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 their SA Hotel Benchmark Survey), with occupancy levels over the past four years averaging at a consistently high 71 percent.
The pent-up demand initiated substantial new hotel developments which are now gradually coming into the market, and while the need has always been there for additional inventory, their market entry is at an unfortunately inappropriate time, says 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 which exerted further pressure on corporate and government spending in South Africa. While the current occupancy level of 60.4 percent is the lowest level experienced for well over the past eight 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," says Abdul-Karrim.
He says the forthcoming FIFA 2010 World Cup will provide some level of reprieve during the effective 40 days of the event. However the fact that substantial new hotel room inventory is being introduced in time for the event - as well as numerous other projects planned prior to the recession and expected to come on line over the next six to 18 months - hotel performance will undoubtedly be diluted.
An added pressure from an inventory perspective is due to the fact 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 a curiously high management fee structure to the distressed developer 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.
Says Abdul-Karrim: "The challenge is that these apartments, which are often perceived to be better living environments than traditional hotels as a result of their contemporary lifestyle offering, 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. Of course the developer has the option, when the residential apartment market turns, of reselling these units as individual apartments. However this is not what the hotel industry is all about, which is commitment, passion and service."
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 lifecycle 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 the hotelier who is in the market for the typical lifecycle of the product. The trading environment post 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.
"With a revised focus on Africa and the entry of a new group of thinking hotel development and management companies we are starting to see a spread of fresh, new product entering the market at prevailing market rates. The net effect of this is that at the early phase the increase in inventory is absorbed by the pent-up demand, however when the supply-demand equation stabilises, the first to suffer are those operators who have bled the market in good times, without due consideration to standards and guest satisfaction. These properties will then be first affected by demand stabilisation, and will rightfully be weeded from the market – proving without doubt the non-sustainability of limiting development and creating a sub-optimal product through demand driven complacency in product development," says Abdul-Karrim.
"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, albeit not to the current extent, but what is clear is that as an industry, hospitality is an embedded element of economic and social development. Furthermore, hospitality is an age old tradition and while there is a difficult patch ahead, there is light at the end of the tunnel," he adds.
Issued by Gaye de Villiers

  Comment on this Article

  Please login to post comments

Post to my facebook wall
Characters remaining

    Latest Property News
    • 22 Nov 2017
      Most people know of the Community Schemes Ombud Service (CSOS) and that levies must to paid to fund its operations. In this article the experts at Paddocks will address some of the issues that are causing confusion.
    • 22 Nov 2017
      While sales have noticeably slowed in most sectors in most Cape town suburbs, the security estate sector in Constantiaberg has bucked the trend by remaining buoyant, with sales by August this year already surpassing total sales in 2016.
    • 22 Nov 2017
      The end of the year is fast approaching, and so are all the travellers, tourists and holidaymakers. For those who live near or own a property in a holiday-hotspot, the festive season also brings with it an abundance of short-term rental opportunities. Its a great way for property owners to make a few extra rand for their own holidays or to put towards their savings.
    • 21 Nov 2017
      The buying process is over, and the moving truck has delivered your household goods to your new property. Now it’s time to unpack and turn your new house into a home.
    • 21 Nov 2017
      When an offer to purchase a property is signed by both buyer and seller, this constitutes a binding agreement or “Deed of Sale” between the two parties. However, in most cases the “standard contract” might not be enough to cover all the specifics pertaining to the sale. The agreement may require some additions or alterations to clauses, which needs an expert hand in the drafting of such
    • 21 Nov 2017
      As more and more South Africans look to invest in property abroad, Spain is offering them one of the best deals in global real estate.
    • 20 Nov 2017
      Since 2012, sectional title complexes have been leading the South African property market, not only in terms of price growth, but sales volumes as well. Remaining relatively strong, even in the face of 2017’s political and economic turmoil, experts say this market segment could offer valuable insight into South Africans’ property purchase priorities.
    • 20 Nov 2017
      Regardless of whether you are purchasing your first start-up home, downsizing or moving in with roommates, finding ways to maximise small spaces can be a big advantage, says Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa.
    Subscribe to the MyProperty Newsletter

    Last Name  
    Email Address  
    Email Frequency
    Share this Page

    For Sale Property
    Rental Property
    More Options
    Connect with us