Monday, February 25, 2013

Bank of Georgia Research: Georgia's Tourism Sector - Seize the Opportunity

25.02.2012. Before heading off on adventure, prospective travelers typically search the web for the top things to do in a given country. Less than a decade ago, many travelers would have been impressed by Georgia's long history and rich culture but turned off by poor infrastructure and services. Georgia has since drastically improved accessibility and services, as well as the safety of attractions. Tourism is not a new concept for Georgia, rather a recollection of what it once was. During the Soviet period in late 80s, the country of then just 5.3mn (official statistics estimates current population at 4.5mn) hosted over 3mn visitors annually, including 250,000 from outside the USSR. The collapse of the Soviet Union and the ensuing unrest brought Georgia's tourism to a standstill and the number of visitors slipped to around 383,000 in 1999, with most coming from the CIS.

Since then, Georgia posted an impressive 22% CAGR in visitors over 2000-2012. The Lonely Planet travel guide recently named Georgia one of its top-10 Best Value Destinations for 2013 (details here). As the world steadily rediscovers Georgia as a real tourist destination, we believe the hospitality sector holds attractive investment opportunities. This is especially true for accommodation as the segment is already starting to see a shortage.

International benchmarks point to significant growth prospects. The number of international arrivals (international visitors who cross the national borders of Georgia with foreign passports) to Georgia was up 56% y/y, reaching 4.4mn in 2012 and we expect around 4.8mn in 2013. We have observed that tourist destinations that are in the development stage demonstrate growth for at least 10 years. We have used this approach for Georgia, taking 2009 as the base year for our forecasts. We believe, Georgia is on pace for 5.7mn international arrivals by 2015 and 8.2mn by 2019, or 1.3x and 1.9x the country's population in respective years. In 2010, Croatia, Cyprus, Montenegro and Estonia hosted 2.1x, 2.0x, 1.7x and 1.6x of their respective populations.

The projected growth will soon flush out a major constraint - a shortage of accommodation units. International brands, including Marriott, Radisson, Holiday Inn, Sheraton, and Citadines, stormed the Georgian market in recent years and additional international projects are slated for 2013-2015. Despite the mass entrance, our base case shows that Tbilisi and Batumi are likely to reach capacity constraints in terms of accommodation units in the next several years. Data suggest that Georgia's current room capacity is significantly lower than in peer countries like Slovenia, Croatia, Cyprus, Estonia, Latvia, Lithuania, Montenegro, etc. With tourism on the rise and a shortage of rooms and beds looming, the timing for hotel development projects looks right as new facilities would likely come on-stream in time to meet rising demand.

Branded mid-scale and branded budget hotels are a priority in Tbilisi and Adjara, as their share is projected to grow at a faster pace. Tbilisi and the Black Sea coast are leading the way in tourism thanks largely to business, leisure and gaming tourism. A key survey shows that only 27% of international arrivals stay in hotels, mainly on business and leisure. In our view, the share of leisure and recreation tourism should rise significantly over the mid-term, reaching 64% by 2019. We believe Georgia could see 3.4mn and 5.2mn of leisure and recreation arrivals by 2015 and 2019, respectively. As for business travelers, we assume their share in total international arrivals will be around 13% by 2019. Global tourism trends show that leisure and recreation travelers are mostly drawn to branded mid-scale and branded budget hotels, while business travelers tend to stay in branded mid-scale and up-scale hotels. Tbilisi accommodation market is relatively undersupplied with a room penetration ratio of 0.67x, some 33% lower than in other select cities.


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