INSIGHTS

LODGING MARKET OVERVIEW – LANSERIA INTERNATIONAL AIRPORT AREA, GAUTENG PROVINCE, SOUTH AFRICA

By on Jan 16, 2018

Introduction

The OR Tambo International Airport (ORTIA) is still by far the largest airport in South Africa, and regional airports such as Lanseria Airport (HLA) benefit greatly with feeder markets from international arrivals. Flights into HLA are convenient for most passengers due to its size which facilitates fast turnarounds, ample parking and access to major highways.

HLA is situated on the border between the North West and Gauteng Provinces. It is one of the most important regional airports in South Africa and it primarily serves the domestic passenger market and covers Cape Town, Durban and George. It is also favoured by the charter airline industry and covers many remote locations that are not served by the likes of the ORTIA. Many private companies and individuals also park their aircraft in the hangars located on the airport grounds.

HLA is owned by a consortium of investors, and the Lanseria Airport Development Company (LADC) was incorporated with a focus to expand the airport and to develop the extensive precinct. Support from Provincial, Local and Metropolitan authorities has also been forthcoming as the airport is seen as a major anchor for the development of a planned aerotropolis. Infrastructure projects such as airport expansions and their amenities create jobs both during construction and operational phases and are seen as an integral part of the planned mobility expansion project of the City of Johannesburg. Support has also been expressed from businesses with large planned projects.

Regional Economy of Gauteng Province  

Despite the relatively dry climate, Johannesburg, the capital city of the Gauteng Province, is still a strong competitor for local and foreign tourists into South Africa due to a relatively stable temperature profile throughout the year.  

The Gauteng regional economy places some significant reliance on HLA to facilitate its mobility. According to Gauteng Tourism, “Johannesburg is geographically fairly centrally located in South Africa, and as the biggest urban conurbation it’s also the largest transport hub – for local, cross-border and international travel”.

The City of Johannesburg Local Municipality is officially considered to have a population of 4,4 million. Johannesburg is the largest single metropolitan contributor to the national economic product. The city’s contribution is almost 16% to the national economy and 40% to the Gauteng province. Its economy is dominated by the financial and business services sector, the retail and wholesale sector, the community and social services sector and the manufacturing sector. These sectors are found in both the formal and informal economies, with the township areas accounting for the bulk of the informal economy.

The below chart illustrates regional GDP growth for the years 1997 to 2019. The trendline for the Gauteng economy is depicted in red.  

The outcome of the recent ANC Elective Conference has had a positive impact on the South African Rand. That, in combination with rising business confidence and a growing world economy, is seen as positive news for the local economy. This outlook however has to be read in line with the recent credit downgrades.   

Passenger Movement

In a past report IATA advised that global air passenger numbers are still set to double over the next 20 years, with an upside scenario growth average 5.8% through 2034 and produces 2.1 billion extra people.

Aviation in Africa has recently been given a major shake-up with the signing of the massively-delayed Yamoussoukro Decision at the end of 2017. This important milestone is meant to put into action the open skies policy for African airlines. The creation of a more competitive environment at Africa’s airports is widely seen as a major boost for the travel and tourism industry on the continent. It is perceived that HLA will benefit greatly from increased traffic.

According to the HLA CEO, Rampa Rammopo, the airport’s aim is to double its passenger numbers to more than 4 million within the next six years. HLA is South Africa’s fourth largest airport by passenger numbers among 21 significant local airports. Being in this position is a major feat considering that the airport is privately owned and relies primarily on the domestic market for its business. In 2006, HLA is said to have seen 100,000 passengers pass through its gates. This number has now risen to 1,9 million passengers and is growing in double digit percentages on an annual basis.

Lodging Market Segmentation

The Lanseria Aerotropolis lodging market consists primarily of a corporate segment, then followed by both group and individual leisure and MICE. Weddings are an important leisure activity in the greater area due to its serene and rural setting. The airport segment is rather small in line with the size of the HLA, however this is seen as a temporary situation because of all the planned expansion and the increased number of airlines that will come with this.

HLA’s rising popularity evolved as a result of corporate clients who were in need of a quick check-in and check-out process at the airport as they moved away from the larger and more elaborate ORTIA. This level of convenience is also extended at the various hotels, guesthouses, bed and breakfast and other lodging facilities that are to be found in the surrounding suburbs.

Individual and group Leisure segments are attracted to the abundant availability of tourism assets in the vicinity of HLA. The Cradle of Humankind and the Lion Park are world-famous destinations. Many wedding venues are to be found in the surrounding areas of the airport. A bit further out but still within easy reach is the Sun City Entertainment Complex. All these assets attract both domestic and international visitors all year round and the HLA helps to facilitate much of this business.

The MICE segment is amply provided for in this region due to the secluded profile of the properties found here together with ample recreational facilities, expansive grounds for team-building and central access.

Lodging Key Demand Areas

Lanseria Aerotropolis is surrounded by the Gauteng Province suburbs of Sandton, Randburg, Roodepoort, Krugersdorp, Magaliesburg and Centurion. The key demand areas comprise major residential, retail, commercial and industrial districts.

 Kya Sands, Lazer Park, Strijdom Park and Honeydew Industrial Townships are located in Randburg. These mature industrial townships have developed rapidly as an extension of Johannesburg as decentralised nodes. As Aerotropolis grew larger and became more relevant as a regional airport, new industrial parks have now been established. Lanseria Industrial Park and Cosmo City Business Park arose on the back of an expanding HLA. Since its establishment in 2006, Cosmo City Business Park has doubled its rate of vacant land take, now almost sold out. Stand development also tends to occur quite rapidly after a stand is sold out. These developments house distribution and warehousing companies and command high rentals.

Fourways and surroundings – This high value residential, retail and entertainment node is anchored by Montecasino and Entertainment Centre and Fourways Mall. Montecasino is always growing with new additions every year and brand new nodes every five years or so. These new nodes typically include entire office parks, retail and hotels.  

Fourways Mall is currently undergoing a major revamp with more than 20,000 square metres of additional shopping space. A sizable bulk of these shops are major international retail brands.

Dainfern and surroundings – Dainfern is essentially a residential golf park which grew to become a luxury node. Some of South Africa’s most expensive residences are known to change hands. It is popular with multinational expatriate executives who come to settle here.

Broadacres and surroundings – Broadacres is a pre-dominantly small-holding area which is fast developing into a high density residential environment. It is anchored by a community shopping centre and has access to Fourways and Sandton.  

Sun City – This world-famous entertainment and gambling hideaway is a short one and a half hour’s drive from Lanseria Airport.

Hartbeespoort – Hartbeespoort houses the largest dam in Gauteng Province. The town also supports much leisure activities over weekends and public holidays. Visitors come from far and wide to enjoy the various activities such as the newly-revamped cable car and water sports in the dam.

The Cradle of Humankind is a popular is perennially popular with both locals and foreigners because of its unique product offering and the operator’s focused marketing effort.

Lodging Source Markets

Lanseria Aerotropolis is essentially a business destination with a high domestic and continental guest component. Domestic source markets for hotels in the city include corporate travellers from Cape Town and Durban on scheduled Kulula, FlySafair and Mango flights, as well many chartered flights to far flung tourist destinations such as Kruger National Park and mining towns. Travellers arrive from all countries on the African continent. The previous Minister of Tourism, Derek Hanekom, has in the past announced that travellers in transit through Aerotropolis will no longer require transit visas, further cementing the airport’s reputation as a rapid transfer airport.

Lodging Properties and Indicative Room Rates

The Lanseria Aerotropolis lodging market comprises of only a few locally branded hotels, no global brands and numerous independent hotels and bed and breakfast establishments. Active brands include Tsogo Sun, aha and City Lodge Group. Surrounding hotels are situated at varying distances from the airport and all of them have great access to its facilities. The properties described in this paragraph are popular with business tourists due to their convenient location, attractive surroundings, affordable room rates and aesthetics.

Hertford Country Hotel, Shumba Valley Lodge and Kloofzicht Lodge are some of the more famous independently-owned assets and they cater for pilots, businesspeople, corporates, weddings and small conferences. Maropeng and Forum Homini Boutique Hotels cater for exclusive visitors to the Cradle of Humankind. Hotels at Montecasino, Indaba Hotel and City Lodge Fourways compete for the formal hotel client in the Greater Sandton and Randburg suburb. Rates at these properties are very competitive and much flexibility exists in pricing, a situation which can be attributed to their being privately owned and the largely independent operator profile.

Hotel prices change very rapidly on a daily, sometimes hourly basis. Through Google Maps, one can see the location of most of the properties that regularly advertise their price on the internet. In the study area, customers can rarely find a formal hotel room that is advertised at less than R1,200 per night. The bulk of the properties that are being advertised below that price are either guesthouses or bed and breakfast places. Formal hotels charge rack rates that are upwards of R1,500 the closer they are to the surrounding suburbs. At Montecasino in Fourways, the five-star Palazzo Hotel rack rate was advertised at R3,665 at the time this article was written. The Southern Sun was priced at R2,999 from R2,978 a few minutes earlier. On the other hand the City Lodge across the road was priced at R1,597. On the opposite end of the HLA, the aha Lesedi is advertising rack rates of just under R1,200.

Hotel Market Performance in South Africa

The average room occupancy rate of South African hotels is reported to be persistent in a range between 45% and 60% across all market positions. The branded properties tend to operate in the upper limit of this range. For most operators the key to profitability lies in how they manage their expenses while maintaining standards and still remain attractive to their guests.   

The rate of supply of hotel rooms in South Africa is in some ways regulated by the lending environment and the risk averse attitude of banks towards the funding of hotel investments. In line with that property developers have tended to staying away from hotel projects.     

The performance of the accommodation industry as measured by Statistics South Africa reveals a rising trend in revenue figures. Over the past 10 years room revenue has maintained a consistent upward trend despite tough economic conditions: “Measured in nominal terms (current prices), total income for the tourist accommodation industry increased by 1,2% in October 2017 compared with October 2016. Income from accommodation increased by 2,9% year-on-year in October 2017, the result of a 3,7% decrease in the number of stay unit nights sold and a 6,9% increase in the average income per stay unit night sold”.  

ACCOMMODATION REVENUE TREND 2012-2017

The accompanying graph from Statistics South Africa illustrates the accommodation industry’s room revenue trend during the period 2012 to 2017. Based on a perceived improving economic outlook, this rising trend is expected to remain over the next couple of years.

Room occupancy rate has remained bound in the 45% to 55% range over the same period. Whilst occupancies have been restrained, annual average room rates have maintained reasonable growth  

 

The Outlook For HLA

The outlook for the South African hotel industry is a positive one, following on increased confidence levels in business circles and the accompanying GDP growth outlook. This, in conjunction with demand for private  development in the area, government pledges  for large infrastructure projects such as new rail and water sanitation, is the setting that Lanseria aerotropolis needs to sustain a bustling hotel industry.

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For more information on the above and to learn more about our services please get in touch with us:

Makhudu Hospitality Consultants (Pty) Ltd.
Block D, Sweet Thorn on Beyers Office Park
2595 Bosbok Road,
Randpark Ridge, 2156
Gauteng Province,
SOUTH AFRICA

TEL: +2782 301 4572
CEL: +2787 238 2457
eMAIL: tshepo@makhudu.co.za
WEB: www.makhudu.co.za

COMPANY PROFILE MAKHUDU HOSPITALITY CONSULTANTS

We are a Hotel and Related Hospitality Property Consulting and Brokerage Services Company. We Pride Ourselves And Our Place through our dedication, our passion and our skill, all of which we bring to bear in serving our customer.  

The recent competitive entrance of global hotel operator chains in Africa over the last number of years has necessitated a rapid rise in new hotels. Because of that a related increase in the level of sophistication of hotel investors has created a need for a specialist consultancy service to meet to service the industry. Makhudu Hospitality Consultants (Pty) Ltd was established in 2017 to meet this need.

Over many years Tshepo Makhudu has amassed experience and knowledge of the hotel investment industry in South Africa and across the continent. He has held positions at leading consulting, real estate owning, banking institutions. Recently Tshepo has worked for a global hospitality development, management and investment consultancies in the world, where he was tasked with valuations, market and feasibility studies and consulting engagements in Africa.

Learnt skills include commerce and property development and management at leading universities in South Africa and executive leadership training in the USA. Tshepo is a founding Board Member of the South African Institute of Black Property Practitioners and in in 2015 he was bestowed the IsiThwalandwe Award for his contribution towards the transformation of the property industry in South Africa.

 

South African Listed Property Funds – The Case For Hotel REITs

By on Aug 6, 2017

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.

 

 

An Interview with Steve Rushmore, Founder and Chairman of HVS — 3continents3semesters

By on Jun 30, 2017

March 21, 2016 – The Master of Global Hospitality Business students embarked on a four-day intensive “Hotel Market Study

via An Interview with Steve Rushmore, Founder and Chairman of HVS — 3continents3semesters

THINC Africa 2017: Exciting future for African hotel market

By on Jun 28, 2017

According to the United Nations World Travel Organisation (UNWTO), the African continent experienced an increase of 8.1%, while Western European destinations showed little to no tourism growth in 2016. Visitor totals in Sub-Saharan Africa grew more than 10% year-over-year – the most of any world region or sub-region.
Managing Partner of HVS in South Africa, Tim Smith believes there is ongoing demand for local knowledge and expertise from prospective investors, which prompted HVS to hold their Tourism, Hotel Investment and Networking Conference, THINC Africa for the first time last year. Following the success of the inaugural conference, the second conference will take place on 30- 31 August 2017 at the FNB Portside Building, situated in Cape Town’s iconic V&A Waterfront precinct.

“The conference is run by hotel consultants with a deep passion for the industry, for the benefit of the industry,” said Smith. The THINC conferences are held in various regions around the globe and are aimed at hotel investors, hotel brands, and management companies, real estate developers, investment bankers and lenders, fund representatives as well as public and private hotel, tourism and convention agencies.

Evolution of the African hotel market

According to the latest HVS African Hotel Market Update, 2016 was a positive year for the African hotel market, tempered by external factors such as UK voters opting for Brexit and the US voting for Donald Trump as their president, both of which will have far-reaching ramifications for global markets, including those on the African continent.

“The evolution of the hotel market across Africa continues with some of the largest international brands announcing they were opening hotels in new countries. For example, Marriott and Rezidor launched large hotels in Kigali, Rwanda. Rezidor also opened a Radisson hotel and convention centre in Togo and announced it was developing five Park Inn hotels in Angola,” Smith points out. “Meanwhile, after the merger with Starwood, Marriott will be opening their first hotel in West Africa, the Sheraton Grand in Conakry Guinea.

The more established markets continue to be popular with Hilton announcing a new Hilton in Upper Hill, Nairobi – the 255-room hotel is set to be the tallest in Nairobi. Hilton also reported it would build the first modular construction hotel in Africa, the 280-room Hilton Garden Inn in Accra, and said it planned a 350-room Hilton at Lagos International airport.

Meanwhile, Accor is progressing with their impressive partnership for 50 hotels in Angola and have just announced three new hotels in Ethiopia” he said.

Positive trends present an exciting future

Smith says 2017 is sure to see more exciting announcements and if commodity prices continue to recover, some of the larger and more influential countries may enjoy economic growth, which in turn should further promote hotel development. “There will be ‘bumps in the road’ but positive trends present an exciting future for operators and investors,” he said.

The tremendous potential for growth in South Africa and the Southern African region is attracting regional and global investors, lenders, developers and operators from the hotel and tourism industries.

THINC Africa going from strength to strength

“Last year’s conference speakers included 30 MDs, CEOs and equivalent senior executives as well as Wesgro CEO Tim Harris and James Vos, MP Shadow Minister of Tourism. The feedback from attendees was extremely positive. 80% thought our speakers were excellent and 93% said it offered excellent networking opportunities,” said Smith.

Smith says the conference is going from strength to strength and is expecting 200 delegates, up from last year’s 160. The focus will remain on hotel investment with sessions on issues affecting owners and operators. Speakers will be senior people in the industry with experience in Africa generally. A new addition to the programme will be sessions focused exclusively on particular countries and one-on-one interviews with business leaders and entrepreneurs.

“We want to ensure that all delegates leave having been challenged and learned something. We have already secured a stellar line-up of speakers and sponsors” Smith said. “We will be encouraging audience participation so individuals can have their questions and issues is addressed. The instructions to speakers will be ‘don’t be boring or say something that can be Googled – people want opinions’.”

International Sporting Events – Takeaways for Hotel Investors

By on Jan 27, 2017

Introduction

There is no doubt hosting a major sporting event boosts the profile of the country and city.  Who does not want to visit Rio after the recent FIFA World Cup and Olympics?  However, these events are only for a few weeks and even allowing for a year of visits from sponsors and managers in the lead up to the event and the boost to demand once the curtain comes down and the television cameras depart, does hosting an international sporting event justify building new hotels?

In this article, we review the possible impact of hosting the Commonwealth Games on the city of Durban and provide some advice for would be hotel investors.  We also share some of the lessons from the 2010 World Cup in South Africa, the London Olympics 2012, the 2014 World Cup and the Rio Olympics.

The Commonwealth Games and Durban

In a BBC article two years ago, the last Commonwealth Games in Glasgow in 2014 was listed as the fifth largest global sporting event.  They attracted 1,300,000 spectators to watch 4,820 athletes from 71 nations.  Television coverage was taken to 90 countries.  The next edition of the ‘friendly games’, as they are known is in Gold Coast Australia in 2018.

The Commonwealth Games 2022 have been awarded to Durban, South Africa. However, there are rumours that the city is facing the real prospect of losing the right to host the Games. This instability is not good news for investors who had been readying themselves to enter the Durban landscape with new hotel developments since the hosting announcement was made.  We assume this insecurity will soon be lifted and all parties can plan for a successful event.

Durban has hotels, swimming beaches, stadia and wonderful weather all year round. Hotel performance has not been stellar in the past couple of years however, with the city still having to work off the oversupply from the 2010 FIFA World Cup.  As things stand, the event will coincide with the countrywide Municipal and Local elections in 2022, and this may or may not interfere with the city’s ability to host a successful event.

PERCENTAGE CHANGE IN HOTEL VALUE PER ROOM

The HVS Hotel Valuation Index 2016 graph below illustrates the trend in hotel values since 2010, and it can be seen how these have suffered between 2010 and 2016. This can be attributed to the bedroom oversupply that affected all the major centres in South Africa.  Values are reported in US$. The weakness of the Rand against the Dollar also contributed to the poor performance. Over the seven-year period from 2010 to 2016 the CAGR for value is -6.1% for Durban, which compares to -2.2% for Johannesburg and 4% for Cape Town.

durbanchart

What Can We Learn from Past Events?

In 2010 FIFA was reported to have block-booked more than 450,000 bed-nights long before the start of the event in an effort to regulate room rates prior to the Games. This was also done before the devastating financial crisis of 2008 and 2009 and due to this, many prospective sports followers cancelled their planned trips into South Africa. However, since many new hotel development projects were kick-started shortly after the hosting announcement and before the financial crisis, a hotel room oversupply resulted.

London is a mature tourism market with a stable tourism flow. Wary that this stability would be disrupted, the organising committee block-booked hotel rooms prior to the Summer Olympics of 2012 and released them to the market closer to the start of the event. Average Daily Room Rate during the Games was up 86.1% compared to the same days the prior year, whilst occupancy was recorded at 88,5% for London hotels. RevPAR also increased during the same period, according to data from STR. So how did London manage to host such a successful event for the hotel industry? The answer lay in how the city kept a lid on building new hotels, and rather worked on adjusting the room rate to increase performance.

Leading up to the start of the 2014 FIFA World Cup, tour operators who had years before bought blocks of rooms, were desperately offloading their spare capacity. Discount rates of more than 40% were not unheard of. As in the case South Africa in 2010, FIFA’s accommodation partner, Match Hospitality, prior to the event, released unsold rooms it had previously block-booked. The unfortunate result was that some World Cup hotel room prices dropped to half of the levels the hoteliers were achieving two years before. Overall, hotels in Brazil saw a 50.1% ADR increase in June and a 36.1% ADR increase in July; occupancy levels across all host cities decreased when compared to 2013; Brazil saw a two percent supply increase in June 2014 on a 12-month-moving-average basis, according to reported STR statistics.

On the other hand, the 2016 Olympic Games in Rio de Janeiro were successful not only on the sporting front, but on the hotel performance side as well. Media reports leading up to the Games were dominated by the devastating impact of the Zika virus, with the resultant withdrawal of some athletes from across the world, and the political turmoil involving the Brazilian president. Despite these hurdles, Rio hotels achieved good performance ratings during the games. STR has reported a 199.2% surge in average daily rate for Rio hotels during the games. The combination of this growth in rate and a 26.6% increase in occupancy to 76%, brought about a 278.6% increase in Revenue per available room. These are glowing statistics and it is generally held that Rio hotels outperformed London hotels during the previous Olympic Games of 2012. The key point to note however is that Rio was oversupplied with hotel rooms leading up to the games and this supply overhang is likely to negatively impact occupancies in the future. STR has estimated this bedroom oversupply at 23% more than a year earlier.

How Are Other Host Cities Preparing for Future Games?

The FIFA World Cup 2018 will be hosted by Russia; Tokyo will be receiving visitors to Japan for the Summer Olympics in 2020, and the FIFA World Cup 2022 will be held in Qatar. With prospects of many thousands of visitors, hoteliers are hoping to make significant profits from hosting the Games. Hotel investors are also eyeing superior returns from new properties that are entering these markets. These countries’ and cities’ organizers would do well to heed the lessons from previous international events.

Russia’s foreign political landscape, the exclusion of its top athletes from the Rio Olympics and the FIFA corruption scandals relating to how Russia won the rights to host the 2018 World Cup do not bode well for the country’s prospects to host an untainted event. On the other hand, Hotel News Now has recently reported that “the end of uncertainty in the Russian economy coupled with growth of occupancy and other performance indicators might increase the number of new hotel projects in Moscow and Saint Petersburg between 2016 and 2018”.

STR has previously reported that the Tokyo hotel industry is a high performer, with “some of the highest occupancy levels globally and with rates continuing to rise – all against the back drop of limited supply in the pipeline”. This situation could be an indication that the hotel market in Tokyo will be lucrative for hotel investors as large numbers of visitors are expected to flock to the city for the Games in 2020. The proviso however is that the delicate balance between supply and demand should be respected always.

Conclusion

Hotel investments are by nature very cyclical, therefore a delicate balance needs to be struck between the variables of supply and demand. International events can throw this balance out, and market players that can skilfully navigate these events can extract maximum benefit. To ensure that Durban hotels derive maximum benefit from hosting the Commonwealth Games in 2022, it is essential that hotel supply is kept at reasonable levels. A six-week event does not justify a $20 million investment in a new hotel, however to time the opening of a new hotel with such an event can massively help with cash flow management in the tricky first year of operation.  Durban hotels may not enjoy a 280% increase in RevPAR that Rio managed for the Olympic Games last year, but a substantial increase should be achievable.

However, perhaps the biggest bonus for all current and future hotels in the city is four years of international marketing reminding people of all the attractions Durban has to offer. The hotel industry can have a huge impact on the success of the games.  It is therefore imperative that the hotel industry is properly represented in the organising committee to ensure both the success of the games and the long-term success of the hotel industry learn from recent events.

ENDS

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.

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.

 

 

In Focus: South African Hotel Market Update

By on Mar 19, 2016

This is the first in a planned series of HVS articles on the South African Hotel Industry.

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Should you require any further information please get in touch with us directly.

Spatial Planning and Land Use Management Bill: Public Hearing Inputs

By on Sep 29, 2012

I am not quite certain whether the formal hearings have been concluded or not, however the following is a summary of the the foregoing hearings in Parliament on the SPLUMB. Once again, these are reproduced with compliments from the PMG.

The Committee’s Content Adviser and Researcher presented a summary of the comments and submissions made at the public hearing on the Spatial Planning and Land Use Management Bill (B14-2012) (SPLUMB). The comments were divided into general and specific comments. The issues raised in relation to the general comments were in respect of consultation; public participation/consultation; framework legislation; cost of planning; constitutionality of the Bill; land tenure and land use communal areas; alignment with other laws and custodian of the Bill. The issues raised in relation to the specific comments were in respect of intergovernmental support; intervention in functional areas of municipal competence; spatial development frameworks; mining; land use schemes; municipal planning tribunals; time-frames for applications; engineering services/development charges; appeals; exemptions; regulations; transitional arrangements and repeals.

The Department of Rural Development and Land Reform (DRDLR) presented its responses to the issues it had identified from the submissions made at the public hearing. These issues centred on decision making bodies; repeal of laws; transitional provisions; interface with provincial legislation and legal status of Spatial Development Frameworks (SDFs).

Members asked if the Parliamentary Legal Adviser could advise the Committee on the proposals which had been made in respect of the Bill; if the Committee ought to be dealing with the Bill alone or if the Department of Co-operative Governance and Traditional Affairs (COGTA) should also participate in the deliberations on the Bill.

Snap Survey – Spatial Planning And Land Use Management Draft Bill of 2011

By on Oct 4, 2011

The Constitutional Court will make a final ruling on the Development Facilitation Act in June 2012, which could result in this Act being repealed. This could mean that Development Tribunals would no longer be able to make decisions on land development applications. In the absence of the DFA, the Spatial Planning And Land Use Management Act would have to have been put in place. Should the new Act not be in place by then, development applications would then have to be made in terms of the legacy Townships Ordinances.