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Network News • 10-12-2020

A Renaissance in the hospitality sector

Author: George Mangion
Published on Business Today 10 December 2020

PKF has, for a number of years, been following the performance of the hotel industry, which has seen glorious advancement, reaching a total of 2.7 million arrivals by the end of 2019. Sadly, the advent of the COVID-19 pandemic has turned the tables upside down. Hot on the heels of a potential vaccine, the Prime Minister has declared he wants Malta to be back to business as usual by May after the vaccine has been rolled out.  To help bail out the economy, the Government quickly offered a furlough scheme for all employees which started in earnest in April and has now been extended until March 2021.

This was hailed by party apologists as a saviour of many jobs.  However, only recently, the restaurants association have complained that the wage supplement paid to their members is less than that paid to hotel workers. Andrew Pace, the president of the association, said that “the feedback we are being given by the economy minister is that equivalence will happen. The sooner we get this imminent support the easier it will be for us to survive”.

Pace also said the rent and electricity subsidy announced by the government earlier this year provided a great boost, but these funds, which have yet to be paid out, were badly needed as the industry approached the peak shoulder this winter.

He was commenting that the industry is very much in survival mode at the moment, as a general guide there are over two thousand permits for various restaurants and eateries so one would expect around 8,000 workers to be at risk. Also, at risk are the hotel sector which has been growing over recent years as the policy for mass tourism has been prevalent and amply promoted by MTA. In order, to obtain a better understanding of the implications of such a hiatus caused by a severe drop in arrivals during this year, PKF has drawn an analysis that has been broken down properties according to the hotel classification.  The main question – is it true that the quality of arrivals (spending power) is dwindling?

The ensuing pattern pre-Covid shows that the island is going for quantity, not quality. Starting with the two-star hotels, statistics show that the year-on-year number of guests and nights spent by guests in such hotels is increasing. Over a six-year period, the total number of guests staying at two-star hotels has increased by 48.19 per cent, which means an average annual growth rate of 8.03 per cent.

Although not to the same extent, the total nights spent in two-star hotels have also increased over the aforementioned period (27.5 per cent).  When one undertakes a similar analysis for three-star hotels this yields comparable results to the ones attained for the second-class category.

The facts show how from 2013 to 2019, the total number of guests staying at three-star hotels increased from 353,496 to 497,553, or by 40.75 per cent.  On the contrary, the rate recorded amongst five-star hotels is a mere 4.21 per cent.  It is evident that although the number of tourists coming to Malta has increased by more than 54 per cent over the past five years, the quality of the visitors is declining, as evidenced by the greater influx of guests in the lower category hotels.

This has been exacerbated by the sponsoring by the MTA of low-cost airlines.  Surely the issue of quality tourism has been a regular topic by our parliamentarians such that recently, the Prime Minister argued that the COVID-19 pandemic has presented an opportunity to realign the tourism industry to cater for higher quality visitors, rather than focusing on attracting larger numbers.

Everyone agrees that to upgrade there has to be a shift away from overcrowded touristic areas to more upscale niche tourism thus reducing the pressure on the local ecology and environment. While one must give credit to a lot of embellishment carried out during the past decade, yet there is an ongoing criticism that the burgeoning construction industry has been galloping ahead reducing the island into a massive building site replete with tower cranes.

Surely, the Holy Grail to attract higher-quality tourist starts with improving the standard of living and general ambience of an overcrowded island. The economic factor justifying mass tourism has led us to keep an inventory of underperforming assets – mainly built-in central sites. The question is: are these investments yield a decent return on capital? Certainly not: this means that workers are also suffering from lower wages and longer hours. Another phenomenon that has challenged the profitability of hotels has been the popularity of Airbnb.

More specifically, hoteliers are preoccupied that the private rental services system may attract house owners tempted to abuse the system, that is they do not register their property for rent and vat regulations. In recent years, tourist arrivals using such type of accommodation have registered a double-digit growth rate.

Facts show how growth in the private accommodation section was strong, whereby in March 2019, circa 30,000 (20 per cent) tourists rented private accommodation. It goes without saying that Airbnb has emerged as a major player in linking property owners with prospective visitors since its establishment in the USA twelve years ago. The hotel lobby remark that this is unfair competition saying if users are not properly licensed or are not registered for VAT, then such non-regulated activity will generate an unfair disadvantage for hotels that must abide by the rules.

Although no official data is available in terms of the supply of properties, it is estimated that Airbnb has had 813 properties listed for rent in 2013, over 1,000 in 2015, circa 6,800 in 2018 and 8,761 listings in 2019. This factor alone strengthens the maxim that our tourism sector pre-Covid, has been growing healthily but in real terms, the earnings per arrival were in decline.

Sadly, the percentage of tourists who decide to stay in five-star hotels has been declining.  The good news is the recent appointment of a qualified accountant the Hon Clayton Bartolo as minister of tourism. With his stamina and determination, he is promising to lead a think tank of experts to plan outside the box and map a future cure to our dilemma.

Objectively, a logical solution is to undertake a root and branch reform of the hotels licensed so far and to discuss each on the merits of their financial viability. Following such a study with stakeholders on board, a suggestion is to incorporate an SPV as a PPP with funding from the Malta Development Fund and an issue of popular government bonds.

Ideally, over five years, the administrators of the SPV, start buying non-performing hotel properties and demolish same. The vacated plots will be transformed by the SPV into recreational parks, public car facilities and ornate gardens adorned with elaborate water fountains. 

This is a major restructuring task so somebody with nerves of steel has to bite the bullet to revamp our image as a quality resort. Thanks to the brief respite in the hospitality sector one can with the guidance of the energetic minister of tourism take the bull by the horns and plan a Renaissance.

Author: George Mangion
Published on Business Today 10 December 2020
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