By: Heba Eid
With its strategic central location surrounded by the Mediterranean and Red Seas, warm weather, and its historic background and monuments, Egypt always had an influx of visitors and tourists.
Thus, the hospitality sector has always flourished – up until the 2011 revolt and the ensuing political instability led to the deterioration of a once blossoming tourism sector. Some cities have fared better than others, while others had many hotels closures.
Greater Cairo Overview:
As of 2016, Greater Cairo boasted a total of 28,000 keys distributed over six districts, namely 6th of October, Pyramids/Giza, Downtown Cairo, Heliopolis, Maadi, and New Cairo according to a Colliers International Report entitled Cairo’s Hospitality Market. In the past few years, hotel demand has seen a significant shift towards hotels located in the east (New Cairo) of the capital and the west (Giza and 6th of October), mainly due to the development of new urban resorts, offering more leisure and meeting facilities.
Each district in Cairo, with its unique characteristics and surroundings, drives an influx of guests targeting different segments and facilities.
New Cairo has a large MICE (meetings, incentives, conferences and events) market and is regarded as a weekend getaway for locals. Moreover, global financial institutions and oil corporations bring an inflow of guests to the district.
6th of October hotels witness a high demand from GCC citizens, where 61% of the hotels have five-star ratings. The Pyramids and Giza district is driven by leisure demand and has a low average daily rate (ADR) given the area’s saturation with unbranded hospitality ventures.
Downtown Cairo is home to a large number of embassies and thus international visitors, whether corporate or government officials, the majority of whom flock to downtown hotels. In addition, the hotels’ proximity to the Nile and their central location is strong driver of leisure tourists primarily from the GCC region, followed by EU visitors. In 2015, hotels in downtown saw a massive 44% increase in occupancy level, largely due to the Suez Canal expansion.
Heliopolis has witness a steady increase in corporate demand, with visitors from the GCC and Africa, especially Libya, dominating the guest inflow. Medical tourism is quite popular in the Heliopolis district, attracting guests, as well as domestic and regional medical and pharmaceutical conventions.
The Maadi district is a residential district first and foremost, and is largely popular among expatriates living in Egypt. Thus visiting friends and relatives (VFR) are quite common, while the hospitality market in the area is mainly unbranded.
Greater Cairo Source Markets
In the past, Cairo’s source markets for the hospitality sector were mainly Europeans and Americans visiting for leisure purposes, according to the Colliers report . However, following the exodus of Western tourists in the aftermath of the 2011 uprising and the ensuing socio-political turbulence, Gulf visitors were primarily responsible for the bulk of the demand on hotels in Greater Cairo. They now account for approximately 55% of all guests in Cairo, mainly visiting for leisure and business purposes. Meanwhile, approximately 10% of hotel guests are from the EU/USA, whereas local guests account for 20% of hotel demand.
Two hotels are expected to be built by the end of 2016, namely the St. Regis and Steigenberger Tahrir Square, both located in the downtown area. In addition, luxury hotel developments, such as Emaar’s The Address Hotel, are also in the pipeline. Approximately 50% of the 1,300 rooms in the pipeline are expected to be delivered this year, with the rest postponed to 2017, according to Cairo Real Estate Market Overview Report by JLL.
By the end of the second quarter, the hospitality sector saw a 5% increase in occupancy rates, compared to the same period in 2015. This growth was preceded by a 60% increase in occupancy rates compared to the previous year, signaling a continuous positive growth trend. The average daily rate (ADR) saw a 5% increase up to May 2016, against the same period of 2015, according to another Colliers International Report, the Egypt Quarterly Review and Forecast report.
Mediterranean and Red Sea Hospitality Sector
While the hospitality sector in Greater Cairo is slowly recovering and experiencing a period of growth, the hotel market outside of Cairo is not as fortunate. In the past, the Mediterranean and Red Sea Hotels were filled to capacity with international tourists, primarily from Europe and the United States. Following the downing of the Russian Metrojet plane in October 2015 and the Egypt Air crash earlier this year, international tourism in Egypt almost came to a complete halt, with Egypt recording a 54% decline in the number of tourists compared to 2015. In the first half of 2016, Egypt registered 2.3 million tourists versus 4.8 million tourists in the first half of 2015.
With the steep decline in tourists, many hotels were forced to shut down nationally, especially after the downing of the Russian Metrojet flight in October 2015. About 220 hotels have closed down in Sharm El Sheikh, Hurghada, Marsa Alam, Safaga, Luxor, and Aswan, according to Ahmed Balbaa, chairperson of the tourism committee in the Egyptian Businessmen’s Association (EBA), as reported by Daily News Egypt.
Half of Marsa Alam’s hotels, 35 hotels, closed down due to the decline in tourists, especially from Russia, the UK, and Italy, said Tarek Shalaby, Vice President of the Tourism Investment Association in Marsa Alam.
In an effort to weather the dire economic conditions following the decline in international tourists, the hotel market has turned its attention towards local tourism to simulate demand. Some cities, like Alexandria, have experienced a 100% growth rate, while other cities, like Sharm El Sheikh and Hurghada, are witnessing plummeting occupancy rates. Once the imposed travel bans are removed, occupancy levels are expected to turn around.
Similarly, for the Red Sea the number of approved hotel rooms—executed, under construction, or planned—in the Red Sea governorate are 105,977 rooms. The Red Sea governorate alone has a total of 77,720 constructed hotel rooms, according to Tourism Sector Overview report by Invest Gate.
Hurghada is expecting 1,000 additional keys by 2017, with the Fairmont and Hilton hotels in the development pipeline, according to Colliers International. Meanwhile, occupancy rates have plummeted by a staggering 48%, compared to the same period in 2015, forcing 34 hotel closures in 2016. Despite the low number of international tourists, the ADR is expected to increase by 7% due to the rise in domestic guests. MICE events are now targeted by hotels to increase occupancy levels, especially events from the pharmaceutical industry.
Ain Sokhna, on the other hand, has a total of 25,286 approved rooms, whether executed, under construction, or planned, of which 10,194 rooms already built.
Shifting to the Northwest Coast has to date the approval of 1,644 hotel rooms with 1,626 existing hotel rooms. The Northwest Coast demand is most seasonal, operating mainly in the summer months, with domestic tourism as the primary source of income.
Occupancy levels forecast in Alexandria are estimated to record 70% by the end of 2016, a 1% decrease compared the same period last year. The ADR jumped up by 20% by the end of Q2, compared to the same quarter of 2015. Fuelled by domestic price-sensitive travelers, occupancy levels for high-end hotels remained low, with guests opting for cheaper, unbranded establishments. A new hotel is in the pipeline, Citymax Alexandria, scheduled to enter the market in 2018. The demand for the market in Alexandria is fueled primarily by the domestic market and GCC tourists, where they account for 72% of total demand.
The South Sinai governorate follows closely with 82,614 rooms. South Sinai includes 50,464 constructed hotel rooms.
Sharm Sheikh’s hospitality sector is struggling amid the decline in tourists to the region, where 54 local and unbranded hotels have been forced to shut down in 2016 alone, given the bleak market conditions. The occupancy level took a 52% dip in the second quarter of 2016, compared to the same period in 2015. The ADR declined by 6% in the second quarter as well.
Despite the austere market condition, a new development project is in the pipeline, the City Stars complex. The complex is expected to include a Raffles, Fairmont and Swissotel, and is scheduled to be completed by 2019.
Impact of Upcoming Real Estate Projects On Hospitality Sector
There are several development projects on the horizon, including Cairo Gate, Qatari Diar’s Nile Corniche Project, Uptown Cairo, Citadel Plaza, and Mall of Egypt. All of these projects are expected to improve the domestic, regional, and international demand on tourism in Egypt.
The socio-political instability, incidents such as plane crashes, and Egypt’s overall critical location in the region have caused the tourism sector to plummet. Egypt heavily relies on tourism to generate revenue as a main source of foreign reserves, with the hospitality market as one of its main beneficiaries. Tourism income in Egypt saw a massive drop in 2016, losing 80% of revenues compared to the same period in 2015, according to Daily News Egypt. The imposed travel bans on Egypt have been a major factor in driving tourists away, which led to hotel closures as seen in Sharm El Sheikh, Marsa Alam, Hurghada, Safaga, Luxor, and Aswan. The volatility of the region also contributes to the problem at hand.
Discussions are currently underway in the parliament regarding the value-added tax (VAT), which, if implemented, would heavily burden the struggling sector. The VAT law is still being studied, but if imposed would range anywhere between 10-14%; the exact rate is yet to be decided. The tourism sector would suffer an added financial burden, given the low occupancy rates. Head of the Tourism Investors Association in Sahl Hasheesh, Maged Fawzy, is demanding that tourism sector have zero taxes imposed on them, according to Daily News Egypt. The tourism sector should be treated as the export sector, added Fawzy.
While the current picture might seem grim, there is still room for optimism for Egypt’s hospitality sector. Recently, there has been a shift towards four-star and mid-range hotels from high-end luxury hotels, which is key to attracting price-sensitive travelers from emerging economies. According to MENA Hotel Forecasts report by Colliers International, Cairo and Alexandria are expecting a 21% and 11% increase in demand, respectively.
A $500 million loan from the Saudi Fund for Development will be channeled towards transportation, housing, and agriculture projects in Sinai—all of which are expected to pave the way for a more secure area, more developments, and consequently more tourists.
The International Monetary Fund has agreed to a $12 billion three-year loan to Egypt, conditioned upon the introduction of a number of reform initiatives, including easing red tape for foreign investors. The approval of the IMF loans is expected to bolster foreign investments and revive the stagnant economy, and consequently revitalize the hospitality sector.
Once the review of airport security procedures is completed, travel bans will be lifted and Russian tourism will begin to flow again, said Hisham Ali, Chairperson of the Investors Association in Sharm El-Shiekh, to Daily News Egypt.
A flailing tourism industry in Egypt is severely testing the resilience of the hospitality sector in Egypt. Over the course of 12 months, the hotel market has flourished in some areas, and plummeted elsewhere, with hotel closures a testament to the tourism calamity.
Greater Cairo saw a steady increase in the occupancy rate, with GCC and corporate visitors driving the demand. Domestic tourism has been a lifesaver to many hotels in Sharm El-Sheikh, causing an increase in occupancy in many cases.
Despite the uncertainty facing the hospitality market, and the current market conditions, one thing remains true; the hospitality sector may have lost the current battle, but the long-term outcome is yet to be seen. The Cairo market is expecting two new hotels to enter the market by the end of 2016, Alexandria anticipates the completion of Citymax Alexandria by 2018, and Sharm El Sheikh will have three new hotels in the City Stars Complex by 2019 – all of which indicate investor optimism for the sector bouncing back.