Chal­leng­ing times ahead for grow­ing SA ho­tel in­dus­try

Weekend Argus (Saturday Edition) - - PROPERTY -

THE SOUTH African ho­tel in­dus­try has en­joyed ex­tremely sound growth from 2002 to 2008, with dou­ble-digit growth over the past three years (as re­ported by Smith Travel Re­search (STR) in its SA Ho­tel Bench­mark Sur­vey), with oc­cu­pancy lev­els over the past four years av­er­ag­ing at a con­sis­tently high 71 per­cent.

The pent-up de­mand had ini­ti­ated sub­stan­tial new ho­tel de­vel­op­ments which are now grad­u­ally be­ing com­pleted and, al­though there has al­ways been a need for ad­di­tional in­ven­tory, their mar­ket en­try is at an un­for­tu­nately in­ap­pro­pri­ate time, said Kamil Ab­dul-Kar­rim, MD of Pam Gold­ing Tourism & Hos­pi­tal­ity Con­sult­ing – a mem­ber of Pam Gold­ing Hos­pi­tal­ity.

“The past year from July/Au­gust 2008 to date has been an ex­tremely dif­fi­cult trad­ing en­vi­ron­ment for the ho­tel in­dus­try, with a do­mes­tic econ­omy ex­pe­ri­enc­ing high inflation lev­els with the as­so­ci­ated high cost of money. As a re­sult there was a con­sid­er­able re­duc­tion in ho­tel oc­cu­pan­cies and con­fer­enc­ing rev­enue, cou­pled with a world­wide re­ces­sion­ary eco­nomic en­vi­ron­ment that ex­erted fur­ther pres­sure on cor­po­rate and gover nment spending in South Africa.

“Al­though the cur­rent oc­cu­pancy level of 60.4 per­cent is the low­est level ex­pe­ri­enced for many years (based on the ear­li­est avail­able data from STR), rates have held and, in fact, in­creased by five per­cent over the pe­riod Jan­uary to Au­gust 2009. As a re­sult the in­dus­try de­cline of 9.6 per­cent has been some­what cush­ioned,” said Ab­dul-Kar­rim.

He said the forth­com­ing World Cup will pro­vide some level of re­prieve dur­ing the ef­fec­tive 40 days of the event. How­ever, ho­tel per­for mance will un­doubt­edly be di­luted be­cause sub­stan­tial new ho­tel room in­ven­tory is be­ing in­tro­duced in time for the event – as well as many other projects planned be­fore the re­ces­sion and ex­pected to come on line over the next six to 18 months.

An added pres­sure from an in­ven­tory per­spec­tive is that nu­mer­ous res­i­den­tial apart­ment de­vel­op­ments, which be­came dis­tressed with the credit crunch, have been in­tro­duced in the short term rental mar­ket and now op­er­ate in the same space as con­ven­tional ho­tels.

Th­ese are ei­ther self-op­er­ated or op­er­ated by op­por­tunis­tic ho­tel man­age­ment com­pa­nies that of­ten raise cu­ri­ously high man­age­ment fee struc­tures to dis­tressed de­vel­op­ers and make overtly op­ti­mistic rev­enue prom­ises that are in­vari­ably never met. This un­likely ‘mar­riage’ of de­vel­oper and man­ager ul­ti­mately di­lutes the rep­u­ta­tion of the SA ho­tel in­dus­try which adopts among the high­est stan­dards in the world.

Ab­dul-Kar­rim says the chal­lenge is that th­ese apart­ments, which are of­ten per­ceived to be bet­ter liv­ing en­vi­ron­ments than tra­di­tional ho­tels, are rented out on a daily ba­sis at con­sid­er­ably lower rates, driven by the fact that they do not have the nec­es­sary ho­tel in­fra­struc­ture be­hind the prop­erty or op­er­a­tion. But the jury is out as to the sus­tain­abil­ity of this busi­ness model.”

He says un­like ma­ture mar­kets in Europe and North Amer­ica, ho­tel de­vel­op­ment in South Africa has al­ways been de­mand-driven as op­posed to ca­pac­ity cre­at­ing.

“In a de­mand-driven en­vi­ron­ment such as ours, we typ­i­cally en­counter de­vel­op­ment spikes as ex­pe­ri­enced in the past and present, which cre­ate over­sup­ply sit­u­a­tions. And as there is a sub­stan­tial lag be­fore de­mand ab­sorbs the sup­ply, the re­sult is that de­vel­op­ers seem to catch up on the mar­ket dy­nam­ics only when de­mand is reach­ing sat­u­ra­tion lev­els.

“With the typ­i­cal life cy­cle of ho­tel de­vel­op­ment be­ing 20 years or more, the gains over the longer term are there for the de­vel­oper who fully ap­pre­ci­ates the mar­ket dy­nam­ics.”

Ab­dul-Kar­rim says de­spite the im­pend­ing over­sup­ply of ho­tel room in­ven­tory, the longer term out­look for the ho­tel in­dus­try re­mains healthy and af­fords on­go­ing ben­e­fits and vi­able re­turns for hote­liers who are in the mar­ket for the typ­i­cal life­cy­cle of the prod­uct.

“The trad­ing en­vi­ron­ment af­ter 2010 will be chal­leng­ing, prob­a­bly for 18-14 months, while de­mand grows and ul­ti­mately ab­sorbs the new in­ven­tory. What is crit­i­cal for des­ti­na­tion South Africa to re­main sus­tain­able and foster growth in the tourism and hos­pi­tal­ity in­dus­try is to en­sure there is ap­pro­pri­ate ca­pac­ity to ser­vice grow­ing de­mand.

“Lack of ca­pac­ity re­sults in loss of bed nights, and sus­tained lack of ca­pac­ity cre­ates the per­cep­tion that a prospec­tive vis­i­tor will never find ac­com­mo­da­tion. As a re­sult the des­ti­na­tion slowly ex­cludes it­self from travel plans and cou­pled with this – as seen in busy hubs in Africa – is that lack of ca­pac­ity and grow­ing de­mand drives prices to un­nat­u­ral lev­els with sub-op­ti­mal prod­ucts ul­ti­mately de­mand­ing ex­tremely high dol­lar based rates, a sit­u­a­tion which is not sus­tain­able.

“It’s not clear at this stage whether the ex­pected re­ver­sal of the pre­vail­ing re­ces­sion­ary con­di­tions will have the de­sired ef­fect on the broader tourism and hos­pi­tal­ity sec­tor. What is ev­i­dent is that spending pat­terns have changed and the phe­nom­e­non of op­u­lent con­sumerism may be trans­form­ing into a more dis­creet pat­tern.

“The South African ho­tel in­dus­try has pre­vi­ously ex­pe­ri­enced volatil­ity, al­though not to the cur­rent ex­tent; how­ever, it is clear that the hos­pi­tal­ity in­dus­try is an em­bed­ded el­e­ment of eco­nomic and so­cial de­vel­op­ment. Also, hos­pi­tal­ity is an age-old tra­di­tion and though there is a dif­fi­cult patch ahead, there is light at the end of the tun­nel,” he said.

Call Kamil Ab­dul-Kar­rim on 082 902 0533 or email kamil. ab­dul-kar­rim@gold­ingho­tels.co.za.

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