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JOO Young-Min

Tourism Investments Needed in Tough Competition

JOO Young-Min

Sept. 25, 2009

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Growth in international tourism market has slowed amid the global economic strife. The number of international tourist arrivals worldwide was 920 million in 2008, up by only 1.9% from 2007, well below the 6.1% increase in 2007 and 6% in 2006. International tourism receipts rose a mere 1.9% during the same period to US$944 billion, compared with a 5.4% rise in 2007 and 5.3% increase in 2006. The picture has been much bleaker this year. Between January and April, international tourist arrivals fell 8.4% year-on-year. Excluding Africa, which had a 3.1% increase in foreign travelers, other regions suffered a decline, with Europe and Middle East posting the largest drops of 10.4% and 18.1%, respectively.

Such weak showing reflects a worldwide recession and concerns over the new influenza A virus. In spite of overall reduction in the global tourism market, however, some countries have shown favorable performances. Among the top 50 countries that attracted the most international tourists in 2008, Korea saw international tourist arrivals jump 18.7% year-on-year in January-April this year. Other gains in this period were posted in Taiwan (13.9%), Morocco (9.8%), Mexico (5.9%), Malaysia (3.4%), United Arab Emirates (3%), Tunisia (1.3%) and Hungary (0.4%).

In many countries, substantial investments have fostered tourism as a strategic industry, and aggressively developed new service segments such as medical tourism and MICE (Meeting, Incentive, Conference, Exhibition). Tourism markets in Korea and Taiwan, on the other hand, have benefited from other catalysts. Taiwan has seen a wave of tourists from the China mainland since the market was officially opened in July 2008. While Korea also saw a jump in tourists from China, the depreciation of the won have also played a part in inducing an increasing number of travelers from Japan and Southeast Asia.

As the international tourism market shrinks, investment in the industry is also expected to decrease. World tourism capital investment is forecast to drop 5.3% in 2009 from the previous year to US$1.22 trillion. Yet in the next 10 years of 2010-2019, capital investments in the sector will likely increase an average of 4.7% annually, reaching an estimated US$2.59 trillion by 2019. By region, according to World Travel and Tourism Council in 2009, the biggest investments made in 2009 will likely be in Europe with US$385.6 billion, followed by the Asia-Pacific region (US$381.4 billion), and the Americas (US$369.7 billion). In 2019, however, the Asia-Pacific area will see the biggest investments, of US$941.2 billion, with Europe following with US$765.5 billion, and the Americas with US$722.3 billion.

With competition in the Asian tourism market intensifying, it is necessary for Korea to expand investments in tourism in order to maintain competitiveness and to stay ahead of others. However, Korea lacks sufficient infrastructure such as lodging facilities, world-class resorts and theme parks that can attract new foreign travelers.

According to Business Travel News in 2009, the average cost for a hotel room in Seoul was US$203, ranking 51st ; Tokyo, US$227, 40th ; Singapore, US$220, 45th ; Osaka/Kobe, US$209, 49th ; Hong Kong, US$194, 62nd ; and Beijing, USS$159, 79th. This indicates that Seoul has higher competitiveness than Tokyo, Osaka, Kobe and Singapore.

Such smaller hotels in Seoul are partially helped by the government and the capital’s support measures, but a weak won has also played a major role. In 2006 when the won/dollar exchange rate was 1,401, the average hotel rate in Seoul was US$341, ranking 14th, while in 2009, when the won/dollar rate was 1,262, the rooms cost US$203. This suggests that hotel costs in Seoul will lose competitiveness if the won strengthens.

The UNWTO reported that only the cities of Rio de Janeiro (2.9%), Seoul (9.1%), Nairobi (24%) and Beirut (31.2%) were expected to see hotel occupancy increase in 2009 among 91 cities worldwide, with Seoul likely to post the highest occupancy, 81.5%. Such high occupancy would translate to higher room prices. All this means that investments should be made to boost supply, which in turn could enhance the price competitiveness of Korea’s tourism industry.

What factors are needed to expand tourism investments? First and foremost, a strong leadership by the government is needed. The government’s strong commitment is crucial for successful tourism development, with total empowerment given to those in charge of development. A virtuous cycle should be formed in which the government chooses a profitable business -> concentrates on its development -> injects necessary public infrastructure -> attracts investors (by gaining their trust) -> and obtains new investments.

Second, highly profitable businesses - like casinos, MICE, medical tourism facilities - should be promoted together with other facilities as a set. It is necessary to include highly attractive tourist destinations in overall development projects to boost profitability.

Third, the supply of facilities should be controlled, based on an appropriate demand forecast to provide stable profits to private companies that have invested. The Canadian resort town of Whistler and the Indonesian resort island of Bali are representative places that have successfully balanced supply and demand. Whistler set the ceiling for the number of beds at lodging facilities to 52,500, while the Bali government has temporarily frozen expansion of hotel rooms since 2005.

Last but not least, it is crucial to utilize real estate securitization to boost tourism investment. As a means to generate various sources of investment, private equity funds or REITs (real estate investment trusts) could be utilized, while establishing special-purpose corporations responsible for both fund-raising and project execution.

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