Plenty more rooms at the inns

SA’s ho­tel sec­tor has had a bumper 12 months on the back of a re­cov­ery in for­eign tourism. But how long will the up­turn last this time around, asks Joan Muller

Financial Mail - Investors Monthly - - Feature -

Ho­tel oc­cu­pan­cies in some ar­eas are close to lev­els last seen dur­ing the hal­cyon days of the 2010 soccer World Cup, no doubt spurred by the 13% year-on-year uptick in in­ter­na­tional tourists who vis­ited SA’s shores in the first quar­ter (Stats SA fig­ures).

Cape Town’s hos­pi­tal­ity sec­tor had a buoy­ant sum­mer sea­son, with oc­cu­pan­cies across all graded ho­tels av­er­ag­ing 71% in the first quar­ter, fig­ures from in­dus­try re­search group STR Global show. Cape Town’s three-star mar­ket has been the top per­form­ing sub­sec­tor, achiev­ing a record 81.4% av­er­age oc­cu­pancy in the first quar­ter. Rev­enue per avail­able room (RevPAR), a key per­for­mance met­ric used to gauge the health of the ho­tel in­dus­try, was up 17.9% in Cape Town in the first quar­ter, plac­ing the Mother City as one of the top per­form­ers glob­ally in terms of rev­enue growth.

Ho­tel in­dus­try play­ers say last year’s re­cov­ery in oc­cu­pan­cies and RevPAR fol­lowed a dis­mal 2015, which had a sharp drop-off in for­eign tourism due to govern­ment in­tro­duc­ing oner­ous visa re­stric­tions. The Ebola out­break in West Africa, neg­a­tively af­fected all African coun­tries. But by late 2015/early 2016, the virus was con­tained, govern­ment had lifted some visa re­stric­tions, the rand hit a new low af­ter Nenegate and ad­di­tional in­ter­na­tional flights to the coun­try were in­tro­duced. So SA reap­peared on in­ter­na­tional tourism radars.

Re­cent re­sults from JSE-listed ho­tel own­ers such as Hos­pi­tal­ity Property Fund and Spear Reit con­firm oc­cu­pan­cies and rev­enues in­creased over the past sum­mer sea­son, with a par­tic­u­larly strong per­for­mance from Cape Town-based port­fo­lios. Spear, which owns two ho­tels in Cape Town, last month sur­prised the mar­ket with a maiden div­i­dend of 23.51c/share for the four months end­ing Fe­bru­ary — 16.75% ahead of the com­pany’s Novem­ber prelist­ing fore­cast.

Spear CEO Mike Flax says the out­per­for­mance was sup­ported by higher-than-ex­pected in­come from the com­pany’s Dou­ble Tree by Hil­ton Ho­tel in Up­per East­side, Wood­stock, which achieved oc­cu­pancy of 90% for most sum­mer months. Spear also owns the five-star 15 on Or­ange Ho­tel in the Cape Town CBD. “De­spite Airbnb mak­ing huge in­roads into SA’s hos­pi­tal­ity mar­ket, Cape Town ho­tels had a su­perb sum­mer sea­son,” says Flax.

Hos­pi­tal­ity, which owns 24 ho­tels across SA, posted a solid set of re­sults for the March re­port­ing pe­riod. Rental in­come on a like-for-like ba­sis for the 12 months to the end of March was up 10%. Hos­pi­tal­ity’s West­ern Cape port­fo­lio, mostly in the Cape Town CBD, achieved oc­cu­pancy and RevPAR growth of 4.8% (to 71.1%) and 12.6% (to R1,245) re­spec­tively for the 12 months to the end of March. That com­pares to an over­all na­tional oc­cu­pancy in­crease of 2.3% to 65.5% and an 8.9% rise in RevPAR to R797.

Ho­tel de­vel­op­ers, own­ers and op­er­a­tors, lo­cal and off­shore, aren’t wast­ing any time to try to cash in on more

favourable trad­ing con­di­tions. Ac­cord­ing to in­dus­try talk, there are up to 50 new ho­tel projects ei­ther un­der con­struc­tion or in the pipe­line across SA. Cape Town is ex­pe­ri­enc­ing the lion’s share, with at least 12 new ho­tels ex­pected to open their doors over the next two years — an es­ti­mated 5,000 ad­di­tional rooms to the Cape Town mar­ket alone.

An­drew McLach­lan, se­nior vice-pres­i­dent, busi­ness de­vel­op­ment, Africa & In­dian Ocean for the Carl­son Rezi­dor Ho­tel Group, one of the largest ho­tel op­er­a­tors in the world, con­firms SA is one of the com­pany’s key ex­pan­sion mar­kets. He says Rezi­dor is on track to open six new ho­tels in SA within the next three years. That will take the group’s lo­cal foot­print, un­der the five-star Radis­son Blu and three-star Park Inn brands, from 14 ho­tels (open or un­der con­struc­tion) to 20 and will add about 1,500 rooms to their cur­rent 3,000.

Two new Rezi­dor ho­tels have al­ready opened in SA this year: the Radis­son Blu Ho­tel & Res­i­dence in Cape Town’s city cen­tre; and a Park Inn in Polok­wane. The group will soon in­tro­duce two of its other global brands to SA: the su­per­lux­ury Quorvus Col­lec­tion as well as the trendy Radis­son Red. McLach­lan is tight-lipped about the lo­ca­tion of its new Quorvus Col­lec­tion ho­tels, say­ing these deals are still un­der ne­go­ti­a­tion.

The first four-star Radis­son Red in Africa opens its doors at the V&A Water­front in Cape Town mid-Septem­ber 2017. McLach­lan be­lieves the Radis­son Red con­cept, first launched two years ago in the US and Brus­sels, will prompt a re­al­ity check among lo­cal play­ers. “Red is an edgy brand, un­like any­thing else yet seen in SA. It has a strong fo­cus on art, fash­ion and mu­sic and is aimed at tech-savvy mil­len­ni­als.”

McLach­lan con­cedes that if the es­ti­mated 50 new ho­tels for SA do ma­te­ri­alise over the next three years, SA is likely to have an over­sup­ply of new rooms. “But that’s the na­ture of the game. The ho­tel in­dus­try glob­ally has al­ways been cycli­cal with boom pe­ri­ods typ­i­cally fol­lowed by a down­turn.”

He says the South African ho­tel sec­tor has sur­vived a num­ber of down cy­cles since 1994. “A strong de­vel­op­ment cy­cle af­ter SA’s first demo­cratic elec­tions lead to an over­sup­ply of ho­tel rooms by 1999-2000, with a sub­se­quent drop in oc­cu­pan­cies and rev­enues. By 2003-2004 de­mand and sup­ply had evened out. That was fol­lowed by a four-year up­turn un­til the global credit cri­sis hit in 2007-2008.’’

McLach­lan says 12-18 months later, ev­ery­one who owned a piece of land started build­ing ho­tels again in the run-up to the 2010 soccer World Cup, which in­evitably led to an­other slump in 2011. The in­dus­try thought it would take at least three to four years to re­cover from the 2010 over­sup­ply, but he says sup­ply/de­mand met­rics nor­malised sur­pris­ingly quickly with oc­cu­pan­cies and RevPAR re­sum­ing their steady up­ward climb from 2012 — bar the down­turn in 2015.

This time around, says McLach­lan, a po­ten­tial down­turn caused by an over­sup­ply of new ho­tel rooms is likely to be short-lived, given still-high oc­cu­pan­cies and sup­ply con­straints in some ar­eas. He be­lieves sup­ply/de­mand lev­els should be kept in check over the longer term by a grow­ing trend to­wards con­sol­i­da­tion.

“Ho­tel in­vestors are in­creas­ingly look­ing at tak­ing over un­der­per­form­ing ex­ist­ing ho­tels in­stead of build­ing new ones from scratch, given how cap­i­tal in­ten­sive ho­tel de­vel­op­ments are be­com­ing.”

He says con­tin­ued growth in the do­mes­tic tourism mar­ket on the back of a weaker rand, which places over­seas hol­i­days out of reach for most South Africans, will fur­ther sup­port lo­cal ho­tel de­mand over the next few years.

BON Ho­tels CEO Guy Stehlik has a more bear­ish view. He says while ris­ing sup­ply in most of the larger cities is pos­i­tive for job cre­ation, es­pe­cially in light of the chal­lenges cre­ated by SA’s new junk sta­tus and eco­nomic and po­lit­i­cal un­cer­tainty, even a short-term over­sup­ply of rooms could lead to a dan­ger­ous dis­count­ing spi­ral by less ex­pe­ri­enced op­er­a­tors, which will have a neg­a­tive ef­fect on the mar­ginal and fringe ho­tels that com­pete on rate.

Though most ma­jor cities are seem­ingly head­ing for an over­sup­ply, Stehlik be­lieves there are pock­ets of op­por­tu­nity for new de­vel­op­ments out­side tra­di­tional ur­ban CBDs. “The real op­por­tu­ni­ties lie in the sec­ondary towns, specif­i­cally for ho­tels with a mid­mar­ket, full-ser­vice of­fer­ing.”

How­ever, Stehlik is con­cerned about the im­pact the credit rat­ings down­grades, po­lit­i­cal in­sta­bil­ity and SA of­fi­cially en­ter­ing a re­ces­sion will have on the tourism and hos­pi­tal­ity sec­tor. He says govern­ment’s mixed mes­sages about visa re­stric­tions also muddy SA’s tourism wa­ters.

“The South­ern Africa Tourism Ser­vices As­so­ci­a­tion es­ti­mated that 13,000 for­eign vis­i­tors were left stranded at air­ports all over the world last year, un­able to en­ter the coun­try due to mixed mes­sages re­lat­ing to visas — a PR dis­as­ter for Brand SA.”

Stehlik says given SA’s ex­change rate, value for money propo­si­tion and dy­namic tourism of­fer­ing, SA should be shoot­ing the lights out.

“For­eign tourist ar­rivals should be up by 25%-30% in­stead of only 13%.”

He be­lieves the only way for the SA tourism and hos­pi­tal­ity sec­tor to grow to its full po­ten­tial is for govern­ment and pri­vate sec­tor tourism to work more closely to­gether. “The big­gest chal­lenge is for SA’s rep­re­sen­ta­tive tourism bod­ies to truly part­ner with govern­ment, so that when govern­ment makes far-reach­ing de­ci­sions they have been quan­ti­fied by in­dus­try ex­perts. In many cases, this has not hap­pened.”

Hos­pi­tal­ity CEO Keith Ran­dall voices a sim­i­lar sen­ti­ment in the com­pany’s lat­est re­sults over­view. He says though trad­ing con­di­tions may have im­proved, par­tic­u­larly in the Cape, growth prospects over the next few years are de­pen­dent on the econ­omy’s per­for­mance and the “de­gree of pol­icy cer­tainty em­a­nat­ing from govern­ment”.

The newly opened Radis­son Blu & Res­i­dence in Cape Town’s city cen­tre

An­drew McLach­lan … SA is a key ex­pan­sion mar­ket

Guy Stehlik … bear­ish view

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