Outlook healthy for hotel industry

Kamil Abdul-Karrim, MD of Pam Golding Tourism & Hospitality Consulting argues that the long-term outlook for the industry is healthy.

The pent-up demand initiated substantial new hotel developments, which are now gradually coming into the market, and while the need has always been there for additional inventory, their market entry is at an unfortunately inappropriate time, said Abdul-Karrim.

"The past year from July/August 2008 to date has been an extremely difficult trading environment for the hotel industry, with a domestic economy experiencing high inflation levels with the associated high cost of money. As a result there was a considerable reduction in hotel occupancies and conferencing revenue, coupled with a worldwide recessionary economic environment, which exerted further pressure on corporate and government spending in South Africa. While the current occupancy level of 60.4 percent is the lowest level experienced for well over the past eight years (based on the earliest available data from STR), rates have held and in fact increased by five percent over the period January to August 2009. As a result the industry decline of 9.6 percent has been somewhat cushioned," he said.

World Cup reprieve

He said the forthcoming FIFA 2010 World Cup will provide some level of reprieve during the effective 40 days of the event. However, the fact that substantial new hotel room inventory is being introduced in time for the event, as well as numerous other projects planned prior to the recession and expected to come on line over the next six to 18 months, hotel performance will undoubtedly be diluted.

An added pressure from an inventory perspective is due to the fact that numerous residential apartment developments, which became distressed with the credit crunch, have been introduced in the short-term rental market and now operate in the same space as conventional hotels. These are either self-operated or operated by opportunistic hotel management companies that often raise a curiously high management fee structure to the distressed developer and make overtly optimistic revenue promises that are invariably never met. This unlikely “marriage” of developer and manager ultimately dilutes the reputation of the SA hotel industry, which adopts among the highest standards in the world.

The jury is out

Abdul-Karrim continued: "The challenge is that these apartments, which are often perceived to be better living environments than traditional hotels as a result of their contemporary lifestyle offering, are rented out on a daily basis at considerably lower rates, driven by the fact that they do not have the necessary hotel infrastructure behind the property or operation. But the jury is out as to the sustainability of this business model. Of course the developer has the option, when the residential apartment market turns, of reselling these units as individual apartments. However this is not what the hotel industry is all about, which is commitment, passion and service."

SA is demand driven

He said unlike mature markets in Europe and North America, hotel development in South Africa has always been demand driven, as opposed to capacity creating. "In a demand-driven environment such as ours, we typically encounter development spikes as experienced in the past and present, which create oversupply situations. And as there is a substantial lag before demand absorbs the supply, the result is that developers seem to catch up on the market dynamics only when demand is reaching saturation levels. With the typical lifecycle of hotel development being 20 years or more, the gains over the longer term are there for the developer who fully appreciates the market dynamics."

Abdul-Karrim said despite the impending oversupply of hotel room inventory, the longer term outlook for the hotel industry remains healthy and affords ongoing benefits and viable returns for the hotelier who is in the market for the typical lifecycle of the product. The trading environment post 2010 will be challenging probably for 14 to18 months while demand grows and ultimately absorbs the new inventory. What is critical for destination South Africa to remain sustainable and foster growth in the tourism and hospitality industry is to ensure there is appropriate capacity to service growing demand. Lack of capacity results in loss of bed nights, and sustained lack of capacity creates the perception that a prospective visitor will never find accommodation. As a result the destination slowly excludes itself from travel plans and coupled with this - as seen in busy hubs in Africa - is that lack of capacity and growing demand drives prices to unnatural levels with sub-optimal products ultimately demanding extremely high dollar-based rates, a situation which is not sustainable.

Fresh, new product entries

"With a revised focus on Africa and the entry of a new group of thinking, hotel development and management companies we are starting to see a spread of fresh, new product entering the market at prevailing market rates. The nett effect of this is that at the early phase the increase in inventory is absorbed by the pent-up demand; however when the supply-demand equation stabilises, the first to suffer are those operators who have bled the market in good times, without due consideration to standards and guest satisfaction. These properties will then be first affected by demand stabilisation, and will rightfully be weeded from the market - proving without doubt the non-sustainability of limiting development and creating a sub-optimal product through demand driven complacency in product development.

"It's not clear at this stage whether the expected reversal of the prevailing recessionary conditions will have the desired effect on the broader tourism and hospitality sector. What is evident is that spending patterns have changed and the phenomenon of opulent consumerism may be transforming into a more discreet pattern. The South African hotel industry has previously experienced volatility, albeit not to the current extent, but what is clear is that as an industry, hospitality is an embedded element of economic and social development. Furthermore, hospitality is an age-old tradition and while there is a difficult patch ahead, there is light at the end of the tunnel," he concluded.

For further information contact Kamil Abdul-Karrim on +27 (0) 82 902 0533 or email .