EBEN ODENDAAL: Is investment in hospitality property the way to go?

SA may be beset by numerous challenges, but the one thing we certainly have going for us is competitive leisure and tourism offerings. The sector is a boon for the economy, contributing billions towards the fiscus. 

Stats SA’s latest tourist accommodation data shows SA had a bumper December, with a sharp increase in income for the tourist accommodation industry, which grew 10.2% year on year. That translates to a 3.6% increase in the number of nights sold and a 6.4% increase in average income per night sold. In 2023 international arrivals surged to 8.5-million people.

In 2019 the travel and tourism sector contributed 6.4% to GDP. It was hard hit by the pandemic but has been experiencing a steady recovery since 2021. The World Travel & Tourism Council forecasts that SA’s travel and tourism sector will grow at an average rate of 7.6% annually, significantly outperforming the country’s overall economy and creating more than 800,000 jobs over the next decade. It expects that by 2032 the sector could be injecting nearly R287bn into the economy and employing about 1.9-million people.   

Growth of the African travel and tourism industry is also expected to be healthy, with the World Travel & Tourism Council forecasting that the value of travel and tourism will rise 5.1% a year to $300bn by 2033, beating the long-term global rate of growth for travel of 4% a year and the forecast 3% annual growth in African GDP. The council says investment in African travel and tourism rose faster than the global average in 2000-19, increasing from $11bn to $40bn, while global investment in the sector doubled over the same period from $559bn to $1-trillion.

What these figures clearly illustrate is that the growth potential for travel and tourism in both Africa in general and SA is huge. Research indicates that one new job is created for every 30 new tourists, so any growth in this sector helps to alleviate unemployment. In SA, about 57% of tourism expenditure is classified as leisure, representing a significant opportunity for investors — depending on the model, structure and, of course, location. 

Key to the success of any hospitality property investment is the model. A rewarding hospitality property investment gives investors the security of owning the property — or part of thereof — so that they can fulfil the landlord relationship with a trustworthy management company.

A hospitality property investment should always be pooled within the total property to ensure that all investors get the benefit of their investment, whether or not their room, apartment or villa is occupied. Rather than basing the investment on pure profit, it should be based on a percentage of gross revenue. This means the investor always wins.

Knowing where to invest is key, and for that you need to understand trends in the leisure property market. Given the semigration trend away from metropolitan areas, small coastal towns near Cape Town should be a prime investment opportunity as well as towns easily accessible to Gauteng and the Kruger National Park.

Hotel developments involving third parties such as property developers and contractors dilute investments. For this reason the management company’s relationship to the property must be a close one, so that they are making money over a long-term lease and not over the initial construction period of the property.

Greenfield properties can be successful, but they come with numerous potential pitfalls, which is why we typically advise against them unless new construction is linked closely to a well-established successful property with facilities, activities, experiences and existing infrastructure, including reliable Wi-Fi and uninterrupted power supply given that guests choose hospitality establishments based on their ability to provide both a work and leisure environment.

Start-up properties can also be trickier to exit. Investors need to know that they can own a property and make their money liquid as quickly as possible. Selling with a lease allows the new buyer to benefit from rental income.

Staggered development is tough for hospitality property investment companies that want to get a foothold in the industry. While larger players can afford to continually expand using public investment, smaller operators need to be able to offer an enticing business model if they hope to persuade investors that they will see consistent annual growth, with guaranteed increases.

The best way to guarantee that is by paying investors an income based on gross revenue, which increases annually with inflation. Marketing, maintenance, property refurbishment, housekeeping, operational equipment and client consumables should all be paid for by the management company. With this model the investor benefits every year when rental rates are increased. 

When the developer and management company are the same entity, and the aim is to make a profit out of the latter function, investors benefit given that the profit lies in managing rather than constructing. Be wary of investments where the developer intends to make a profit out of the construction phase.

Ultimately, the best advice is to do your homework before making any investment decisions. Assess the market conditions and consult with financial and property professionals to ensure the investment aligns with your goals and appetite for risk.

Having done your homework and made the decision to invest in a well-managed hospitality property with popular amenities and facilities on offer and located in a sought after location, there’s one way your investment will go and that’s up.

• Odendaal is CEO of Touch Down Group.