HVS Cape TownHVS.com 

IN FOCUS: SOUTH AFRICAN HOTEL MARKET UPDATE

MARCH 2016 

Tshepo Makhudu Senior Consultant    Tim Smith, MRICS Managing Partner 

IN FOCUS: SOUTH AFRICAN HOTEL MARKET UPDATE | PAGE 2 

Introduction 

 

The South African economy, like otheremerging markets, has been impacted byseveralglobalchallenges,withmanyofthoselying outside its control. These includeexchange rate fluctuations, the fall incommodity prices and a slowdown in theChinese economy. This article highlights themacro factors impacting the South Africanhotel market. Over supply after the 2010FIFA World Cup is well documented,unfortunately there were other influencersexacerbating the imbalance in supply anddemand. Occupancy and average daily rate(ADR), in local currency, have now beengrowinginthemainaccommodationcentres,signaling the worst may be behind us. Butwhat should investors and operators beaware of when considering South Africa fortheirnexthotel?

Economic Factors 

SouthAfrica’shighestGDPgrowthinthepast5yearswas3.21%in2011,upfrom3.04%in2010. In 2015 it was more modest at 1.2%and 2016 is forecast to be 0.7%. Inflationtargetingisstilltheprimarymonetarypolicywith interest rates used to combat inflationirrespective of the cause of the priceincreases. 

Growth (Annual %)  ‘10  ‘11  ‘12  ‘13  ‘14 ‘15

GDP growth   3.0  3.2  2.2  2.2  1.5 1.2

Inflation   6.4  6.7  5.5  6.0  5.8 5.9

Interest Rate Spread   3.1  3.2  4.1  4.0  5.0 4.2

Population Growth   1.4  1.5  1.5  1.5  1.6 1.6

Source:KNOEMATheentryvisaissueshadanimpactonvisitornumbers. With the current Rand US$exchange rate levels tourism numbers areexpected to rise. However there have beenreports of several families being deniedaccess to ports of entry at airports, as they

didnothave the correctpaperwork to enterthecountry.Manyoperatorsenjoyed recordvisitorsoverthe last few months; the Victoria & AlfredWaterfront in Cape Town had their busiestholiday season. Some hoteliers are takingadvantage of the situation with huge rateincreases. It is claimed some establishmentsincreasedratesby30%over thepast festiveseason, despite headline inflation remainingbelow6%.Theyjustifysuchincreasesbythefall in value of the Rand against leadingcurrencies. Theargumentbeing, if theRandhas dropped more than 30% in value, theinternational guest still benefits if the priceincreaseisless.Unsurprisingly this tactic elicited anacrimonious reaction from wholesalers andlocalsalike. It isunlikely tobesuccessfulasvisitorswillbeexpecting tobenefit fromthedevaluation of the Rand. A further negativeimpact of exchange rate based room rateincreases is that a parallel market getscreatedwherein thedomestic traveller is nolongerabletoaffordtostayinlocalhotels.The unprecedented current drought andheatwave has dealt a serious blow to theeconomy due to high food costs and thedestruction of many crops and livestock. Ithas led to water shortages and rationing inmanyareas.Eskom’selectricitysupplyload‐sheddingalsohadanegative impactontheeconomy. Lostsales at retail outlets, work stoppages atfactories and reduced manufacturing outputhaveallresultedfromthelackofcertaintyofpower.

On the Tourism Front 

SouthAfricanTourism,themarketingwingofthe Department of Tourism, continues to doanimportantfunctionofkeepingthecountry

IN FOCUS: SOUTH AFRICAN HOTEL MARKET UPDATE | PAGE 3 

topofmindwhenitcomestoholidaymakersandbusinesstravellers. 

  

TheWorldEconomicForum(WEF)onAfricanamedSub‐SaharanAfrica'stop10countriesin travel and tourism competitiveness, withSouth Africa taking the lead. The WorldEconomic Forum’s Travel and TourismCompetitivenessIndexplacedSouthAfricaatposition48, an improvementof12positionsin24months.Top 10 Tourist Sources – Dec 2014/2015  

Source:StatssaAccording to the above table, tourists fromthe top tenoverseassources toSouthAfrica,only the UK the USA and China showed anincrease in thenumberofvisitors in the12‐monthperiodtoDecember2015comparedtothe previous year. Tourists from Chinaincreased by the highest number during thesamecomparativeperiod.   

According to Euromonitor, based oninternational traveller statistics for 2014Johannesburg is the 32nd most popular

destinationintheworld.Thesetwocitiesarebynomeansthe onlyonesthathavetourismassets.Eachoneofthe othersevenprovinceshas unique attributes that travellers findattractive.

Internationaloperatorscontinuetoenterthismarketandarebringingwith themtheir fullline‐up of accommodation products. This ispointingtowardsagrowingsophisticationofthe market for both local and internationalguests.Big spenders continued to invest in 2015,with many new hotel developments andrefurbishmentprojectsbeingfinalized.TsogoSun tookownershipof theLibertyLifehotelportfolio last year for an undisclosed sum,while Sun International announced itsintention to purchase competitor PeermontGlobal for R9.4 billion. The latter is pendingCompetitionsCommissionapproval.Global chain groups are still bullish aboutentering the South African hotel market.South Africa is getting its first Marriott branded properties.Marriott International has signed two new properties in South Africa in partnership with property developers the Amdec Group.The 150-room Johannesburg Marriott Hotel Melrose Arch and the 200-unit Marriott Executive Apartments Johannesburg Melrose Arch will be located in the Melrose Arch precinct. Carlson Rezidor, one of the most dynamic hotel groups worldwide, announced the very first Radisson Red in Europe, the Middle East and Africa: the group's new upscale lifestyle select brand launches in Cape Town, South Africa.

IN FOCUS: SOUTH AFRICAN HOTEL MARKET UPDATE | PAGE 4 

The Radisson Red Hotel V&A Waterfront will open in late 2016 and be located at the V&A Waterfront.   

“Despite the global financial crisis and nolongerbeingAfrica’s largest economy, SouthAfricais stillthe number onedestination inAfrica for foreign direct investment with noindication that will change” according totheDepartment of Trade and Industry ofSouthAfrica. -  

2016 Outlook 

Grossdomesticproductgrowthisexpectedtocome in at less than 1% in 2016 whilstinterestratesareexpectedtorisebyat least0.75% by year end to 6.8%. Looming debtratings and subsequent downgrading ofSouth Africa’s investment status have ledbothpoliticiansandbusinesscaptainstotakeaction.With China scaling downmanufacturing andexportactivitiesthisopensupanopportunityforAfricancountriestofillthisspace.Afterallit is commodities from some of thesecountries that have helped China cement itsplace as the second largest economy in theworld.ForeigndirectinvestmentintoSouthAfricaisexpectedtocontinueataconsistentpace.Japanhasadoptednegativeinterestratesasamacroeconomic policy stance in order tostimulate economic activity in that countryand to escape an endemic recession. Thiscouldspurinvestorsintothatcountrytolookfor returns elsewhere in countries that stillpromisepositiveinterestrates,suchasSouthAfrica. 

  

The highest impact of the strict entry visarules was felt mostly by families travellingwithchildren.TheHomeAffairsandTourismDepartments have now unveiled a newpassport for underage children whichcontains the names of both parents. Thistherefore eliminates the need for parents toobtain an abridged certificate for each childtheytravelwithintoSouthAfrica.Thebenefittoforeignvisitorsisthatnowtheycanreducesignificantly the time it takes to completetheirtravelarrangements.Thefive‐yearlyMunicipalelectionsareduetotake place in 2016 and once they are overthey will provide policymakers with amplefocustotakethecountry’seconomyforward.

Conclusion 

Whilethepast12monthshavebeensomeofthe most economically turbulent in thehistory of modern‐day South Africa, thefutureisstartingtobrighten.There are challenges ahead and with allinvestments in Africa, hotels being noexception, there will be potholes on thegravel roads; not the smooth tarmac ofEurope and the US. However, the rewards,onceyoumissthosepotholesaresubstantial.

 

HVS Cape TownHVS.com 

About HVS  HVS,  the  world’s  leading  consulting  and  services organization  focused  on  the  hotel,  mixed‐use,  shared ownership,  gaming,  and  leisure  industries,  celebrated  its 35th  anniversary  last  year.  Established  in  1980,  the company performs 4,500+ assignments each year for hotel and  real  estate  owners,  operators,  and  developers worldwide.  HVS  principals  are  regarded  as  the  leading experts in their respective regions of the globe. Through a network  of  more  than  35  offices  and  more  than  500 professionals,  HVS  provides  an  unparalleled  range  of complementary  services  for  the  hospitality  industry. HVS.com  

 Superior Results through Unrivalled Hospitality Intelligence. 

Everywhere.  

The  Cape  Town  office  focuses  on  the  whole  African continent.  We  have  worked  in  24  different  African countries and both the main established and new markets, advising on existing and proposed hotels and resorts.   

About the Authors 

TshepoMakhuduisaseniorconsultantinourCapeTownoffice.Hehasmanyyearsofpropertyindustryexperience and has held employment at leadingproperty, banking and telecommunicationsmultinationalinstitutions.Notablyheworkedinthehospitality industry during themost vibrant era oftheindustryinSouthAfrica,witharesponsibilityforthe efficient delivery of hotel and casinodevelopment projects. Tshepo studied commerceandpropertydevelopmentatleadinguniversitiesinSouthAfricaandreceivedleadershiptrainingintheUSA.

TimSmith,MRICSisManagingPartnerofourCapeTown office, focusing on assignments across theAfrican continent. He graduated fromDeMontfortUniversitywithadegreeinEstateManagementandhas worked as a chartered surveyor since 1995,specializingon thevaluationandsaleofhotelsandotherleisurepropertythroughouttheEMEAregion.

Forfurtherinformation,pleasecontact:tsmith@hvs.com+27(0)797342296