Challenging times ahead for growing SA hotel industry
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. email@example.com.