'Red tape, lack of funds hinder tourism'
17 March 2010, 16:52
By Suren Naidoo
Despite KwaZulu-Natal's immense beauty and development potential as an international tourism destination, negative perceptions as a result of anti-development sentiment, government bureaucracy, land issues, legal disputes and a lack of financing are holding the province back in attracting investment in major hotel and tourism development.
That's one of the main arguments to come out of the first Standard Bank Mercury Business Breakfast discussion of 2010 in Durban recently. The debate was moderated by KZN development economist Prof Jeff McCarthy and included several tourism and hospitality industry leaders.
McCarthy highlighted that Durban reported a better December festive season compared to the previous year, with higher hotel occupancy rates, despite the tourism industry reportedly being down some 10 percent nationally last year.
Local businessman Ruben Bhagwandeen of Warwick Properties said he had ambitious plans to develop a more than R600 million five-star Sheraton Hotel as part of a 65 000 square metres mixed-use development at the Pavilion site near the Durban beachfront. But, city bureaucracy stifled the project together with constraints around getting financing for specialised assets such as a major hotel.
"The city got consultants Grant Thornton and identified 20 potential hotel sites for development across the city, but now some six years later none of them has been developed. Bureaucracy in the city is a huge problem, just ask the guys from India's Taj Hotel group, who were looking at Durban first but their plans never came together.
"It is an uphill battle to get financing for major five-star hotel developments, but the red tape from government puts a hotel project at further risk. Even projects on private land are difficult to get off the ground," Bhagwandeen said.
McCarthy said considering the huge capital expenditure required for major hotel projects, questions around sustainability and income streams were key in such projects.
"Financing seems to be a key issue here and unless you're an investor with deep pockets it will be tough to get funding for such projects. It must be asked if other models and public-private partnerships in getting hotel projects off the ground need to be looked into.
"Furthermore, what is the average period of return on investment on major hotel projects?" he asked.
Property expert Neels Brink - who's the project director of the Durban Point Waterfront Development - said getting funding for major world-class five-star hotel developments had been a big issue, particularly in KZN and Durban.
"You would need something like R500m of cash upfront and not many developers have that kind of money... Also, you don't get returns straight away; it is something like five years before you start seeing a real return on investment," he said.
"Due to these issues - many hotel developments in Durban have looked at other models, such as packaging hotel rooms for sale or sectional-title hotels. But this is not a local trend - it is the evolving nature of the hotel industry internationally," Brink said.
McCarthy, however, said the Karkloof Spa and Boutique Lodge in the KZN Midlands seemed to be one of the highly successful top-end developments in the province.
Jonathan and Caren Lithgow, the owners of the Karkloof Spa, said more than R230m was invested in the property, which includes a 38-room lodge within a nature reserve.
"We used our own funds and finance from German investors for the project. However, it's more of a trophy business and comes from a passion to get into tourism. We knew we would only see a break-even point in five years in terms of our investment," he said.
Brink said Karkloof and other projects such as Thanda Private Game Reserve were wonderful for the province, but questioned their return on investment.
"You can only get projects like this off the ground if you have deep pockets and it's a pet project out of a passion. Thanda became a reality because of Swedish funding and commitment from the investors.
Tourism KZN chief Executive Ndabo Khoza said institutional investors needed to be aggressive in investing in major tourism projects.
"If private sector financiers are not coming in then we need to look at government agencies like Ithala and the Industrial Development Corporation. They need to come in and play a role in driving tourism competitiveness by investing in large, internationally branded hotel infrastructure projects that, once built, will spur further investment and confidence in the industry," he said.
"Right now we have a market for beach resorts in KZN... International tour operators and charter tours want to bring tourists into KZN for the beach experience, but we don't have a single minimum 300-room all inclusive beach resort in the province. It is time for development institutions like the IDC and Ithala to come in," Khoza said.
Lisa Reeves, of Standard Bank, said hotel projects were capital intensive and thus banks generally did not take an aggressive view in lending to this arena.
"While the recent recession has also had an impact, banks generally have a conservative view when it comes to investing in major hotel projects. This is because of the fact that break-even for the investment usually comes only after year five," she said.
"At Standard Bank we look at the individual client when it comes to financing, their background and how much they are putting into the project. We are investing in the tourism industry, but mainly in smaller boutique style developments," Reeves said.
Participants in the discussion questioned whether it was time for banks to have a more strategic alignment with government's tourism objectives for the country, considering the sector's increasing contribution to economic growth.
But in addition to funding and state bureaucracy, Khoza said anti-development sentiment, land issues and legal disputes were contributing to negative perceptions about major tourism projects getting off the ground in KZN.
"Too many projects in KZN were being held back by legal disputes, land issues or because of opposition to them. Nearly every major project from the Durban Point, to the Film Studio, Zimbali and the new airport has faced these hurdles. This is not a good statement to investors.
"Also, the whole way the eMacambini project was handled has done irreparable damage in terms of investor perceptions about tourism development," he said.
Philip Sithole, the acting head of Durban Tourism, said while most of the focus was on the key development nodes in the city and Umhlanga, the townships should not be forgotten.
"We should also be looking at developing tourism infrastructure in townships and township tourism. Some of our townships have a rich history like the Inanda Heritage Route and the Gandhi Settlement in Phoenix," he said.
Despite KwaZulu-Natal's immense beauty and development potential as an international tourism destination, negative perceptions as a result of anti-development sentiment, government bureaucracy, land issues, legal disputes and a lack of financing are holding the province back in attracting investment in major hotel and tourism development.
That's one of the main arguments to come out of the first Standard Bank Mercury Business Breakfast discussion of 2010 in Durban recently. The debate was moderated by KZN development economist Prof Jeff McCarthy and included several tourism and hospitality industry leaders.
McCarthy highlighted that Durban reported a better December festive season compared to the previous year, with higher hotel occupancy rates, despite the tourism industry reportedly being down some 10 percent nationally last year.
Local businessman Ruben Bhagwandeen of Warwick Properties said he had ambitious plans to develop a more than R600 million five-star Sheraton Hotel as part of a 65 000 square metres mixed-use development at the Pavilion site near the Durban beachfront. But, city bureaucracy stifled the project together with constraints around getting financing for specialised assets such as a major hotel.
"The city got consultants Grant Thornton and identified 20 potential hotel sites for development across the city, but now some six years later none of them has been developed. Bureaucracy in the city is a huge problem, just ask the guys from India's Taj Hotel group, who were looking at Durban first but their plans never came together.
"It is an uphill battle to get financing for major five-star hotel developments, but the red tape from government puts a hotel project at further risk. Even projects on private land are difficult to get off the ground," Bhagwandeen said.
McCarthy said considering the huge capital expenditure required for major hotel projects, questions around sustainability and income streams were key in such projects.
"Financing seems to be a key issue here and unless you're an investor with deep pockets it will be tough to get funding for such projects. It must be asked if other models and public-private partnerships in getting hotel projects off the ground need to be looked into.
"Furthermore, what is the average period of return on investment on major hotel projects?" he asked.
Property expert Neels Brink - who's the project director of the Durban Point Waterfront Development - said getting funding for major world-class five-star hotel developments had been a big issue, particularly in KZN and Durban.
"You would need something like R500m of cash upfront and not many developers have that kind of money... Also, you don't get returns straight away; it is something like five years before you start seeing a real return on investment," he said.
"Due to these issues - many hotel developments in Durban have looked at other models, such as packaging hotel rooms for sale or sectional-title hotels. But this is not a local trend - it is the evolving nature of the hotel industry internationally," Brink said.
McCarthy, however, said the Karkloof Spa and Boutique Lodge in the KZN Midlands seemed to be one of the highly successful top-end developments in the province.
Jonathan and Caren Lithgow, the owners of the Karkloof Spa, said more than R230m was invested in the property, which includes a 38-room lodge within a nature reserve.
"We used our own funds and finance from German investors for the project. However, it's more of a trophy business and comes from a passion to get into tourism. We knew we would only see a break-even point in five years in terms of our investment," he said.
Brink said Karkloof and other projects such as Thanda Private Game Reserve were wonderful for the province, but questioned their return on investment.
"You can only get projects like this off the ground if you have deep pockets and it's a pet project out of a passion. Thanda became a reality because of Swedish funding and commitment from the investors.
Tourism KZN chief Executive Ndabo Khoza said institutional investors needed to be aggressive in investing in major tourism projects.
"If private sector financiers are not coming in then we need to look at government agencies like Ithala and the Industrial Development Corporation. They need to come in and play a role in driving tourism competitiveness by investing in large, internationally branded hotel infrastructure projects that, once built, will spur further investment and confidence in the industry," he said.
"Right now we have a market for beach resorts in KZN... International tour operators and charter tours want to bring tourists into KZN for the beach experience, but we don't have a single minimum 300-room all inclusive beach resort in the province. It is time for development institutions like the IDC and Ithala to come in," Khoza said.
Lisa Reeves, of Standard Bank, said hotel projects were capital intensive and thus banks generally did not take an aggressive view in lending to this arena.
"While the recent recession has also had an impact, banks generally have a conservative view when it comes to investing in major hotel projects. This is because of the fact that break-even for the investment usually comes only after year five," she said.
"At Standard Bank we look at the individual client when it comes to financing, their background and how much they are putting into the project. We are investing in the tourism industry, but mainly in smaller boutique style developments," Reeves said.
Participants in the discussion questioned whether it was time for banks to have a more strategic alignment with government's tourism objectives for the country, considering the sector's increasing contribution to economic growth.
But in addition to funding and state bureaucracy, Khoza said anti-development sentiment, land issues and legal disputes were contributing to negative perceptions about major tourism projects getting off the ground in KZN.
"Too many projects in KZN were being held back by legal disputes, land issues or because of opposition to them. Nearly every major project from the Durban Point, to the Film Studio, Zimbali and the new airport has faced these hurdles. This is not a good statement to investors.
"Also, the whole way the eMacambini project was handled has done irreparable damage in terms of investor perceptions about tourism development," he said.
Philip Sithole, the acting head of Durban Tourism, said while most of the focus was on the key development nodes in the city and Umhlanga, the townships should not be forgotten.
"We should also be looking at developing tourism infrastructure in townships and township tourism. Some of our townships have a rich history like the Inanda Heritage Route and the Gandhi Settlement in Phoenix," he said.
- This article was originally published on page 3 of The Mercury on March 17, 2010
Johannesburg
