Financial Mail - Investors Monthly
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
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”.