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Network News • 04-11-2020

Post COVID-19: Prescribing A Cure For The Hotel Sector

PKF Malta’s George Mangion provides a breakdown of hotel occupancy movements across lower and higher-end accommodation, and how this can inform future policy decisions post-COVID. 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. “One had been hearing a lot of complaints from the hotel lobby asking for an end to the lockdown. Naturally, their complaints reflected the dire position of a three-month lockdown which was eventually lifted on 15th July 2020, when sea and airports were opened for traffic,” says PKF Malta’s Senior Manager, George Mangion.

The government quickly offered a furlough scheme for all employees which started in earnest in April and has now been extended until March 2021. In order to obtain a better understanding of the implications of such a dilemma, PKF has drawn an analysis that has been broken down into different sections according to the hotel category.

PKF Graph

“Is it true that the quality of arrivals (spending power) is dwindling? The ensuing analysis shows that the island is going for quantity, not quality. Starting with the two-star hotels, the graph shows 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, that is 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). “Undertaking a similar analysis for three-star hotels yields comparable results to the ones attained above.”

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. More specifically, the number of guests declined by circa 5.27 per cent. The total nights spent by guests registered an increase of 16.09 per cent over the past six years, yet there was a small decline of 6.62 per cent from 2018 to 2019. On the contrary, the rate recorded amongst five-star hotels is a mere 4.21 per cent.

“The implication here is 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 great increases in guests in the lower quality hotels,” says Mr Mangion.

On the contrary, there has been a marginal increase within the five-star hotels. “This has been exacerbated by the sponsoring of low-cost airlines. This issue of quality tourism has been a regular topic by our political leaders. In fact, only 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 large numbers.

“For quality tourism to prevail over quantity, a shift from overcrowded touristic areas to a more upscale niche tourism is required, thereby reducing the pressure on the local economy and environment,” he argues.

While one must admit that a lot of embellishment has been carried out during the past decade, there is ongoing criticism that the burgeoning construction industry has been galloping ahead, reflecting a recent gallant policy by the Planning Authority when issuing new permits.

The number of tower cranes that litter the sky has been on the increase. PKF Malta Senior Partner George Mangion “It is true that new roads have been planned, but more embellishment is needed to create recreational areas, better spatial planning and planting of landscaped public gardens.

“The Holy Grail is reaching higher quality tourism, as this would improve the standard of living of an overcrowded island. Let us review the financial performance of selected hotel properties. The question is: are these investments yielding a decent return on capital?” The list of hotel groups selected starts with SD Holdings. This group manages and owns the DB Seabank Resort & Spa in Mellieha and the DB San Antonio Hotel & Spa in Bugibba.

“Despite having one of the highest returns on capital employed (ROCE), the group has been registering a decline in such ratio for the past four financial years. For the year 2016, it registered a high ROCE of 15 per cent, but this declined to nine per cent by the end of the 2019 financial year.

“Another important player is AX Holdings Ltd, which has been registering a lower albeit stable ROCE. More specifically, for the financial year 2016, the group’s ROCE stood at five per cent, which then increased to six per cent in 2017 and to seven per cent in 2018, but declined again to six per cent in 2019. AX Holdings Ltd is a prestigious group owning a total of seven hotels.

“A similar pattern is observed by the Corinthia Group, with the Group’s ROCE standing at three per cent for the financial year ending 2016 and since then it has remained stable at four per cent. Contrasting with its counterparties, Phoenicia Finance Company plc ended its financial year 2016 with a negative ratio of -10.10 per cent.

“However, the group managed to change things around by the following financial year, during which the ROCE increased to 2.30 per cent. Another major operator is the International Hotel Investment (IHI) plc which owns, develops and operates a number of five- and four-star hotels at prime sites.”

For the financial year ending 2016, the group registered a ROCE of three per cent and since then it has remained consistently at four per cent, Mr Mangion adds. Another phenomenon that has challenged the profitability of hotels has been the popularity of Airbnb.  “More specifically, hoteliers are preoccupied that the system may attract house owners who are inclined to abuse the system, that is they do not register their property for rent regulations. In recent years, tourist arrivals have registered double-digit growth rate.”

Notwithstanding, in recent months, collective accommodation establishments such as hotels have experienced a slowdown in inbound tourist arrivals. On the other hand, growth in the private accommodation section was strong, whereby in March 2019, circa 30,000 (20 per cent) tourists rented private accommodation. “To this end, Airbnb has emerged as a major player in linking property owners with prospective visitors since its establishment in 2008.

“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.”

However, one notes how the percentage of tourists who decide to stay in five-star hotels has been declining, while the portion of tourists who decide to stay in lower-end hotels and Airbnb has increased.

“This highlights the fact that the quality of the visitors is declining. A cure involves upgrading our hotel assets by forming an SPV funded as a PPP, and over five years, start buying non-performing properties and demolishing same. The vacated plots will be transformed by the SPV into recreational parks and public gardens adorned with elaborate water fountains.”

Author: George Mangion
Published on Malta Chamber 4th November 2020
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