Aug, 2010

The Tourism Industry and Hotel Development in South Africa

By on Aug 25, 2010


For many years the tourism industry in South Africa was classified as only one of the numerous secondary contributors to the country’s gross domestic product. The primary industries were mining, most especially gold, manufacturing and agriculture among others. However, when gold started losing its shine, in a manner of speaking, other industries started to come to the fore. As one of South Africa’s other exports, like gold, tourism started to raise its hand to also be counted. However, it still did not occupy centre stage. Even after the White Paper on Tourism of 1996 was published, tourism was still accommodated as a Sub-Ministry within the Environment and Tourism Department. Even then, it was still not identified as a main priority.

It was only after visitor numbers to South Africa started to rise phenomenally that the authorities started to take notice. The events which had triggered this phenomenon were the erstwhile but very successful general elections of 1994 and the Rugby World Cup of 1995. South Africa became the place to be! Although it is generally regarded as a long-haul destination, tourists still came flocking in even after the two trigger events had long passed. So, what made these people to come flocking in?

South Africa is attractive to tourists due to its physical beauty as well as its mild weather. Natural disasters are very rare. We have an abundance of mineral resources. We have an open economy, which attracts investment, and with it many immigrants. We also have an open-border system, whereby very many people from the north of the continent arrive in droves as political refugees.


Tourism development involves a broad ownership base which means that many people benefit from the tourism industry. One of the economic sectors that derive tremendous benefit from tourism development is the hospitality sector and by extension hotel properties. Hotel properties must be developed all the time in order to support tourism development. With increased tourism development, broadbased economic development increases, which in turn benefits the broader South African community.

Although the South African government was at the forefront of supporting the country to attain the rights to host the 2010 FIFA World Cup, the State still needs to put more funding into promoting tourism. Our competitors are still directing more funding into promoting their countries. With the spotlight shifting away from South Africa to Brazil as a result of being the next nation to host the World Cup in 2014, we cannot afford to lag behind. We have a great product and the right mix of people and export credentials to compete successfully.

Then there is the image issue we need to think about. Issues that get interpreted as signs of political instability are all over the media. Service delivery strikes, no matter where they originate, have an impact on the image of South Africa. Of course there will always be the extreme tourist; one who will always go political hotspots to derive a thrill. However, the majority of our visitors prefer to come here for the milder attractions we have to offer. Do we report only the good news and hope that continuing to do so will eventually lead the world to believe that we do not have problems? Or do we continue to report the bad news as prominently as we are doing now, and risk perpetuating the old stereotype that the African continent is incapable of looking after itself?

The responsibility of growing the tourism industry lies with the State. The good thing is that the South African government has been at the forefront of developing tourism. From these overtures from government, the private sector can only take the cue and forge ahead with the development of tourist attractions.


The hotel industry in South Africa was catapulted into the high road by Sol Kerzner and the South African Breweries with the establishment of Southern Sun Corporation in the late 1969. Since then, many hotels have been built and renovated many times over. Prior to the recession of 2008-9 FIFA was adamant that South Africa has a shortage of hotel bedrooms for the 2010 World Cup. Well, things have changed very rapidly over the last eighteen months or so. Many hotels were built in the intervening period. Arguably theses were built in order to respond to this shortage as per FIFA. The expected numbers did not arrive to take up the room-nights. We now find ourselves in a situation of an oversupply of hotel room-nights.

The financing of hotels is a very problematic subject. Banks still view hotels with extreme suspicion. The revenues are too volatile, they say. As a result it is not possible to forecast how the loan is going to perform over the period it is extended. On the one hand, if they had a lease from a ‘reputable’ hotel operator, they say, then they would happily extend loans for hotel developments.

On the other hand, hotel operators are generally not willing to enter into leases with the hotel owners, thereby providing guarantees to bondholders that the loan is covered by proper collateral. As a result of this impasse, hotel developments are less prevalent than retail and commercial developments.

There is an old adage in the investment world which says the higher the risk, the higher the return. I know of a company which invests in hotel properties as well as retail and offices properties. Rand for Rand, over many years, the hotel property investments provided the highest return for them. So, even under these depressed trading conditions, they are still investing aggressively in hotel properties.

Two major international hotel groups have recently announced plans to either enter the South African market or to increase their current investment. These companies are Marriott International and the Hilton Group. It is hoped that these new initiatives were triggered by more than just the successful hosting of the FIFA World Cup, but also by something more sustainable than that.

In other parts of the world, real estate investment trusts have been formed specifically for the purposes of investing in hotel properties. This is because of the reluctance of bankers to fund hotel property developments. In South Africa only one Fund has been formed. This is the Hospitality Property Fund. At inception, banks were reluctant to extend lending to this Fund too, due to the underlying asset being hotel property. Such motives of the banks need to be questioned. It is almost an open secret among property practitioners that banks sometimes provide lending to funds that have as an underlying asset properties that they would normally not touch on an individual basis. The latter are characterised by poor valuations, dilapidated properties and bad locations, to name a few.


Although this article mentions that South Africa has an oversupply of roomnights, this this phenomenon has not been reported to have been formally established. Operational variables such as low occupancies and revenues and average room rates alone are not enough to use as evidence to arrive at the conclusion that an oversupply definitely does exist. This reported oversupply could be referring to all types of hospitality, thus accounting for bed and breakfast establishments, the latter not being classified as formal hotels. Oversupplied or not, the formal hotel industry needs more hotels to attract tourists.