Simply measuring the RevPAR (revenue per available room) for the first six months of 2011 and comparing it to the same period in 2010 does not reflect the full picture, as the 2010 FIFA World Cup during June/July last year saw a substantial influx of visitors to South Africa and a related increased demand for accommodation.
As a result, while RevPAR for 1 January to 30 June 2011 reflected a decrease of 16.5% (measured in SA Rand), occupancy levels reflected a much lower decrease of 6.4%. From an international perspective, South Africa's July 2011 year to date RevPAR of US$64.39 declined by 14.9% compared to the same period last year, a figure that still compares favourably with the US' July 2011 year to date RevPAR of US$61.33."
When viewed in the context of the increased occupancy level during the World Cup, coupled with the full absorption of increased hotel room inventory - much of which came on line just prior to the World Cup - it reflects a marked move towards a bottoming-out of the recession and global contagion which has driven consistent decline over the past three years.
If the effects of the World Cup period demand were factored out, then we would see levels which were flat or at least stable year on year, as the drop in occupancy is directly driven by the increased demand during this major event. The next six months will be the acid test for whether the hotel industry is stabilising and moving toward a recovery phase in 2012. Rates, however, are not expected to increase substantially as the inventory-driven competitive environment remains a challenge to effective yielding in the industry.
To gain a clearer perspective, examine room rates further and once again taking into account the recessionary trading conditions in recent years, South Africa's hotel occupancy has decreased from 70.2% for the year ended December 2008 to the current level of 53.9%. This is driven by the global contagion, the recent South African economic recession and substantially impacted by the accelerated increase in hotel room inventory over the past three years.
However, the average room rate has increased from R795 for the year ended December 2008 to the current level of R847. While the average room rate is lower this year than last year, this is due to the considerably higher rates achieved during the World Cup, as before June 2010 the decline was only a few percent.
Another factor, which has impacted on the hotel market is a significantly reduced demand from the government sector, which is down from the 2007/8 levels, while international corporate demand remains volatile with the erratic global economic environment debilitating the hotel industry's recovery to past levels. In addition, while local corporate business demand remains more or less at the levels experienced in 2009, the challenge is that this demand has stagnated relative to the aggressively increased inventory base. A further challenge is that corporate buying habits have changed and the buying decision is considerably more price driven, leading to a concerted discounting regime in the hotel industry.
Viewing the hotel market internationally, it should be borne in mind that traditional markets have reflected no growth in international tourist arrivals, and in most cases declined as a direct result of prevailing global economic conditions. Conversely, it is anticipated that the improvement in growth of global travel to South Africa will be substantially driven by the exploration of new markets, with the BRICS (Brazil, Russia, India, China, South Africa) relationship proving to be critical over the long term.
One of the key issues facing the industry is 'cost-push' related inflation affecting utility and transportation costs. The sustained abnormal increase in electricity costs, together with the substantial increase in water, gas and property rates present a significant challenge to hotel operators. These costs have increased substantially above inflation rates while the current market dynamics are repressing room rates and the ability to yield pricing. Fuel price increases present a further 'cost-push' pressure on operating costs. As a result, turnarounds are debilitated by these uncontrollable factors as well as the prevailing market dynamics which are driven by increased inventory and the discounting regime.
While currently there is too much inventory at the four and five star level in most cities in South Africa, there are a number of good joint venture opportunities available with existing hotels, as there is no doubt that in a competitive market, branding, together with global reach and sales and marketing, are very important factors. There are certainly a number of good opportunities in the budget or economy sector of the market in primary and secondary cities, and we also see an opportunity for a 'budget boutique' or a B&B type of hotel - a hotel room that is appealing and has all the 'bells and whistles' but is small in size and in its public areas. In other words, a large version of a business class seat, as opposed to the large rooms with large public areas which we have seen to date in Africa, mainly due to the fact that land has been relatively cheap.
South Africa continues to attract buyers for small hotels and guesthouses, with appealing lifestyle and value for money being key factors and the agency has sold nine small hotels and guesthouses since the start of this year, mainly to European buyers, with an average selling price of R12 million.
Looking ahead, the South African hotel industry still faces a challenging period of between two to three years. While 2012 is expected at best to reflect a marginal recovery on the 2010/11 period, the level of inventory dilution is considerable and demand needs to improve substantially to pre-2009 levels for a reasonable impact in the absorption of increased inventory. The years 2013 and 2014 are expected to reflect marked improvement, albeit strongly dependent on the local and global economic circumstances.
With a presence in gateway cities in South Africa, the international and regional hotel operators will find it much easier to expand in a number of southern and western African countries. There are many hotels in our neighbouring states that offer an opportunity which, with a good refurbishment, strong global brand and a sound hotel operator, have the potential to operate so much better.
