Johannesburg - The 2010 Fifa World Cup is likely to do little to lift the overdeveloped hotel industry out of one of its worst slumps ever. In fact, some Cape Town hotels could hit the wall before the expected 450 000 soccer fans descend on South African shores in June next year.
That was the gloomy message from a number of South African hotel industry captains speaking at the annual Hospitality Investment Conference Africa (HICA) held in Sandton earlier in November.
Kamil Abdul Karrim, MD of Pam Golding Tourism & Hospitality Consulting, told delegates the global recession could not have come at a worse time for the South African hotel industry.
While the supply of new hotel rooms surged by 10%, demand has dropped by 4%. That has seen average hotel occupancies fall to 10-year lows of 60.4% in 2009, down from more than 70% during the boom years of 2006, 2007 and 2008. Hotel revenues (RevPar) simultaneously dropped 10% from January to August 2009 year-on-year.
Karrim's figures showed that there is currently only enough demand to fill about 35 000 graded hotel rooms, while South Africa's room supply has swelled to close to 60 000. That translates into a hefty 25% oversupply.
It seems that the luxury end of the Cape Town's hotel market has been particularly hard hit, with occupancies down a massive 30% for the year to date. Karrim said both leisure and business tourists are not only travelling less, but they are also downgrading to cheaper accommodation.
"The era of opulent consumerism is gone and has been replaced by a move towards moderation."
Decadent days are over
Meanwhile, new four and five star hotels continue to open their doors in the Mother City.
Karrim said in the 12 months to June 2010, about 2 500 new five star hotel rooms would have been added to Cape Town alone, bringing the city's total supply of five star rooms to 14 000.
Kevin Page, group development director of Southern Sun Hotels, said the overbuild situation in the luxury end of the market has to an extent been ego-driven, with many players simply wanting to outdo their competitors.
Said Page: "A degree of realism needs to come to the market if hotels are still going to deliver a decent return on investment."
Figures from Gerald Nelson, CEO of JSE-listed Hospitality Property Fund, showed that Cape Town's current room supply (all grades) would surge by 40% over the next two years.
Said Nelson: "These are not speculative figures but projects that developers are already committed to."
To make matters worse, a number of unsuccessful apartment buildings that have come on stream over the past 12 months in Cape Town are being converted into hotel-type rooms, often at much cheaper rates than graded hotels, bringing yet more supply and competition to an already saturated market.
Nelson said given that the South African hotel industry is already sitting with a 25% oversupply coupled to all the new stock still coming on stream, there is no way that anyone can expect good times ahead.
The industry may well be gearing up for a surge in occupancies during the 2010 Fifa World Cup, but the five-week event alone will not support a sustainable improvement, said Nelson. He warned that it could take as long as five years for South African hotel demand and supply to normalise.
Repossessions loom - but don't expect bargains
Arthur Gillis, CEO of Protea Hotels, had a similar view. He said it's possible that occupancies, particularly in Cape Town, will rise above 80% from December 25 to January 2 and again during the soccer world cup in June/July next year, but that won't prevent some hotels from going out of business.
Gillis said he wouldn't be surprised if banks are forced to repossess a number of failed hotels over the coming months, particularly in Cape Town where many hotel owners can no longer afford to repay their debt.
Banks are partly to blame, Gilles said, as they fuelled South Africa's hotel boom over the past two years by allowing developers to over gear with loan-to-value financing of as high as 90%. "Banks will simply have to take these properties back."
Gilles said the problem with this is that hotels are difficult to redevelop, so there's little else to do with a failed hotel but demolish it. Said Gilles: "A failed hotel is not worth more than the land value minus demolition costs."
However, despite falling occupancies and rising room supply, consumers expecting to cash in on widespread discounted hotel rates over the coming Christmas holidays may be in for a surprise.
In fact, latest figures from Smith Travel Research show that average South African room rates are up 5% over the period January to August 2009.
It appears that most well-established and experienced players are also not planning to lower room rates to any significant degree in a bid to protect the future viability of their hotels.
Said Gillis: "When you panic and drop your room rates, it's difficult to push them back up again when the market recovers. It's a far better practice to keep rates where they are and sit out the downturn."
Gilles cited one example of a five star hotel in Cape Town that is now offering rooms at R600/night, including a massage. "That hotel will from now on always be known as the R600/night hotel and will only alienate costumers when it wants to raise its rates again."
- Fin24.com