Jul, 2016

HVS – Evaluating Hospitality-Focused Mixed-Use Assets

By on Jul 26, 2016

http://www.hvs.com/article/7735/evaluating-hospitality-focused-mixed-use-assets/?campaign=email&campaign-id=GHR-20160725-437

Americans continue to “rediscover” urban areas, they not only seek-out these areas as places to live but also as places to stay when they travel. These walkable neighborhoods offer residents and visitors ready access to civic, economic, and social nodes, to which local hotels can provide access for guests. This results in demand from more segments of hotel guests than if the hotel were located near a single demand driver.

Additionally, hotels in these areas are often less susceptible to new competition due to the higher barriers to entry in more urban markets. These barriers include fewer development sites (and therefore more expensive land), more restrictive zoning, and restrictions put in place by historic preservation boards. These constraints often necessitate adaptive reuse of existing structures and the construction of structured parking (or leasing arrangements with nearby properties that have a surplus of parking).

In addition to structured parking, these assets may derive income from first-floor retail space or apartments that share the upper floors of the building with the hotel. By their very nature, each mixed-use property is unique. Therefore, HVS professionals consider a variety of factors when providing consulting or valuation services for these types of assets.

As with any type of real estate, a determination of highest and best use is critical to the analysis of a mixed-use asset. However, while the highest and best use of a greenfield site in a suburban area is often quite obvious, the possibilities for an urban site are often more varied. Furthermore, an urban site or building could have environmental issues that are less common with suburban sites.

Another critical question when analyzing mixed-use assets is what type of person or entity would be interested in purchasing the property. Does the asset possess a combination of uses that effectively hedge against one another? Or are the asset’s uses so varied that there would be few buyers with the expertise and energy to manage such disparate income sources? Additionally, would the asset still appeal to traditional hotel investors, or are there so many other revenue streams that it no longer meets their investment criteria?

Finally, the appraiser must determine if the various sources of income could be split off and sold separately, and if doing so would result in a higher value than selling the entire property to a single buyer. The answers to these questions can affect the asset’s marketing and exposure times, as well as the yield rate.

After determining the most likely buyer of a mixed-use asset, the next step is to determine how that buyer would evaluate each of the asset’s income streams. For retail and office components, for example, it will be necessary to project market rents, occupancy rates, lease terms, escalations, and tenant improvement allowances. For properties with multi-family components, prevailing market rents or sale prices must be considered. Additionally, the appraiser must determine whether the residential units will be available to hotel guests via a rental pool. Operating expenses and/or selling expenses must also be evaluated.

In some cases, it may be appropriate to combine the income projections for the various components into a single consolidated income projection for the entire property. In other cases, the income projections are not combined because it was determined in the highest and best use that the various components would have more value if sold separately than if they were sold as one property. Furthermore, if a mixed-use property has condominium units, that income projection cannot be combined with the hotel’s income projection because the condominium income will diminish over time while the hotel’s income will continue over the economic life of the property.

After projecting the various income streams for a mixed-use asset, the appraiser must select a discount rate with which to discount those income streams to a present value. The selected discount rate must be consistent with the return expectations of the asset’s most likely buyer (as determined in the highest and best use).

In a case where the non-hospitality income is minimal, it may be appropriate to discount the ancillary income at the same rate as the hotel. However, in situations where the non-hospitality income is more substantial, it may be necessary to analyze the prevailing yield rates for each particular income stream. Additionally, if it was determined in the highest and best use that the asset’s unique characteristics severely limit the pool of potential buyers, investors or buyers may demand a higher yield rate to compensate them for the additional resources necessary to effectively manage the asset.

HVS is known for unparalleled expertise in hospitality valuation and consulting. However, we also have professionals with extensive experience in the valuation of other asset types, which we can leverage to value non-traditional hospitality assets. Hence, we encourage lenders, developers, and other stakeholders to take advantage of HVS expertise as they explore the opportunities in owning and developing mixed-use hospitality-focused assets.

Member Notice – SAPOA – Massmart Complaint – Progress Report 

By on Jul 20, 2016

EXCLUSIVITY CLAUSES – COMPLAINT BY MASSMART

 
On 11 June 2015, Massmart referred its complaint against Shoprite, Pick ‘n Pay and Spar to the Competition Tribunal following the Commission’s decision to ‘non-refer’ the matter due to the Grocery Retail Sector Market Inquiry. 
 
SAPOA has been cited as fourth respondent in the proceedings. Massmart states that SAPOA is cited in the complaint merely for the ‘interest’ that it and its members have in the matter. Importantly, no relief is sought against SAPOA or any of its members.
 
However, if Massmart is successful in its complaint, SAPOA’s members may well be affected in respect of new lease agreements which are to be negotiated or concluded and existing lease agreements which contain exclusivity provisions.
  
Interlocutory procedural applications
  
Exception Applications – Shoprite, Spar and Pick ‘n Pay
 
During August 2015, Shoprite, Spar and Pick ‘n Pay each filed a pleading known as an ‘exception’ to the Massmart complaint.  The exceptions set out argument as to why the substance of the complaint referral to the Tribunal by Massmart does not meet the strict procedural and content requirements to allow the respondents to deal with the complaint.
 
In summary, Shoprite, Spar and Pick ‘n Pay have asked that the Tribunal throw out the complaint, alternatively to direct that the points raised of defective pleading must be remedied by Massmart before the matter proceeds further.
 
In a combined answer to all three exceptions, filed on 16 September 2015, Massmart contends that the exceptions are in respect of matters of particularity and detail, and it is not required or appropriate to decide these issues at this stage of the proceedings.
 
The Tribunal will ultimately decide whether the complaint referral meets the requirements of particularity and detail required by the Competition Act, and/or stipulate what further is required in order for the respondents to answer the case before them. 
 
 Stay Application – Spar
 
On 21 December 2015, Spar filed an application to stay proceedings. The relief sought by Spar is to stay (suspend) the Massmart complaint proceedings pending finalisation of the Grocery Retail Sector Market Inquiry.
 
Spar argues that allowing the Massmart complaint to proceed will result in parallel investigations into the same substantial issues by the Competition Tribunal and the Commission’s assigned Market Inquiry team. This, Spar suggests, is not in the interests of the principle of institutional comity between the Tribunal and the Commission – this principle can be described as a restraint exercised by one institution out of respect for the role of another.
 
Spar also suggests that there is no indication that the Massmart complaint will be finally resolved before the Market Inquiry is due to be completed – by May 2017.
 
Although the Tribunal has not previously been asked to stay proceedings pending conclusion of a market inquiry, it has accepted that it has the power to stay complaint referrals before it. The Tribunal has and will exercise a general discretion in deciding whether or not to grant this application.
 
If the complaint is stayed pending the Market Inquiry, Massmart’s rights to proceed will simply be postponed pending the outcome of the Market Inquiry in the same way as SAPOA has agreed to suspend its rights in terms of the SAPOA complaint.  
 
SAPOA’s role in proceedings 
 
For now, SAPOA has elected to simply take a passive role in the proceedings. It may later choose to make a submission to assist the Tribunal and it may be called upon by the parties to provide information and possibly give evidence on these issues.
 
Fasken Martineau’s brief is to monitor proceedings and communicate developments which may have an impact upon SAPOA and its members.
 
The hearings are set down for the 26th and the 27th July 2016.

Global Hotel Chains – Absolute share price performance week 30 June to 7 July 2016

By on Jul 20, 2016


Per HVS EMEA Hospitality Newsletter – Week Ending 8 July 2016

South Africa: Persisting tough trading conditions affecting tourism 

By on Jul 20, 2016

Jul 20, 2016
PRETORIA, South Africa – The Tourism Business Council of South Africa reports that the persisting tough trading conditions in the South African economy are affecting businesses in the sector and have led to below normal levels of business performance as recorded in the 2016 Quarter 2 Tourism Business Index. However, the Travel and Tourism industry being the resilient sector that it is, both locally and internationally, role players have expressed hope of improved performance going forward.

These are the sentiments highlighted in the latest results of the Tourism Business Index (TBI), published today by the Tourism Business Council of South Africa (TBCSA). The report shows that businesses in the travel and tourism sector were trading under tough conditions in Q2, recording an index score of 78.9, significantly below the score of 100 points, which indicates normal business performance levels. The score is also 7.3 index points below than the 86.2 forecasted for the second quarter of 2016.

Commenting on the outcomes of the report, TBCSA CEO, Ms. Mmatšatši Ramawela, says that the Q2 results is a clear indication that the trading environment is tougher out there hence the results that are even lower than what we were expecting in the sector following on from the impressive results of Q1. It just shows that our recovery as a sector is going to be an even bumpier ride, considering all the added pressure inherent in the broader economy, which will no doubt affect our sector. We still have the after effect of Brexit to contend with, considering that both the EU and the UK are amongst our primary source market for both our business and leisure travellers,” says Ramawela.

Comparing the TBI with other economic indices in South Africa, it is apparent that there is a general trend of low confidence across South Africa’s economic landscape. The Q2 2016 results of the RMB/BER Business Confidence Index fell to a score of 32, which is below the normal confidence levels (a score of 50 indicating normal). On a slightly positive note, the SACCI Business Confidence Index (BCI) showed a slight increase in the quarterly average (from 93.1 to 94.1) in Q2 2016, although the overall trend is still downward from 2015. This being the case, it is going to be critical for role players in the tourism sector to “tighten” their belts and work harder to make South Africa a compelling proposition all around.

Source: eTN Global Travel Industry News 

HVS Cape Town: Hotel assets attract investor interest

By on Jul 20, 2016

The hospitality sector is poised for significant growth because of strong interest in local hotel assets, says global hospitality consulting and services group HVS.

According to the World Travel and Tourism Council, the direct contribution of travel and tourism to GDP in SA was R113.4bn in 2014 (3% of GDP). The contribution is expected to grow 4.6% per annum to R184.7bn (3.4% of GDP) by 2025, reflecting the economic activity generated by industries such as hotels and airlines.

HVS managing partner in Cape Town Tim Smith said on Friday, 15 July, that there was a real demand from prospective hotel investors for local assets. There was also optimism that the industry on the continent would grow, he said.

It was this potential that had led to the decision by HVS to set up shop in Cape Town as a springboard into the rest of Africa, Smith said. HVS undertakes valuations for new ventures and handles feasibility studies.

Smith said that following the post-World Cup slowdown, more companies and individuals had overcome doubts about risk and were prepared to invest in hotels. Occupancies reached a low of 53% in 2011, compared with 72% in 2007 before the global downturn.

“After the 2010 World Cup, there were too many hotel rooms and it took four years for the oversupply to be absorbed “¦ in the past two years, trading has been positive,” Smith said.

The Carlson Rezidor Hotel Group’s Marc Descrozaille announced in June that two new hotels would open in Cape Town in the next 10 months and another in Polokwane, highlighting the multibillion-rand investment the group is making in SA. Descrozaille said the company hoped to build 20 hotels in Africa by 2020.

The Hospitality Outlook: 2014-18 report by PwC says that although SA’s economy is facing headwinds, the hospitality sector is poised for growth in the next five years, in the wake of a number of inbound travellers into the continent.

Source: Business Day

IMF cuts SA growth projection, adding to economic turmoil | Fin24

By on Jul 8, 2016

http://m.fin24.com/fin24/Economy/imf-cuts-sa-growth-projection-adding-to-economic-turmoil-20160707

Harare – South Africa should urgently reform state-owned enterprises, reduce policy uncertainty and speed up reforms, the International Monetary Fund (IMF) said on Thursday, noting however that there has been “progress” in dialogue between the government, labour and business.

The IMF has cut its economic growth projection for SA – now the continent’s third-largest economy – to 0.1%, fresh evidence of the economic turmoil that the country faces.

However, SA remains Africa’s most industrialised country and the most attractive destination for foreign investments aimed at Africa, according to an EY index released in May.

The IMF noted that “authorities are making progress in the recent dialogue between government, businesses, and labour, which could catalyse reform implementation” and breathe fresh life into floundering growth.

The country frequently suffers job protests by workers in the mining sector, one of its most lucrative industries. The protests usually centre on wages for the mineworkers employed in a sector with the world’s largest reserves of platinum and vast deposits of gold and other minerals.

The IMF also urges SA to intensify momentum on its reform agenda. This would help boost employment creation in the private sector that has often complained of policy uncertainty.

“To generate reform momentum, the report suggests government should implement a focused set of tangible measures with a priority on boosting private sector employment.

“Clarifying the regulatory environment in the mining sector and reforming state-owned enterprises, for example, would reduce policy uncertainty and increase confidence and trust even in the short term,” said the IMF’s Yi Wu and Laura Papi in a report released on Thursday.

It said growth in SA slowed to 1.3% in 2015, the slowest pace since the global financial crisis of 2008. SA’s growth trajectory in 2015 was also below that of most emerging market economies and commodity producing nations.

“The IMF projects 2016 growth at 0.1 percent, which would mean a second year of falling per capita incomes. A muted recovery is expected from 2017, approaching 2-2½ percent in the outer years as shocks dissipate and more power plants are completed; with these projections, unemployment will likely rise over the medium term.”

Economic headwinds South Africa is facing could be amplified by “linkages between capital flows, the sovereign, and the financial sector, especially if combined with sovereign credit rating downgrades to speculative” grade.

Additionally, Britain’s decision to leave the European Union has further increased risks for SA, the IMF said, “as there are extensive financial linkages between the United Kingdom and South Africa and sizable trade linkages with the EU as a whole”.

IMF cuts SA growth projection, adding to economic turmoil | Fin24

By on Jul 8, 2016

http://m.fin24.com/fin24/Economy/imf-cuts-sa-growth-projection-adding-to-economic-turmoil-20160707

Harare – South Africa should urgently reform state-owned enterprises, reduce policy uncertainty and speed up reforms, the International Monetary Fund (IMF) said on Thursday, noting however that there has been “progress” in dialogue between the government, labour and business.

The IMF has cut its economic growth projection for SA – now the continent’s third-largest economy – to 0.1%, fresh evidence of the economic turmoil that the country faces.

However, SA remains Africa’s most industrialised country and the most attractive destination for foreign investments aimed at Africa, according to an EY index released in May.

The IMF noted that “authorities are making progress in the recent dialogue between government, businesses, and labour, which could catalyse reform implementation” and breathe fresh life into floundering growth.

The country frequently suffers job protests by workers in the mining sector, one of its most lucrative industries. The protests usually centre on wages for the mineworkers employed in a sector with the world’s largest reserves of platinum and vast deposits of gold and other minerals.

The IMF also urges SA to intensify momentum on its reform agenda. This would help boost employment creation in the private sector that has often complained of policy uncertainty.

“To generate reform momentum, the report suggests government should implement a focused set of tangible measures with a priority on boosting private sector employment.

“Clarifying the regulatory environment in the mining sector and reforming state-owned enterprises, for example, would reduce policy uncertainty and increase confidence and trust even in the short term,” said the IMF’s Yi Wu and Laura Papi in a report released on Thursday.

It said growth in SA slowed to 1.3% in 2015, the slowest pace since the global financial crisis of 2008. SA’s growth trajectory in 2015 was also below that of most emerging market economies and commodity producing nations.

“The IMF projects 2016 growth at 0.1 percent, which would mean a second year of falling per capita incomes. A muted recovery is expected from 2017, approaching 2-2½ percent in the outer years as shocks dissipate and more power plants are completed; with these projections, unemployment will likely rise over the medium term.”

Economic headwinds South Africa is facing could be amplified by “linkages between capital flows, the sovereign, and the financial sector, especially if combined with sovereign credit rating downgrades to speculative” grade.

Additionally, Britain’s decision to leave the European Union has further increased risks for SA, the IMF said, “as there are extensive financial linkages between the United Kingdom and South Africa and sizable trade linkages with the EU as a whole”.

South African Listed Property Funds – The Case For Hotel REITs

By on Jul 6, 2016

Same as last year the South African Property Owners’ Association’s (SAPOA) 51st Convention came and went with great pomp and ceremony as much as could be expected in Cape Town. Judging by some of the media stories that started floating around shortly after the event, it is clear that the South African listed property fund industry is experiencing some rough times, after a very good run for many years. The main reasons for this phenomenon are there for all to see. An economy in recession due to policy uncertainty, a volatile political environment with no immediate prospects for recovery as a result of a depressed global demand for commodities and the volatile Rand (ZAR)- US Dollar exchange rate.

With a persistent climate of reduced positive cash flows and rising expenses in the local environment, it is no wonder funds and asset managers are looking outside our shores to hunt for more optimum returns. Dollar- and Euro-based returns make sense to diversify against the ZAR-based returns, however in my assessment, property funds do not necessarily have to go off-shore to chase after the dollars. Good quality hospitality funds are totally capable of bringing in those dollars. It can reliably be argued that half of the demand for South African hotel accommodation is generated from overseas visitors including Americans, Europeans, Asians and other sources from around the world. Wealthy visitors from some west African countries like Nigeria and Ghana also bring in dollars when they land on our shores, and they also stay in hotels.

Professor Brian Kantor recently sounded a warning to Johannesburg Stock Exchange (JSE) listed property funds to consider very carefully their reasons for investing their funds in foreign markets because the nature of the returns in these markets may not necessarily be superior to those found on the JSE. It is my submission that more hotel funds may offer the required returns.

In the Fin24 article why firms are hoarding R14 trillion the writer points a finger at the listed property sector as having hoarded the most cash. “The surprising thing is that the major cash hoarders, apart from banks, are the rapidly growing listed property investment firms”, said Thando Vilakazi, a senior researcher at the centre. South African listed property funds are investing less in the local market and are using the JSE to source funds which are then used to invest in overseas markets. South Africa needs all the investment it can get and the sooner this happens the better so that business can further help tackle the problems of joblessness, poverty and unemployment.

The usual arguments against investment in hospitality property will need to be reviewed in order for these to be accepted as a viable alternative to put into listed property funds. More and more global chains are entering our markets and with them come operational and management expertise. It is also worth mentioning that the latter bring their client base with them and do not necessarily only rely on the domestic tourism market for hotel accommodation demand.

The graphs below depict the performance of a global Hotel Real Estate watchlist against the Dow Jones, the S&P 500 and the NASDAQ. The watchlist consists of REITs from the United States, Malaysia and a few from Europe and was observed during the period May to August 2017. Over the last three months the watchlist underperformed the Dow, the S&P and the NASDAQ.

3 Month 2017_08_06_13_34_35_Google_Finance_Track_your_portfolio_the_market_for_free

 

Over a six month window the watchlist was a star performer, clicking in a double-digit growth at just above 10%.

6 Month 2017_08_06_15_12_27_Google_Finance_Track_your_portfolio_the_market_for_free

When compared over a 12-month window, both year-to-date in 2017 and over the last year, the Hotel Real Estate watchlist has done well to narrow the percentage growth differential between itself and the Dow and the S&P 500. Only the NASDAQ outperformed the watchlist over this period.

 

YTD 2017_08_06_15_17_15_Google_Finance_Track_your_portfolio_the_market_for_free

1y 2017_08_06_15_20_56_Google_Finance_Track_your_portfolio_the_market_for_free.png

 

It is hoped that the above basic analysis can be sued by the South African investor community, property industry funders and the hotel industry to reconsider their decisions to expand off-shore and to give more hotel REITs on the JSE a chance.

 

 

Sun International subsidiary scraps development in South Africa

By on Jul 6, 2016

Casino developer Emfuleni Resorts (Pty) Ltd has decided to abandon its plan for a mixed-use development, which included a casino, on vacant land in Port Elizabeth, South Africa adjoining the Boardwalk Precinct.
The decision by the Summerstrand, South Africa-based subsidy of Sun International Ltd. (SUI:SJ), was made after a condition of their plan, the extension of the Boardwalk’s casino license, was not issued by the Eastern Cape Gambling and Betting Board. The current casino license expires in nine years and amendment of its 15-year term for an additional 20 years by the Gambling Board would have given the investors security to go forward with their development plans, according to InterGame.The development would have created 8,500 jobs and included a retail shopping mall and an events and entertainment venue. In addition, a 2,000sq.m Magic Company FEC, with cinemas, laser tag, and tenpin bowling, was also part of the plan for the location.

Had the ZAR1.3bn (€80m) development plan come to fruition, it would have been the city’s largest single investment in hospitality and tourism to date.

In other South Africa news, the decision by Rob Davies, the country’s minister of trade and industry, to award a new casino license to the province of North West has drawn criticism from operators and could face a court challenge.

Impact of BREXIT on the European Hotel Sector

By on Jul 4, 2016

A word from HVS London’s chairman, Russell Kett, on the UK’s momentous decision to leave the EU: “With the dust starting to settle following last week’s historic EU referendum vote, with 52% of the UK voting to withdraw from the EU, a number of issues and opportunities are beginning to emerge.

From a political perspective, the UK government is slowly organising itself to initiate the formal process, commencing with the invocation of Article 50 of the Lisbon Treaty, but this is complicated by the Conservative Leadership elections, for which nominations closed yesterday. The new leader – and Prime Minister – will however not be known until 9 September leaving a summer of uncertainty whilst political manoeuvring will doubtless continue, not least by those who would really prefer the UK to remain within a somewhat watered-down version of the EU. For the moment, the leaders of the other 27 countries and the EU President himself are indicating that the UK cannot cherry-pick which ‘freedoms’ it wishes to retain, so it will be interesting to see if this position moderates over the coming two months – some adjustment to the freedom of movement being the one aspect which could cause the UK to find a way to avoid exiting, as this would enable the freedom of trade and investment to remain as at present. Whatever the ultimate outcome, there is clearly more advantage in a dignified separation rather than an acrimonious divorce, and slowing down the speed of change is understandable. It may also help to weaken the impact of a reduction in the UK’s GDP over the coming year or two and help restore the rating agencies’ views on the country’s prospects. This could be destabilised, however, if the elections for a new Conservative leader and/or the internal wranglings within the Labour party precipitate an early general election this autumn, some 3+ years ahead of expectation.

So we are now experiencing an unprecedented level of uncertainty. And uncertainty fuels indecision. Indecision causes deals to slow down or even stop. We can expect there to be a softening of demand for hotel accommodation in many locations within Europe, so long as this uncertainty prevails, to a greater or lesser extent depending on the location. Probably more so when this is coupled with new hotel openings which are already in the pipeline. On the other hand, visitation to the UK is likely to be stimulated in the short term as the exchange rate suddenly makes the country more affordable, particularly for those from the US and the Eurozone. London hotels should be a particular beneficiary, so leisure tourism ought to balance out some of the losses from business visitors, at least in the summer period.

Each hotel will need to be viewed on its own merits in terms of its anticipated future trading and investment potential. We remain cautiously optimistic that the European hotel sector will remain an attractive source of investment from those global investors who are interested in the medium- to long-term growth perspective as well as knowledgeable intra-regional investors who are seeking to consolidate their ownership position in markets that they know well.”

HVS, June 2016