South African Listed Property Funds – The Case For Hotel REITs

Same as last year the South African Property Owners’ Association’s (SAPOA) 51st Convention came and went with great pomp and ceremony as much as could be expected in Cape Town. Judging by some of the media stories that started floating around shortly after the event, it is clear that the South African listed property fund industry is experiencing some rough times, after a very good run for many years. The main reasons for this phenomenon are there for all to see. An economy in recession due to policy uncertainty, a volatile political environment with no immediate prospects for recovery as a result of a depressed global demand for commodities and the volatile Rand (ZAR)- US Dollar exchange rate.

With a persistent climate of reduced positive cash flows and rising expenses in the local environment, it is no wonder funds and asset managers are looking outside our shores to hunt for more optimum returns. Dollar- and Euro-based returns make sense to diversify against the ZAR-based returns, however in my assessment, property funds do not necessarily have to go off-shore to chase after the dollars. Good quality hospitality funds are totally capable of bringing in those dollars. It can reliably be argued that half of the demand for South African hotel accommodation is generated from overseas visitors including Americans, Europeans, Asians and other sources from around the world. Wealthy visitors from some west African countries like Nigeria and Ghana also bring in dollars when they land on our shores, and they also stay in hotels.

Professor Brian Kantor recently sounded a warning to Johannesburg Stock Exchange (JSE) listed property funds to consider very carefully their reasons for investing their funds in foreign markets because the nature of the returns in these markets may not necessarily be superior to those found on the JSE. It is my submission that more hotel funds may offer the required returns.

In the Fin24 article why firms are hoarding R14 trillion the writer points a finger at the listed property sector as having hoarded the most cash. “The surprising thing is that the major cash hoarders, apart from banks, are the rapidly growing listed property investment firms”, said Thando Vilakazi, a senior researcher at the centre. South African listed property funds are investing less in the local market and are using the JSE to source funds which are then used to invest in overseas markets. South Africa needs all the investment it can get and the sooner this happens the better so that business can further help tackle the problems of joblessness, poverty and unemployment.

The usual arguments against investment in hospitality property will need to be reviewed in order for these to be accepted as a viable alternative to put into listed property funds. More and more global chains are entering our markets and with them come operational and management expertise. It is also worth mentioning that the latter bring their client base with them and do not necessarily only rely on the domestic tourism market for hotel accommodation demand.

The graphs below depict the performance of a global Hotel Real Estate watchlist against the Dow Jones, the S&P 500 and the NASDAQ. The watchlist consists of REITs from the United States, Malaysia and a few from Europe and was observed during the period May to August 2017. Over the last three months the watchlist underperformed the Dow, the S&P and the NASDAQ.

3 Month 2017_08_06_13_34_35_Google_Finance_Track_your_portfolio_the_market_for_free

Over a six month window the watchlist was a star performer, clicking in a double-digit growth at just above 10%.

6 Month 2017_08_06_15_12_27_Google_Finance_Track_your_portfolio_the_market_for_free

When compared over a 12-month window, both year-to-date in 2017 and over the last year, the Hotel Real Estate watchlist has done well to narrow the percentage growth differential between itself and the Dow and the S&P 500. Only the NASDAQ outperformed the watchlist over this period.

YTD 2017_08_06_15_17_15_Google_Finance_Track_your_portfolio_the_market_for_free

1y 2017_08_06_15_20_56_Google_Finance_Track_your_portfolio_the_market_for_free.png

It is hoped that the above basic analysis can be sued by the South African investor community, property industry funders and the hotel industry to reconsider their decisions to expand off-shore and to give more hotel REITs on the JSE a chance.

 

 

An Interview with Steve Rushmore, Founder and Chairman of HVS — 3continents3semesters

March 21, 2016 – The Master of Global Hospitality Business students embarked on a four-day intensive “Hotel Market Study

via An Interview with Steve Rushmore, Founder and Chairman of HVS — 3continents3semesters

THINC Africa 2017: Exciting future for African hotel market

According to the United Nations World Travel Organisation (UNWTO), the African continent experienced an increase of 8.1%, while Western European destinations showed little to no tourism growth in 2016. Visitor totals in Sub-Saharan Africa grew more than 10% year-over-year – the most of any world region or sub-region.
Managing Partner of HVS in South Africa, Tim Smith believes there is ongoing demand for local knowledge and expertise from prospective investors, which prompted HVS to hold their Tourism, Hotel Investment and Networking Conference, THINC Africa for the first time last year. Following the success of the inaugural conference, the second conference will take place on 30- 31 August 2017 at the FNB Portside Building, situated in Cape Town’s iconic V&A Waterfront precinct.

“The conference is run by hotel consultants with a deep passion for the industry, for the benefit of the industry,” said Smith. The THINC conferences are held in various regions around the globe and are aimed at hotel investors, hotel brands, and management companies, real estate developers, investment bankers and lenders, fund representatives as well as public and private hotel, tourism and convention agencies.

Evolution of the African hotel market

According to the latest HVS African Hotel Market Update, 2016 was a positive year for the African hotel market, tempered by external factors such as UK voters opting for Brexit and the US voting for Donald Trump as their president, both of which will have far-reaching ramifications for global markets, including those on the African continent.

“The evolution of the hotel market across Africa continues with some of the largest international brands announcing they were opening hotels in new countries. For example, Marriott and Rezidor launched large hotels in Kigali, Rwanda. Rezidor also opened a Radisson hotel and convention centre in Togo and announced it was developing five Park Inn hotels in Angola,” Smith points out. “Meanwhile, after the merger with Starwood, Marriott will be opening their first hotel in West Africa, the Sheraton Grand in Conakry Guinea.

The more established markets continue to be popular with Hilton announcing a new Hilton in Upper Hill, Nairobi – the 255-room hotel is set to be the tallest in Nairobi. Hilton also reported it would build the first modular construction hotel in Africa, the 280-room Hilton Garden Inn in Accra, and said it planned a 350-room Hilton at Lagos International airport.

Meanwhile, Accor is progressing with their impressive partnership for 50 hotels in Angola and have just announced three new hotels in Ethiopia” he said.

Positive trends present an exciting future

Smith says 2017 is sure to see more exciting announcements and if commodity prices continue to recover, some of the larger and more influential countries may enjoy economic growth, which in turn should further promote hotel development. “There will be ‘bumps in the road’ but positive trends present an exciting future for operators and investors,” he said.

The tremendous potential for growth in South Africa and the Southern African region is attracting regional and global investors, lenders, developers and operators from the hotel and tourism industries.

THINC Africa going from strength to strength

“Last year’s conference speakers included 30 MDs, CEOs and equivalent senior executives as well as Wesgro CEO Tim Harris and James Vos, MP Shadow Minister of Tourism. The feedback from attendees was extremely positive. 80% thought our speakers were excellent and 93% said it offered excellent networking opportunities,” said Smith.

Smith says the conference is going from strength to strength and is expecting 200 delegates, up from last year’s 160. The focus will remain on hotel investment with sessions on issues affecting owners and operators. Speakers will be senior people in the industry with experience in Africa generally. A new addition to the programme will be sessions focused exclusively on particular countries and one-on-one interviews with business leaders and entrepreneurs.

“We want to ensure that all delegates leave having been challenged and learned something. We have already secured a stellar line-up of speakers and sponsors” Smith said. “We will be encouraging audience participation so individuals can have their questions and issues is addressed. The instructions to speakers will be ‘don’t be boring or say something that can be Googled – people want opinions’.”

International Sporting Events – Takeaways for Hotel Investors

Introduction

There is no doubt hosting a major sporting event boosts the profile of the country and city.  Who does not want to visit Rio after the recent FIFA World Cup and Olympics?  However, these events are only for a few weeks and even allowing for a year of visits from sponsors and managers in the lead up to the event and the boost to demand once the curtain comes down and the television cameras depart, does hosting an international sporting event justify building new hotels?

In this article, we review the possible impact of hosting the Commonwealth Games on the city of Durban and provide some advice for would be hotel investors.  We also share some of the lessons from the 2010 World Cup in South Africa, the London Olympics 2012, the 2014 World Cup and the Rio Olympics.

The Commonwealth Games and Durban

In a BBC article two years ago, the last Commonwealth Games in Glasgow in 2014 was listed as the fifth largest global sporting event.  They attracted 1,300,000 spectators to watch 4,820 athletes from 71 nations.  Television coverage was taken to 90 countries.  The next edition of the ‘friendly games’, as they are known is in Gold Coast Australia in 2018.

The Commonwealth Games 2022 have been awarded to Durban, South Africa. However, there are rumours that the city is facing the real prospect of losing the right to host the Games. This instability is not good news for investors who had been readying themselves to enter the Durban landscape with new hotel developments since the hosting announcement was made.  We assume this insecurity will soon be lifted and all parties can plan for a successful event.

Durban has hotels, swimming beaches, stadia and wonderful weather all year round. Hotel performance has not been stellar in the past couple of years however, with the city still having to work off the oversupply from the 2010 FIFA World Cup.  As things stand, the event will coincide with the countrywide Municipal and Local elections in 2022, and this may or may not interfere with the city’s ability to host a successful event.

PERCENTAGE CHANGE IN HOTEL VALUE PER ROOM

The HVS Hotel Valuation Index 2016 graph below illustrates the trend in hotel values since 2010, and it can be seen how these have suffered between 2010 and 2016. This can be attributed to the bedroom oversupply that affected all the major centres in South Africa.  Values are reported in US$. The weakness of the Rand against the Dollar also contributed to the poor performance. Over the seven-year period from 2010 to 2016 the CAGR for value is -6.1% for Durban, which compares to -2.2% for Johannesburg and 4% for Cape Town.

durbanchart

What Can We Learn from Past Events?

In 2010 FIFA was reported to have block-booked more than 450,000 bed-nights long before the start of the event in an effort to regulate room rates prior to the Games. This was also done before the devastating financial crisis of 2008 and 2009 and due to this, many prospective sports followers cancelled their planned trips into South Africa. However, since many new hotel development projects were kick-started shortly after the hosting announcement and before the financial crisis, a hotel room oversupply resulted.

London is a mature tourism market with a stable tourism flow. Wary that this stability would be disrupted, the organising committee block-booked hotel rooms prior to the Summer Olympics of 2012 and released them to the market closer to the start of the event. Average Daily Room Rate during the Games was up 86.1% compared to the same days the prior year, whilst occupancy was recorded at 88,5% for London hotels. RevPAR also increased during the same period, according to data from STR. So how did London manage to host such a successful event for the hotel industry? The answer lay in how the city kept a lid on building new hotels, and rather worked on adjusting the room rate to increase performance.

Leading up to the start of the 2014 FIFA World Cup, tour operators who had years before bought blocks of rooms, were desperately offloading their spare capacity. Discount rates of more than 40% were not unheard of. As in the case South Africa in 2010, FIFA’s accommodation partner, Match Hospitality, prior to the event, released unsold rooms it had previously block-booked. The unfortunate result was that some World Cup hotel room prices dropped to half of the levels the hoteliers were achieving two years before. Overall, hotels in Brazil saw a 50.1% ADR increase in June and a 36.1% ADR increase in July; occupancy levels across all host cities decreased when compared to 2013; Brazil saw a two percent supply increase in June 2014 on a 12-month-moving-average basis, according to reported STR statistics.

On the other hand, the 2016 Olympic Games in Rio de Janeiro were successful not only on the sporting front, but on the hotel performance side as well. Media reports leading up to the Games were dominated by the devastating impact of the Zika virus, with the resultant withdrawal of some athletes from across the world, and the political turmoil involving the Brazilian president. Despite these hurdles, Rio hotels achieved good performance ratings during the games. STR has reported a 199.2% surge in average daily rate for Rio hotels during the games. The combination of this growth in rate and a 26.6% increase in occupancy to 76%, brought about a 278.6% increase in Revenue per available room. These are glowing statistics and it is generally held that Rio hotels outperformed London hotels during the previous Olympic Games of 2012. The key point to note however is that Rio was oversupplied with hotel rooms leading up to the games and this supply overhang is likely to negatively impact occupancies in the future. STR has estimated this bedroom oversupply at 23% more than a year earlier.

How Are Other Host Cities Preparing for Future Games?

The FIFA World Cup 2018 will be hosted by Russia; Tokyo will be receiving visitors to Japan for the Summer Olympics in 2020, and the FIFA World Cup 2022 will be held in Qatar. With prospects of many thousands of visitors, hoteliers are hoping to make significant profits from hosting the Games. Hotel investors are also eyeing superior returns from new properties that are entering these markets. These countries’ and cities’ organizers would do well to heed the lessons from previous international events.

Russia’s foreign political landscape, the exclusion of its top athletes from the Rio Olympics and the FIFA corruption scandals relating to how Russia won the rights to host the 2018 World Cup do not bode well for the country’s prospects to host an untainted event. On the other hand, Hotel News Now has recently reported that “the end of uncertainty in the Russian economy coupled with growth of occupancy and other performance indicators might increase the number of new hotel projects in Moscow and Saint Petersburg between 2016 and 2018”.

STR has previously reported that the Tokyo hotel industry is a high performer, with “some of the highest occupancy levels globally and with rates continuing to rise – all against the back drop of limited supply in the pipeline”. This situation could be an indication that the hotel market in Tokyo will be lucrative for hotel investors as large numbers of visitors are expected to flock to the city for the Games in 2020. The proviso however is that the delicate balance between supply and demand should be respected always.

Conclusion

Hotel investments are by nature very cyclical, therefore a delicate balance needs to be struck between the variables of supply and demand. International events can throw this balance out, and market players that can skilfully navigate these events can extract maximum benefit. To ensure that Durban hotels derive maximum benefit from hosting the Commonwealth Games in 2022, it is essential that hotel supply is kept at reasonable levels. A six-week event does not justify a $20 million investment in a new hotel, however to time the opening of a new hotel with such an event can massively help with cash flow management in the tricky first year of operation.  Durban hotels may not enjoy a 280% increase in RevPAR that Rio managed for the Olympic Games last year, but a substantial increase should be achievable.

However, perhaps the biggest bonus for all current and future hotels in the city is four years of international marketing reminding people of all the attractions Durban has to offer. The hotel industry can have a huge impact on the success of the games.  It is therefore imperative that the hotel industry is properly represented in the organising committee to ensure both the success of the games and the long-term success of the hotel industry learn from recent events.

ENDS

HVS – Evaluating Hospitality-Focused Mixed-Use Assets

http://www.hvs.com/article/7735/evaluating-hospitality-focused-mixed-use-assets/?campaign=email&campaign-id=GHR-20160725-437

Americans continue to “rediscover” urban areas, they not only seek-out these areas as places to live but also as places to stay when they travel. These walkable neighborhoods offer residents and visitors ready access to civic, economic, and social nodes, to which local hotels can provide access for guests. This results in demand from more segments of hotel guests than if the hotel were located near a single demand driver.

Additionally, hotels in these areas are often less susceptible to new competition due to the higher barriers to entry in more urban markets. These barriers include fewer development sites (and therefore more expensive land), more restrictive zoning, and restrictions put in place by historic preservation boards. These constraints often necessitate adaptive reuse of existing structures and the construction of structured parking (or leasing arrangements with nearby properties that have a surplus of parking).

In addition to structured parking, these assets may derive income from first-floor retail space or apartments that share the upper floors of the building with the hotel. By their very nature, each mixed-use property is unique. Therefore, HVS professionals consider a variety of factors when providing consulting or valuation services for these types of assets.

As with any type of real estate, a determination of highest and best use is critical to the analysis of a mixed-use asset. However, while the highest and best use of a greenfield site in a suburban area is often quite obvious, the possibilities for an urban site are often more varied. Furthermore, an urban site or building could have environmental issues that are less common with suburban sites.

Another critical question when analyzing mixed-use assets is what type of person or entity would be interested in purchasing the property. Does the asset possess a combination of uses that effectively hedge against one another? Or are the asset’s uses so varied that there would be few buyers with the expertise and energy to manage such disparate income sources? Additionally, would the asset still appeal to traditional hotel investors, or are there so many other revenue streams that it no longer meets their investment criteria?

Finally, the appraiser must determine if the various sources of income could be split off and sold separately, and if doing so would result in a higher value than selling the entire property to a single buyer. The answers to these questions can affect the asset’s marketing and exposure times, as well as the yield rate.

After determining the most likely buyer of a mixed-use asset, the next step is to determine how that buyer would evaluate each of the asset’s income streams. For retail and office components, for example, it will be necessary to project market rents, occupancy rates, lease terms, escalations, and tenant improvement allowances. For properties with multi-family components, prevailing market rents or sale prices must be considered. Additionally, the appraiser must determine whether the residential units will be available to hotel guests via a rental pool. Operating expenses and/or selling expenses must also be evaluated.

In some cases, it may be appropriate to combine the income projections for the various components into a single consolidated income projection for the entire property. In other cases, the income projections are not combined because it was determined in the highest and best use that the various components would have more value if sold separately than if they were sold as one property. Furthermore, if a mixed-use property has condominium units, that income projection cannot be combined with the hotel’s income projection because the condominium income will diminish over time while the hotel’s income will continue over the economic life of the property.

After projecting the various income streams for a mixed-use asset, the appraiser must select a discount rate with which to discount those income streams to a present value. The selected discount rate must be consistent with the return expectations of the asset’s most likely buyer (as determined in the highest and best use).

In a case where the non-hospitality income is minimal, it may be appropriate to discount the ancillary income at the same rate as the hotel. However, in situations where the non-hospitality income is more substantial, it may be necessary to analyze the prevailing yield rates for each particular income stream. Additionally, if it was determined in the highest and best use that the asset’s unique characteristics severely limit the pool of potential buyers, investors or buyers may demand a higher yield rate to compensate them for the additional resources necessary to effectively manage the asset.

HVS is known for unparalleled expertise in hospitality valuation and consulting. However, we also have professionals with extensive experience in the valuation of other asset types, which we can leverage to value non-traditional hospitality assets. Hence, we encourage lenders, developers, and other stakeholders to take advantage of HVS expertise as they explore the opportunities in owning and developing mixed-use hospitality-focused assets.

South African Listed Property Funds – The Case For Hotel REITs

Same as last year the South African Property Owners’ Association’s (SAPOA) 51st Convention came and went with great pomp and ceremony as much as could be expected in Cape Town. Judging by some of the media stories that started floating around shortly after the event, it is clear that the South African listed property fund industry is experiencing some rough times, after a very good run for many years. The main reasons for this phenomenon are there for all to see. An economy in recession due to policy uncertainty, a volatile political environment with no immediate prospects for recovery as a result of a depressed global demand for commodities and the volatile Rand (ZAR)- US Dollar exchange rate.

With a persistent climate of reduced positive cash flows and rising expenses in the local environment, it is no wonder funds and asset managers are looking outside our shores to hunt for more optimum returns. Dollar- and Euro-based returns make sense to diversify against the ZAR-based returns, however in my assessment, property funds do not necessarily have to go off-shore to chase after the dollars. Good quality hospitality funds are totally capable of bringing in those dollars. It can reliably be argued that half of the demand for South African hotel accommodation is generated from overseas visitors including Americans, Europeans, Asians and other sources from around the world. Wealthy visitors from some west African countries like Nigeria and Ghana also bring in dollars when they land on our shores, and they also stay in hotels.

Professor Brian Kantor recently sounded a warning to Johannesburg Stock Exchange (JSE) listed property funds to consider very carefully their reasons for investing their funds in foreign markets because the nature of the returns in these markets may not necessarily be superior to those found on the JSE. It is my submission that more hotel funds may offer the required returns.

In the Fin24 article why firms are hoarding R14 trillion the writer points a finger at the listed property sector as having hoarded the most cash. “The surprising thing is that the major cash hoarders, apart from banks, are the rapidly growing listed property investment firms”, said Thando Vilakazi, a senior researcher at the centre. South African listed property funds are investing less in the local market and are using the JSE to source funds which are then used to invest in overseas markets. South Africa needs all the investment it can get and the sooner this happens the better so that business can further help tackle the problems of joblessness, poverty and unemployment.

The usual arguments against investment in hospitality property will need to be reviewed in order for these to be accepted as a viable alternative to put into listed property funds. More and more global chains are entering our markets and with them come operational and management expertise. It is also worth mentioning that the latter bring their client base with them and do not necessarily only rely on the domestic tourism market for hotel accommodation demand.

The graphs below depict the performance of a global Hotel Real Estate watchlist against the Dow Jones, the S&P 500 and the NASDAQ. The watchlist consists of REITs from the United States, Malaysia and a few from Europe and was observed during the period May to August 2017. Over the last three months the watchlist underperformed the Dow, the S&P and the NASDAQ.

3 Month 2017_08_06_13_34_35_Google_Finance_Track_your_portfolio_the_market_for_free

 

Over a six month window the watchlist was a star performer, clicking in a double-digit growth at just above 10%.

6 Month 2017_08_06_15_12_27_Google_Finance_Track_your_portfolio_the_market_for_free

When compared over a 12-month window, both year-to-date in 2017 and over the last year, the Hotel Real Estate watchlist has done well to narrow the percentage growth differential between itself and the Dow and the S&P 500. Only the NASDAQ outperformed the watchlist over this period.

 

YTD 2017_08_06_15_17_15_Google_Finance_Track_your_portfolio_the_market_for_free

1y 2017_08_06_15_20_56_Google_Finance_Track_your_portfolio_the_market_for_free.png

 

It is hoped that the above basic analysis can be sued by the South African investor community, property industry funders and the hotel industry to reconsider their decisions to expand off-shore and to give more hotel REITs on the JSE a chance.

 

 

In Focus: South African Hotel Market Update

This is the first in a planned series of HVS articles on the South African Hotel Industry.

Should you require any further information please get in touch with us directly.