Recently PAM GOLDING Tourism & Hospitality Consulting provided an in-depth review of the performance of the hotel industry, with a specific analysis of expected return on investment and the effect of inflation on the numerous new hotel developments that came on line during 2008 to 2010.

Further to this, and taking into account industry performance indicators for the six months to June 2013 (from Smith Travel Research), one can now glean a future perspective on the South African hotel industry.

Industry recovery evolving to sustained growth

A quick review of the sector’s performance over the period January to June 2013 reflects sustained growth with RevPAR (revenue per available room) increasing by 13.1% on a national aggregated basis. Healthy growth of 12.4% was experienced at 3 and 4 Star levels, while the 5 Star levels reflected impressive 15.6% growth.

Breaking this up into the key centres of Johannesburg, Cape Town and Durban reflects that Durban’s hotel sector has experienced the most impressive growth in the country at 26.7%, with Cape Town at 16.2% and Johannesburg at 9.1%.

The lower growth in Johannesburg needs to however be seen against the substantial growth of 16% in 2012, when Durban only improved by 0.9% and Cape Town by 9.5%. The accumulated growth over the past two years in all the major centres has nevertheless exceeded 25%.

RevPAR across the major centres as well as at the national level has reached its highest level over the past five years and has now finally exceeded the previous highs achieved in the bullish 2008/9 period.

While growth has been driven by both occupancy and rate, occupancy remains lower than the peak trading levels experienced in 2007/8. This is not exactly a negative trend as it should be borne in mind that hotel room inventory has grown by around 30% in the major centres, and notwithstanding lower occupancy levels, the quantum of rooms demanded has seen sustained growth since 2011.

Hotel industry cyclicality

The hotel industry in South Africa is acutely cyclical and the last high-trading cycle spanned a period of eight years, starting in 2002 and tapering off in 2009.

The low-trading cycles have historically been shorter in the past, however, the recent low cycle of three years was influenced substantially by the global economic conditions and the resultant recession in South Africa coupled with the accelerated increase in hotel room inventory over the past five years.

‘Hockey-stick’ phenomenon

What is interesting currently is the reminiscence of the start of the ‘high cycle’ in 2002. We have gone through a sustained recovery period over the past 18 months and more, reflecting a classical ‘hockey stick’ phenomenon (i.e. begins slowly and then gathers impetus).

Essentially, the industry reached its lowest point in 2011 (on a RevPAR basis) and currently is marginally above the previous high point of 2008.

The sustained growth experienced over the past 18 months is set to continue, as substantiated by projections of the major hotel groups and the recent announcements especially by JSE-listed hotel related companies.

The recent results announcement by Hospitality Property Fund is resounding testament to this. With RevPAR now at a level marginally higher than the previous high level of 2008, the industry has compellingly emerged from a recovery phase into a growth phase.

Current growth is sustainable

The most critical factor influencing the sustainability of the current growth cycle is undoubtedly the steadying in the level of hotel room inventory. Inventory growth has definitely stabilised since the surge around 2010 and the indicators, as positive as they currently are, are not nearly at the level that will provide the required confidence levels to induce banks and funding institutions into lending on new hotel developments, especially in the major centres.

Added to this is the fact that some of the major banks, and even parastatal funding institutions, are hampered with substantial ‘non-performing’ loans and even provisional liquidations. This again is reminiscent of the period 1999-2001, when brands such a Movenpick encountered ’speed-wobbles’ and the Tourism Bank faced fatal challenges.

Banks really only began relaxing their view in late 2006-early 2007 when the industry was peaking. We currently remain, in my opinion, at least 24 months or more away from reaching peak levels, which will be driven ostensibly by growing demand and stable supply, driving both rates and occupancy through performance optimisation.

An added factor that is currently driving supply stability is the limited availability of services including electricity and waste management, inducing local government ordinances to limit zoning approvals.

Insulated growth

The expected stabilised inventory environment over the next 24 months or more will translate into increasing demand on a stagnating base. Growth in the hotel industry is driven jointly by demand in room nights and increases in rate.

Demand is driven by numerous factors including economic growth, economic and political stability, and, growth in disposable income, among various other factors. Rate increases are driven by inflation, and importantly, by rate optimisation opportunities afforded through demand growth and segmentation yielding.

What we have therefore is an environment displaying the necessary indicators conducive to an extended period of insulated growth. Demand has been increasing on a sustained basis since the last quarter of 2011 and rates have seen consistent growth over the same period.

The general industry expectation is moderate demand growth of between 2% to 4% while rates are expected to increase above inflation at between 8% and 10%. This will compute to expected industry growth of around 10% at the lower expected level.

Given the growth during the similar period in 2004-5 of closer to 15% per annum, the industry prognosis provided may well be conservative for especially the coming 2014-5 period.

This Scenario

The scenario presented in this article is achievable based on the current environment. What we do not have certainty of is in regard to global political and economic developments, despite the fact that Sub-Saharan Africa has to a great extent been insulated against the recent negative impacts.

However, interestingly, the most aggressive growth in the South African hotel industry was experienced in the period immediately post the global events of 2001, which indicates that the effects of global events on the industry cannot always be accurately predicted.