Are South A'fricas Room Rates Sus­tain­able?

Tourism Tattler - - EDITORIAL - By Des Langk­ilde. *Trav­elS­martCrew share­hold­ers in­clude African Pride Tours, Afr­ica­pass, Africa Travel Group, Cedar­berg African Travel, Egoli African Des­ti­na­tions, Gilt­edge Travel, High­line Tours & Travel, Ilanga Travel, In­spi­ra­tions ITT, Pem­bury Tours,

Room rates for South African ho­tels and lodges in­creased dra­mat­i­cally be­tween 2016 to 2017, specif­i­cally in the 4-star and 5-star mar­kets. De­spite the rand hav­ing strength­ened over the past 12 months, some prop­er­ties are post­ing even higher rate in­creases for 2018, which cre­ates mas­sive prob­lems for book­ing agents. Are these rate in­creases sus­tain­able?

Look­ing at South African ho­tel room rate in­creases for 2018, some ho­tels seem to think that cur­rent high oc­cu­pancy lev­els are go­ing to last for­ever.

How­ever, fac­tors that con­trib­ute to ho­tel room rate in­creases can be com­pli­cated, so to sim­plify the de­bate and ar­rive at a log­i­cal con­clu­sion, let's take a look at the ques­tion from dif­fer­ent per­spec­tives.

From an Eco­nomics / Cur­rency Per­spec­tive

The cur­rent high oc­cu­pan­cies are re­ally at­trib­ut­able to book­ings that were made 12 months ago when the rand was a lot weaker. The re­cent strength of the rand is a fac­tor that seems to have been com­pletely ig­nored by prop­er­ties that have im­posed some in­cred­i­ble rate in­creases.

From a book­ing agent's per­spec­tive, this cre­ates a mas­sive prob­lem as they not only have to con­tend with room rate in­creases but with for­eign cur­rency ex­change rate fluc­tu­a­tions as well.

Based on av­er­age room rate in­creases from 2016 to 2017, a typ­i­cal R5,000 room in 2016 has in­creased to R5,900 in 2017.

But how do these room rate in­creases and cur­rency fluc­tu­a­tions trans­late in terms of for­eign vis­i­tors? For the same room, UK, USA and Euro­pean vis­i­tors would have paid:

ho­tel in­dus­try – ho­tel per­for­mance for Q1 2017 saw oc­cu­pancy lev­els rise 5% to 56%, ADR in­crease 9.8% to $111.15 and RevPAR in­creased 15.3% to $62.19 across the African con­ti­nent. In stark con­trast, the Mid­dle East re­ported year-on-year per­for­mance de­clines in the first quar­ter of 2017. Oc­cu­pancy fell 1.4% to 70.5%, ADR dropped 6.8% to $173.06 and RevPAR de­creased 8.2% to $122.07.

In South Africa, av­er­age room oc­cu­pancy (ARO) lev­els in­creased by 8% for all ho­tel star grades over the past five years (2012-2016), while room oc­cu­pancy has re­mained rea­son­ably con­sis­tent at an av­er­age of 62.6%. Av­er­age room rates (ARR) over the same pe­riod in­creased by close to 25%, while rev­enue per avail­able room (RevPar) in­creased by nearly 31%. The big­gest ho­tel room rate in­creases came from the 5-Star sec­tor at 27.3% with av­er­age rev­enue in­creas­ing from R917 to R1432 per avail­able room – an in­crease of 36%.

Look­ing to the fu­ture of ho­tel rates, Martin van Vu­uren, Strate­gic De­vel­op­ment & Plan­ning Di­rec­tor at Grant Thorn­ton says “Growth in av­er­age room rates in South Africa over the past five years has been driven by in­creased de­mand (par­tic­u­larly from the in­ter­na­tional mar­ket) and a limited in­crease in the sup­ply of ho­tel rooms. I ex­pect that this trend will slow in the next five years with growth in the in­ter­na­tional mar­ket slow­ing to a global av­er­age of around 5% with the open­ing of new ho­tels cur­rently un­der con­struc­tion ab­sorb­ing some of this growth. Changes in the ex­change rate may re­sult in short-term fluc­tu­a­tions but the long term trend should still hold.”

From an Agents Per­spec­tive

Travel Agents, DMCs and Tour Op­er­a­tors deal with a wide va­ri­ety of ac­com­mo­da­tion types and are in tune with rate in­creases and the im­pact

that these have on ho­tel book­ings. Com­pound­ing the rates is­sue for agents is that many ho­tels are im­pos­ing un­re­al­is­tic can­cel­la­tion and pay­ment/de­posit poli­cies – but that's an­other story.

Il­lana Clay­ton, CEO of Trav­elS­martCrew* with an an­nual spend of R1.6 bil­lion in South and South­ern Africa in 2016, says: “There is no sin­gle fac­tor that im­pacts on in­bound de­mand. We have seen an ex­cep­tion­ally strong 18 months, at­trib­ut­able to a num­ber of pos­i­tive con­tribut­ing fac­tors. Even with a weak ex­change rate, South African ho­tel prices gen­er­ally are no longer cheap, and many of the tar­iffs we are see­ing now are def­i­nitely un­sus­tain­able. In a strong de­mand en­vi­ron­ment, the temp­ta­tion to ap­ply large in­creases is a risky con­sid­er­a­tion if a long term trade-part­nered strat­egy is de­sired.

“First sup­port from DMC's and Tour Op­er­a­tors is to the more re­al­is­ti­cally priced prod­uct, and only when those of­fer­ings are full, are the higher priced prod­ucts sold. When de­mand drops or avail­able stock of rooms in­creases (i.e. Cape Town in 2018), those who have had a more re­al­is­tic and long-term view on sus­tain­able rate in­creases will reap the ben­e­fit. We are still see­ing some ZAR ac­com­mo­da­tion units ap­ply­ing 20-50% in­creases for 2018, while many USD based prod­uct in South­ern Africa are ei­ther de­creas­ing their rates or hold­ing them for 2018. We are in for an in­ter­est­ing 2018.”

From an Owner’s Per­spec­tive

And last, but cer­tainly not least, the per­spec­tive of an ac­com­mo­da­tion property owner is im­por­tant to con­sider see­ing as the buck stops here and what better place to ask for an opin­ion than a sa­fari lodge.

Ver­non Wait, Mar­ket­ing Di­rec­tor at Lal­i­bela Pri­vate Game Re­serve says: “Whilst Lal­i­bela has en­joyed an ab­so­lutely bumper 2016 and the first quar­ter of 2017, we have looked at the macroe­co­nomic en­vi­ron­ment when de­cid­ing on our rates for 2018. The re­cent strength of the rand weighed very heav­ily on our de­ci­sion and we have taken the view to hold rates for 2018 steady. The new own­ers feel very strongly that this is a long-term project that re­quires long-term re­la­tion­ships with sup­pli­ers.

“Even with us hold­ing rates steady 2018, we are mind­ful that in USD, Euro and UK pound terms it will cost more to send clients to Lal­i­bela in 2018. A rate in­crease for 2018 was sim­ply not an op­tion,” con­cludes Wait. (Read more on ‘The Role of Tour Op­er­a­tors in Sa­fari Book­ings' here).

Con­clu­sion

Ac­cord­ing to lead­ing in­dus­try ex­perts then, it would seem that South African ho­tels should take the lead shown by Lal­i­bela and by USD based ho­tels in neigh­bour­ing coun­tries and adopt a cau­tious ap­proach to room rate in­creases, look­ing for long-term sus­tain­abil­ity in terms of room oc­cu­pancy lev­els and RevPar, specif­i­cally over the next five years.

Anec­do­tal ev­i­dence cer­tainly shows that some (not all) prop­er­ties have posted mas­sive in­creases for 2018 – some as high as 45% but with 20% in­creases not be­ing at all un­com­mon. With no-one know­ing what's go­ing to hap­pen to the rand, there is a se­ri­ous risk that South Africa is in the process of out-pric­ing it­self rel­a­tive to other mar­kets.

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