Professionals grab bulk of new property investment class

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Last week, Hotel Room Investments (HRI) CEO, Mark Taylor addressed its investment club membership of primarily professional people and introduced three products presently coming to market. He said that each was conservatively estimated to deliver annual returns of 10% to 15%. HRI is a division of the élan Property Group, which has been involved in the marketing of sectional title units in hotels and holiday resorts in highly desirable locations since 1997.

Taylor explained that tourism is a "good, risk-averse" investment provided it is in known destinations and the hotels are managed and marketed properly. At the launch, sectional title units were on offer at three upscale resorts: Praia do Cossa in Mozambique (units priced at R980 000 to R2.45 million); Corail de Plage in Mauritius (euros 375 000 to 670 000); and the Franschhoek Valley Wellness Resort in South Africa (R2.8 million to R3.2 million).

Swapped internationally for vacations

Sectional title investors secure up to a 60-day personal access to the property in which they invest - and approximately one-tenth of investors buy simply for this perk - which can either be put back into the pool if not required (to increase return) or swapped internationally for vacations in similar resorts all over the world. For the remainder of the year, each room is placed in the hotel's rental pool, which pays monthly revenue pro-rata to each owner.

Taylor explained that the anticipated returns are based on average tourism numbers and occupancy levels for similar properties in similar locations, discounted by 20% to 30% to ensure figures are conservative. The model for HRI is to take the investment opportunity to investors. A high proportion of investors, especially into Mauritius, are international and HRI is about to embark on an international roadshow. The current weak rand makes the investment case even more enticing for foreign investors. Locally, the appeal is primarily to high-nett-worth individuals (HNWIs) because of the relatively high entry level, but also because it will take 18 months to achieve projected returns.

"It takes this long for a new development to establish its market presence. Thereafter, experience suggests the annual return grows consistently because there is also an average 10% capital growth. Some investors who have been with us for 12 years are today making returns of up to 30%."

Inflation-linked income for life

"When the HRI asserts that ordinary, hard-working South Africans can buy a R980 000 property to obtain an asset that not only appreciates in value over time, but also produces a passive, inflation-linked income for life, it obviously sounds too good to be true, especially to those who are not wise to the power of property investment. However, in tourism you are buying into one of the fast-growing global industries via the portal of one of the most experienced sectional-title hospitality companies that outsources the management of its properties to only the best management companies. We have a track record of returns, our properties are in the right locations, and that significantly reduces the risk," said Taylor.

Taylor pointed out that the three properties are particularly attractive options at the moment. Even economists cannot agree which direction the rand will go from R10.70/USD and the two properties outside South Africa offer a forex hedge. The JSE is commonly regarded as expensive (with the top 100 stocks averaging valuations of 25X compared to a global average of 15X. Even offshore equities have benefited from a record five-year bull market and are no longer considered cheap.

Tourism in South Africa has consistently outperformed other major overseas destinations and is now a bigger contributor to the country's GDP than the gold mining industry, according to the Department of Trade and Industry. The southern African tourism market remains strong and researchers such as PricewaterhouseCoopers not only predict strong growth for the hospitality sector, but indicate that over the next five years hotels are expected to be the fastest-growing category with the demand for rooms growing faster than supply and overall occupancy rates expected to increase.