CHTIC discusses emerging markets, industry state

The Caribbean Hotel and Tourism Investment Conference is arguably the year’s most important talking-shop for the industry reports Journalist Joe Shooman.
It brings together heads of government, tourism professionals and high-level executives for two days of networking and analysis of the industry.   This year’s event was held at the San Juan Conference Centre in Puerto Rico and was attended by around 300 delegates.

 
State of the industry
The keynote speaker, Robert Crandall, was introduced as ‘the man who changed the way the world flies’. The former president and chairman of American Airlines said that the Caribbean was uniquely dependent on tourism, meaning that solid, well-financed, carefully-thought out planning to sustain the attractiveness of the region was enormously significant.
 
He said that travel and tourism directly and indirectly supported about one of every 11 jobs worldwide. In the Caribbean, that figure is as high as one in every five jobs, he noted, a total of 2.5 million. Seven of the 10 most dependent countries on tourism in the world were in the Caribbean.
 
He praised the wide variety of cultures, languages and influences, saying that proximity to the United States, Canada and Latin America was key as well as good airline service to and from Europe.
 
The travel industry only grew 1.5 per cent between 1992 and 2001, he said, whereas worldwide tourism was 4.5 per cent. In the aftermath of 9/11, said the airline chief, growth was substantial for the Caribbean, particularly in the cruise industry, offshore financial services and new approaches to mixed-use real estate developments.
 
However, 2009 was particularly weak and 2010 was set to be unsatisfactory. This was a mixture of high oil prices driving up shipping costs plus a wider world economic trend.
 
“Less accessibility and higher prices made the region less inviting and in the fall of 2008 the collapse of the housing sector, the resultant near-collapse of the banking sector and the sharp decline n the stock market frightened consumers and diminished demand,” said Mr. Crandall.
 
He sounded a warning that the current recovery noted in the world economy was dependent on abnormally low interest rates and that it would likely slow down; unfunded future obligations would lead to higher unemployment and higher taxes.
 
The airline industry had ‘reached the end of its financial rope’ he said. Consolidation was necessary to reduce competition, increase pricing leverage and control capacity.
With oil prices rising, ticket prices would have to rise to cover profits and fuel costs.
 
“All in all, while I think the Caribbean will continue to be well-served, I do not expect that visitors will see the kind of price points that have prevailed in years past,” he said.
 
In order to move forward, it was time for action in the region.
“First and foremost, the region’s governments need to come together and reach agreement that they will act, collectively, to increase awareness across the region of just how important travel and tourism really is and to do the things necessary to support the industry’s continued growth.
 
“This greater awareness, once established, will have profound impacts on public policy,” said the airline expert.
 
He said that more efficient immigration processes would provide a more welcoming rather than hostile experience, that continuous, high quality Internet connectivity was vital and that public services such as garbage removal were expected by tourists as a minimum.
 
Most importantly, in the face of intensifying competition from around the globe, the probability of more difficult economic conditions in the years ahead and the diminishing availability of low cost air transport, it was important for the Caribbean to work together on a regional marketing effort.
 
He added that travel and tourism was in effect an export product as it derived revenues from abroad in exchange for domestic products or services.
 
“In most cases, exports are encouraged, not taxed, but here in the Caribbean and in other travel venues around the world governments tax the tourism product rather heavily, thereby reducing the quantity consumers are willing to buy. That just doesn’t make sense to me,” said Mr Crandall.

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Emerging markets
There was a major focus on emerging markets at the conference, with market analysts looking both worldwide and across the Caribbean for clues and cues.
Carlos Vogeler, regional representative for the Americas at the World Tourism Organisation, said that international tourism had experienced a 4.3 per cent decline in visitors and around 6 per cent in receipts.
 
Whilst acknowledging that tourism was vulnerable to world events, he pointed out that it was cyclic and could recover reasonably quickly.
 
He noted that the top four world destinations were France, United States, Spain and China. Forty-five per cent of all travel was to the top 10 destinations, he said, which also captured 50 per cent of all receipts. The United States was best earner with China also now in the top five.
 
The outbound market that was biggest was Germany, then United States, United Kingdom and then China. This accounted for 51 per cent of the world’s total. Recent figures released by the California Travel and Tourism Commission, for example, have shown a double-digit growth rate in Chinese visitors over the last few years.
 
Mr. Vogeler noted that China was a very large emerging market and that on a global basis, despite the recent downturn, forecasts were still in line with their 2020 vision prediction of rising tourism figures.
 
Simon Townsend of KPMG agreed and added that a Chinese building project in Bahamas would also lead to 5,000 Chinese workers working and living in Nassau. Mr. Townsend said that the three preferred markets for investors were Bahamas, Dominican Republic and Cayman Islands.
 
Of great interest to all concerned was the possibility of a future that included a Cuba open to United States tourism.
 
It was estimated that in the first 12 months after the lifting of any travel ban, Cuba would see a million new tourists from America. Indeed, according to experts, that could rise to 3 million annually within the following five years.
 
At present, Cuban infrastructure could not support a sudden influx of tourists but an increased commitment to partnerships on projects with foreign investors allied to the planned addition of 20,000 hotel rooms would make a huge difference.
 
Analyst Emily Morris noted that Cuba was comparable to Dominican Republic in terms of size, rate of growth and potential. Cuba had much less visitors from the United States due to the travel restrictions, she said.
 
By 2014, should sanctions be lifted, arrivals would lift 15 per cent to 20 per cent, leading to an increase of 10 per cent in foreign exchange in the economy and having a significant and profound cultural impact. She noted that the dual currency economy would be affected by more hard currency coming in but as prices were controlled by the government inflation could also be controlled.
 
Cuba could be the Caribbean’s top destination by 2014, she said.
 
David Jessop, the Caribbean Council’s executive director, said that Cuba was open to investment from the United States and drew no discrimination in that respect. He said he had been approached by three investors to set up development funds, that major clients were planning major investments and more airlift was planned in what he termed ‘the last great emerging market.’
 
Emily Morris concluded that Cuba could also become a hub for multi-destination tourism which would help the market in the Caribbean as a whole.
 
Hotels, resorts and timeshare
Mark Lomano of Smith Travel Research explained that from a Caribbean perspective he was optimistic. The first quarter of 2010 had shown increased occupancy across the region but the previous year’s propensity for deep discounting of room rates could prove counterproductive.
 
He said that it was a strategy that did not create demand as much as move it around to different hotels. In 2001, he explained, there had been significant occupancy decline but the room rate remained flat. It took six years for the room rates to recover. A new pricing dynamic was vital for the industry, which must not be drawn into creating a long-term problem by slashing prices which would take 8 to 10 years to return to 2008 levels as a result.
 
Other analysts spoke of timeshare or fractional ownership properties. Interval International, which is agents for 2,500 resorts in 75 countries, added 100 resorts to their books in 2009. 1.6 million of its clients are US residents and the Caribbean is top destination.
 
Shared ownership provides multiple sources of revenue, said Neil Kolton of Interval. There is a higher occupancy even during a recession as owners have pre-paid for the vacation and have a higher propensity to use it. That made it a resilient sector in a crisis, he noted.
 
Keith Stephenson, director of government affairs at the American Resort Development Association, called timeshare a critical component of the tourism industry.
 
Timeshare owners stayed in a destination for seven to eight days, he said, as compared to three to four days for a hotel stay. Occupancy was around 75 per cent compared to 55 per cent for hotels. Therefore there were obvious economic benefits, said Mr. Stephenson.
 
Timeshare was gaining traction in the Caribbean, he noted, but countries must implement constructive regulatory environments and more airlift would enable more velocity of sales.
 
Cayman Islands
Cayman was well-represented at the conference, with public and private sector individuals in attendance.
 
Trina Christian of the Cayman Islands Tourism Association said she was excited to attend the series of seminars and networking events.
 
“We’ve been working together with the newly-formed private sector group, the National Investment Council, who are looking to collaborate ideas on how to attract inward investment and I’ve sat in on meetings of the Cayman Islands Investment Council as well.
 
“It’s good to get the momentum going so that we look at how we can be more attractive as a destination for inward investment, what can we do to streamline processes and make it more customer-friendly and raise awareness of Cayman,” she added.
 
She said that the conference was very timely as it fit a lot of the movements that were already in place in Cayman and that the Tourism Association was pleased to attend along with members of the investment council and Dart Enterprises.
 
“By hearing all the updates you really get a sense of where things are at with developers and with the rest of the Caribbean,” she noted.
 
Premier McKeeva Bush arrived during the week to discuss the possibility of holding the conference in Cayman during 2011 and to meet with developers.
 
Consultant Tom McCallum, called the presence of the premier and investment professionals a ‘resounding endorsement’ of the idea of promoting inward investment.
 
“I spoke with a number of leading professional advisors that were here; those whose clients are investors and asset managers – people with money. A number of them said they hadn’t really looked at Cayman for a number of years,” he said.
 
The conference was seen both as an opportunity to remind people of what Cayman had to offer as well as discuss possible solid investment for development, enterprises and partnerships in the future.
 
KPMG survey
KPMG’s regional advisory practice released the finding of its annual Caribbean Regional Financing Survey at the conference.
 
Lenders were asked about the key lessons learned over the past year and in general the responses revealed a back to basics return to a conservative, long- term approach to lending. The most common response was that cash support from promoters would be key going forward. 
 
With respect to development financing, responses indicated that the level of reliance on pre-sales had become very unattractive and should pre-sales be considered as a source of funding then more manageable phasing and  more thorough due-diligence would be required.
 
Not surprisingly, lenders remain cautious about the projects they are willing to finance and where. When asked to name their current top three markets they noted The Bahamas; Barbados and Bermuda. However, when asked about future investment, there was less agreement, with The Bahamas, Jamaica and Costa Rica all in the running.
 
All agreed that good airlift and strong market demand were crucial for the success of any project.
 
Collectively those surveyed reported total exposure in the region in excess of US$2.58 billion. 
 
When asked what characteristics might suggest to them that a development should be re-financed or otherwise revived they noted:

  • Strong project sponsorship (new and sufficient infusion of cash)
  • Quality of sponsors and current customer base
  • Strong project fundamentals
  • Structural competencies (such as good location, adequate airlift and viable infrastructure).

In summary, recovery in the major tourism and investment markets will take time to translate into recovery in the region. The development pipelines will be fairly slow for the next two to three years and the roller coaster ride in personal savings and investments over the last few years could further dampen the demand for second homes even longer; the exception being very high net worth individuals.
 
The majority of projects getting financing in the coming year will be smaller, phased, not so high end, well capitalised projects with sound fundamental and experienced backers with a higher equity to debt ratio.

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KPMG’s Kris Beighton

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