Egypt has long been a magnet drawing cultural visitors to the sites of antiquities, as well as leisure travelers seeking the beauty of sun and seascapes in a climate that is benign much of the year. It is leisure tourism, however, that represents the highest potential for growth with the Sinai and Red Sea resorts at the center of opportunity. In the not too distant past, a tourist to Egypt would be primarily interested in cultural sites, perhaps extending a vacation with some sun at the end. In contrast, Egypt's current tourism industry is dominated by leisure tourism and the majority of visitors may never see any of the historic sites. Almost 75 percent of tourism activity in Egypt was leisure orientated in 1996, mostly concentrated on the Sinai and Red Sea.

Unfortunately the impact of politics on tourism in the Middle East is an ever - present reality, and recent terrorist atrocities have cast a shadow over Egypt's tourist industry. Yet investment in the tourism industry and on the Red Sea in particular continues. Given the spectacular growth of Red Sea hotel development, Arthur Andersen has developed a comprehensive knowledge base to better understand the opportunities and potential pitfalls for the hospitality and leisure industry.

Economic Background

In 1991, an economic reform program was implemented, aimed at transforming the Egyptian economy into one that is market-based and outward oriented. Responding to the international demand for more variety in the area of tourism, the Government of Egypt launched a vast program to modernize and develop the tourism infrastructure, with significant improvements in road, rail and air services and communication systems. Although the compound growth in tourist arrivals to Egypt is not as significant as in some neighboring countries, in
absolute terms Egypt is by far the largest tourist market in the region. Egypt's tourism receipts are now among the country's primary foreign exchange source, surpassing even the oil industry.

A wide variety of issues influences the pattern and volume of visitation to Egypt. Political stability remains fundamental to the tourism success of a destination, and this is of particular significance in Egypt. The Gulf War in 1991, followed by isolated terrorist attacks on foreign tourists, particularly in 1992, resulted in a major decline in tourist visitation. Official figures for 1997 are not available yet, but the attack on tourists in late 1997 near Luxor at the site of one of the most heavily visited antiquities sites will have had major impact on visitation. Although the government clamped down hard on terrorism, the long-term effect on tourist visitation to the country is bard to predict.

Tourism to the Sinai and Red Sea

Mindful of the fact that Egypt's unique cultural heritage is threatened by mass tourism, the Ministry of Tourism is keen to develop new areas within the country. The Sinai Peninsula and Red Sea coast are the major focus of investment, with both Government and World Bank support.

In a wider geographic context, the Sinai and Red Sea currently compete for tourists with a number of other regional destinations including Eilat (Israel), Aqaba (Jordan) and Dubai (United Arab Emirates). Although not competitive at present, Muscat and Salalah and possibly other coastal areas in Oman may emerge as strong tourist destinations over the next decade. To remain competitive, Egypt is seeking to diversify its tourism product and offer a wider product mix, in areas such as leisure, sport, adventure travel, conference and incentives and eco-tourism.
 
 

Hurghada / Red Sea Governorate

The Red Sea Governorate contains four principal population centers and tourist destinations -Hurghada, Safaga, El Quseir, and Mersa Alam. The main resort in the region, however, is Hurghada

The Development of Hurghada

Roughly 1,800 rooms considered suitable for international visitors were developed in Hurghada between 1980 and 1990. Today, the quality offer is approaching 7,000 rooms, with an additional 6,000 rooms of a lower standard. Most hotel accommodation is found in self-contained developments, which sprawl over large sites along a 30-km coastal strip. Some properties offer villas/apartments and time-sharing is not uncommon. With the exception of Sheraton and Sonesta, major international hotel chains entered the market only recently. Unfortunately, much of the development has occurred without the benefit of strict planning/zoning control and as a result an abundance of hotels has emerged with little or no regard for aesthetics or the environment.

Visitation to Hurghada

Visitation to Hurghada totaled 16,200 roomnights in 1980 and rapidly increased to 207,000 in 1990. In 1980, some 80 percent of visitors were domestic, by 1990, nearly 70 percent of visitors were foreign. By 1995, total arrivals reached 616,000 and Hurghada had become a well - recognized regional destination and an inexpensive medium-haul alternative to Turkey, Tunisia, Morocco and the Canary Islands.

New Development

Of the 155 new tourist projects approved by the Egyptian Tourism Development Authority between January 1996 and June 1996, 34 percent are located on the Hurghada Coast. The room capacity of these 52 projects is estimated at 54,285 units, reflecting the policy of the Ministry of Tourism to concentrate its development strategy in this area.

A relatively recent phenomenon is the development of new hotels within master-planned resort communities. These offer a variety of facilities, including retail, leisure (golf), entertainment and increasingly residential real estate components. The El Gouna resort, a fully self-contained and independent resort community. pioneered this type of development. The success of El Gouna in establishing a precedent for a destination resort development on the Red Sea has stimulated development of other integrated resort communities, notably the SahI Hasheesh Resort Community and Abu Soma.

The 120-km coastal stretch between El Quseir and Mersa Alam is earmarked by the Tourism Development Authority (TDA) for significant touristic investment. It is anticipated that a large number of hotels, along with real estate components and a variety of other ancillary leisure facilities, will be developed over the next decade. Although most of the plots have been sold, development plans for the majority are still unknown.
 
 

Demand for Hotel Accommodation in Hurghada

Although the supply of rooms in the Red Sea Governorate generally and in Hurghada in particular, has increased significantly, the absolute number of rooms sold has increased as well. This supply-led growth has been induced by aggressive marketing by hotel operators and tour operators, combined with highly competitive rates.

Sharm-el-Sheikh / South Sinai

Until 1987 there were only two hotels in Sharm el Sheikh, one in the village itself and one located seven km to the west on Na'ama Bay. Due to the sheltered bay, good beach and attractive mountainous backdrop, it is primarily the facilities located on Na'ama Bay which have evolved into the destination that is now known as Sharm-el-Sheikh. Whilst Sharm-el-Sheikh represents the largest hotel and tourism community on the Sinai Peninsula, several other villages have established themselves as tourist destinations and provide hotel accommodation. The three most important of these are Taba, Dahab and Nuweiha, all of which are located north of Sharm-el-Sheikh, on the Gulf of Aqaba.

New Development

Of the total of 155 new tourist projects approved by the Egyptian Tourism Development Authority between January and June 1996, 31 percent (48 projects) are located on the Gulf of Aqaba, reflecting the policy of the Ministry of Tourism to concentrate development strategy in this area. It is anticipated that a large number of hotels, together with complementary real estate components and ancillary leisure facilities, will be developed over the next five years. Since Na'ama Bay has been fully developed, new development is mainly concentrated on the adjacent bays further north which unfortunately do not have the benefit of a large sandy beach, although they enjoy spectacular views due to their elevation. A large number of international five star properties are slated to open within the next two years.
 
 

Demand for Hotel Accommodation

Although the supply of rooms in Sharm-el-Sheikh has increased significantly over the past five years, occupancy rates have remained strong. Once again, supply-led growth has been driven by successful marketing to European tour operators, (particularly Italian). Sharm-eI-Sheikh is not comparable with Hurghada however. The development of quality hotel supply has been limited by the dimensions of Na'ama Bay and is generally of a higher standard, allowing for a better rate performance.

The danger that Sharm-el-Sheikh is now courting, however, is that the current construction boom in the adjacent bays may lead to a perception that it is a mass tourism destination, comparable to Hurghada. This said, much of the hotel stock under construction is of a five/five star deluxe orientation. The ability of internationally branded hotel operators to move the destination further up-market will be tested in the next three to five years.

Development Opportunities and Threats

The resort markets in the Red Sea Governorate in particular and the South Sinai Governorate to a lesser extent have developed rapidly, leading to concerns over planning, zoning and environmental control. Tourism Development Authority initiatives and master planning are increasingly resulting in low rise, aesthetically pleasing and culturally sensitive architecture, complemented by well-landscaped grounds. This appears to represent the product wanted by most visitors. This is in sharp contrast with, for example, the development in Hurghada to date. The development of resorts in new locations such as Mersa Alam, for example, also carries a significant risk however. Although the precedent for supply-led growth is good, the impact of a large number of hotel rooms entering the market within a short period of time is difficult to predict.

Development also poses significant environmental risks. The coral reef eco-system is the most densely populated community of living organisms found in the sea, which also makes it one of the most exciting areas for scuba diving. The Red Sea is particularly rich In coral reefs. Reckless development in Hurghada, however, has had disastrous results, with 80 percent of the live coral along that portion of the coastline effectively destroyed. As a result, new legislation has been developed to enforce the protection of the natural environment. The Egyptian Environmental Affairs Agency (EEAA) has published a comprehensive set of regulations for
new construction and development, which prohibits the destruction of the natural coastline, tidal flats and coral reefs. Any construction plans that might endanger the environment must now be presented to the EEAA for approval.

For new development within the Red Sea Governorate and the Sinai, the Tourism Development Authority is actively promoting environmen-tally acceptable construction and is strictly enforcing the regulations as set by the EEAA. The development of the beach area in particular pre-sents problems along much of the coastline, because of the tidal flats and relative inaccessibility of open water. In particular the creation of swimming areas and mooring facilities for dive and charter boats requires creative solutions to avoid permanent damage to the natural marine environment. An environ-mental impact analysis (EIA) is typically required to comply with EEAA regulations. In an effort to avoid an unregulated construction boom such as seen in Hurghada, the Governorate of South Sinai has developed strict rules for construc-tion permits to ensure that buildings are kept well back from the beach and are no more than two stories high.

Summary and Conclusions

The rapid expansion of accommoda-tion supply is continuing on the Red Sea coast, notably in self-contained resort communities. Developers are targeting tourists seeking alternative destinations, with a more carefully designed product within an attractive environment. To date, market occupancy has remained steady, despite strong growth in room stock, indicating supply-led growth. This growth in supply has increased pressure on room rates, however, as hoteliers aggressively seek to attract new business. Market performance in Hurghada, in particular, has been impacted by the need to fill a significant volume of new rooms.

The development of a large number of properties fronting the coast without a common 'city center' has led to the isolation of guests within the perimeters of the resorts. To counteract this phenomenon, new development is increasingly designed in the form of master-planned resort communities, providing not only hotel accommo-dation, but also entertainment, leisure and retail facilities, often combined with the development of commercial real estate. Golf courses are also being developed.

As tourism on the Red Sea coast is dominated by the European markets, a strong link with these markets is vital to success, requiring operators with strong international brands, recognized in these markets. The success of new projects will largely depend on the ability of the operator to penetrate the existing demand base and - importantly generate new demand through effective marketing of the property to the international resort market. Brand recognition and associated quality perception will be vital in achieving acceptable profit margins. 

(Rutger Smits is a Senior Consultant with Arthur Andersen's Middle East Hospitality & Leisure Practice, and is based in Bahrain. The practice has undertaken significant work in Egypt, supported by the Arthur Andersen Office in Cairo. Nada Shousha of the Cairo office undertook much of the original research for this article.)

©Arthur Andersen