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Distressed Hospitality & Its Impact on the Industry

Grovest-Opinions
DISTRESSED HOSPITALITY INDUSTRY

Pepperclub Fund Manager, Amaresh Chetty writes about COVID-19 effect on the hospitality industry & job losses.

A document authored by the Treasury titled, “Economic transformation, inclusive growth, and competitiveness: A contribution towards a growth agenda for the South African economy”, states in the abstract :-

“The combination of low growth and rising unemployment means that South Africa’s economic trajectory is unsustainable. Government should implement a series of growth reforms that promote economic transformation, support labour-intensive growth, and create a globally competitive economy. We start by highlighting five fundamental building blocks of sustainable long-run growth…addressing distorted patterns of ownership…small business growth; (iii) prioritizing labour-intensive growth in sectors such as …tourism;…We estimate the economy-wide impact of the proposed interventions over time based on when they can realistically be implemented, and find they can raise potential growth by 2–3 percentage points and create over one million job opportunities.”

That was last year, and then the world changed with the advent of the corona virus.

According to a recent survey conducted on the tourism sector in South Africa by the IFC South Africa hosted some 10.4 million international visitors last year.

The tourism sector employs some 740 000 people directly and 1.5 million indirectly.

The survey found that 99 percent of respondent businesses had been impacted negatively by Covid-19, with 50 percent already having made staff redundant. Since the introduction of restrictions in the country, 69 percent of businesses had temporarily closed and 58 percent had applied significant downscaling.

The survey also indicated that 58 percent and 54 percent of businesses respectively could not cover debt repayments or fixed costs in March.

The Western Cape alone estimate job losses of over 200 000 in the sector.

It would be trite to continue to cite the research published by the IFC report so for the sake of brevity I will refrain from explicating the relationship between COVID and tourism, indeed the economy.

I had originally intended to write this note motivating for Section 12J to continue to allow investments with a real estate underpin as there is a class of investor that considers the tangible underpin of real estate a risk mitigant.

To that end perhaps a fair trade would have been to ask that Treasury consider allowing Section 12J investments in enterprises to which the real estate is critical and which serves a social purpose and would build capacity in an otherwise stretched public sector and had in mind to suggest :-

a. Schools – you appreciate why they can’t simply re-locate given the anguish that would cause to hundreds of learners
b. Hospitals and medical facilities such as clinics and day facilities -same reasoning as above

In the post-COVID environment far from the noble aspiration to create one million jobs, the first priority should be to prevent any jobs from being shed and this is a grim reality. To this end I believe that tourism should continue to be allowed by the Section 12J regime.

Distressed hospitality assets may well require an equity re-capitalisation to strengthen their balance sheet and that is well suited to be provided by a VCC.

In other cases a more opportunistic VCC may purchase a distressed hospitality asset – both instances will at least preserve jobs that may otherwise be lost.

Given government’s limited budget to support the tourism industry, court challenges aside, the investment capacity provided by VCC capital should be viewed as a welcome addition to a very real problem that can not be ignored.

 

Source credits:

http://www.treasury.gov.za/comm_media/press/2019/Towards%20an%20Economic%20Strategy%20for%20SA.pdf
https://www.iol.co.za/business-report/economy/tourism-industry-finds-itself-in-dire-circumstances-47764931
https://www.iol.co.za/capeargus/news/tourism-sector-desperate-to-get-back-to-work-as-200-000-jobs-expected-to-be-lost-48126227

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