian Business Association (BEBA) member Mohamed Montasser tells Invest-Gate. Montasser adds that hotels will manage to cover their costs and generate higher revenues if the number of tourists increases during the upcoming period.
EGP Float Impact on Hospitality sector
The hospitality sector is seen to be gradually improving following the EGP float as the country has become a competitive destination and is now more affordable to foreign markets, in addition to the state’s efforts to address issues like socio-political unrest due to high-profile security incidents and terrorism threats.
The stabilization of the exchange rate – standing at around EGP 18 per one USD by the end of Q1 of 2017 – has lured foreign investments into the sector, reflecting a positive outlook for the country’s economy, according to the Jones Lang LaSalle (JLL) Q1 of 2017 report. The new exchange rates are likely to provide higher income in local currencies, which will have a positive effect on hotels’ bottom lines, the report states.
Meanwhile, the devaluation of the Egyptian pound has led to a significant rise in average daily rate (ADR) figures – measuring the average rate paid per night – to reach EGP 1,276.25 in January 2017. However, ADR decreased 19.1% when reported in USD, a report by STR, a hotel data company, adds.
In the first three months of 2017, the country generated USD 1.6 bn worth of tourism revenues from around 1.7 mn inbound tourists compared to around 1.2 mn in the same period last year, according to official data. Germans topped the list of tourists with 227,000 visitors in Q1 of 2017, followed by Ukrainians at 226,000 tourists, and Britons at 74,000.
“There has been an increase in tourist inflow from Japan and China recently, who account for a large part of the sector’s growth,” Montasser says. “A recently signed deal entails 65 flights to Luxor, with 16,000 Japanese tourists on board,” he adds.
The sector is expected to see “massive” recovery in 2017 as foreign airlines from major markets, including Russia, the UK, and Germany resume flights to the country’s tourist attraction, according to Tourism Minister Yehia Rashed. Revenues from these markets account for more than 40% of total tourism inflows to Egypt in past sessions, Rashed adds.
January saw an improvement in occupancy from the very low levels in the last 15 months. Occupancy rates rose 24.3% y-o-y in January 2017 to reach 47.5% when compared to the same period in 2016, STR figures showed.
The CBE devalued the local currency by 14.5% in March 2016, only to adopt a free-float exchange rate regime, last November, to regain investor confidence in the country’s economy and achieve monetary stability to lower inflation levels, according to a released statement. In 2016, the EGP float resulted in a “sharp” rise in hotels’ average daily rate (ADR) when reported in local currency to reach EGP 793.97. And year-end ADR growth was 2.5% when calculated in USD, according to STR.
Supply and Demand
In line with the EGP devaluation, hotel supply rose in 2016 and is expected to see higher growth rates as new hospitality projects are launched in the upcoming few years to meet projected higher demand, a report by BNC, a construction business platform, highlights.
“Egypt now has around 220,000 ready hotel rooms and another 230,000 in the pipeline,” Montasser confirms.
The hotels’ supply in the capital already grew by 3% in 2016 after the opening of numerous locations such as Steigenberger Hotel El Tahrir, Westin Golf Resort, Westin Katameya Dunes, and Nile Ritz-Carlton, Colliers International said in its 2016 review on Egypt.
The first quarter of 2017 also saw the opening of the Westin Golf Resort in New Cairo. The capital will see further growth in its hospitality supply in 2017, with the scheduled opening of St. Regis Cairo this August, along with expectations of the planned airport in 6th of October City attracting hotel investors to western Cairo, the report adds.
Sharm El Sheikh saw an increase of 3% in 2016 in its supply, following the opening of the 610-bedroom 5-star Steigenberger Alcazar. Supply is expected to continue to rise at the same rate until 2019, in line with the expected launch of the 250-bedroom expansion of Hilton Sharks Bay hotel in 2017, Colliers anticipates.
The government is launching initiatives, aiming to support hotels’ supply across the country. For example, CBE has proposed to fund the refurbishment of worn-out hotels, whose owners are unable to renovate them by providing EGP 5 bn worth of loans with an interest rate of 10%, according to JLL. This will allow hotel owners to create value from more efficient operations from these hotels, which will be more appealing to the tourists.
Cairo is considered one of the most attractive tourism destinations in Egypt to foreigners. STR says that Cairo hotels posted a 20.6% y-o-y increase in occupancy to 68.6% for the month, with Colliers’ forecast that occupancy rates would reach 73% in 2017. Similarly, Sharm El Sheikh’s occupancy also rose to 29.9% and is expected to reach 41% in 2017.
Hurghada and Alexandria’s occupancy rates are projected to reach 40% and 75% respectively, and they are expected to see constant supply in 2017.
The Hospitality Sector Prior to EGP devaluation
In the past two years, the industry saw a slowdown, especially, after some European countries like Russia and Britain suspended flights to Egypt due to security concerns following the 2015 crash of a Russian passenger flight in Sinai.
Between 2015 and 2016, tourism income also declined by 44.3%. The inflow of tourists fell 40% to 5.3 mn visitors in 2016, according to a report by BNC Network.
The number of tourists fell from 15 mn before the 2011 revolution to reach below 1 mn annually, and plunged further since then. In addition, Egypt’s revenues from tourism dropped 44.3% y-o-y to USD 3.4 bn in 2016, according to CBE data. As a result, occupancy rates fell 14.5% y-o-y to reach 45.8% in 2016 as compared to 2015, according to STR. Demand was also down 15.3% for full-year 2016.
The hospitality sector has suffered financial pressures in the past period due to their commitment to pay salaries and other expenses despite low income levels resulting from a demand decline, according to Montasser.
Challenges and Potentiality
“The sector is expected to pick up in 2017, targeting a return to tourism market levels seen in 2010, a peak year for tourist numbers which neared 15 mn visitors,” Montasser says, adding that “We did it before with the same conditions, so it is possible’”.
“Egypt has what it takes to regain tourism as it has airports and hotels with sufficient capacity to meet traffic, in addition to the recovery of security conditions,” Montasser explains.
The government should put in efforts to revamp the country’s image and regain stability, including “promoting good news, events held in Egypt and visits, by internationally acclaimed figures such as the recent one by Pope Francis, thus sending a positive message to the rest of the world,” Montasser notes.
On another note, Montasser believes that the country should find a mechanism to offer financing for closed hotels, cruises, and other tourism institutions, which need around EGP 204 mn to reopen.
Cities on the Red Sea coasts such as Sharm El Sheikh, as well as the busy capital of Cairo are expected to be the most attractive destinations to tourists, head of the Tourism Investors Association in South Sinai, Hisham Ali, told local media.
Once travel bans are lifted from countries like Russia and Britain, the number of tourists is expected to rise to 10.5 mn in 2017, up from 5.3 mn last year, local media quoted an official at the Egyptian Tourist Authority (ETA) as stating. Russia was the number one source of tourists to Egypt, comprising approximately 68% of Egypt’s tourist inflows in 2015.