Is Cape Town’s hotel market headed for a downturn?
Cape Town’s hospitality sector appears to be saturated, yet developers are planning to bring another 2,000-odd new hotel rooms to the market. Will the tourism cycle turn again soon?
The mini-boom in Cape Town’s hotel development market could not have come at a worse time. At least five new hotels have opened in the Mother City over the past 18 months — a period that coincided with the worst drought in decades and a drop in the number of overseas tourists.
The result has been that hotel occupancies in Cape Town decreased by an overall 6.5 percentage points in 2018 to 65% (from 71.5% in 2017), according to figures from global hospitality research group STR. Revenues, as measured by average daily room rates, declined by 1.7% to R1,765 over the same period.
Figures released by Stats SA last month show a similar year-on-year decline (-1.6%) in overseas tourists to SA between January and November.
That follows a bumper 2016 and 2017, when the tally of overseas visitors rose by 12.8% and 7.2% respectively after a 6.8% drop in 2015.
The 2016/2017 uptick was seemingly driven by the relaxation of visa regulations.
Considering that as many as 1,200 new rooms were added over the past 18-odd months, the market has held up OKXander Nijnens
Last year’s decline in Cape Town occupancies and revenues coincided with a number of new projects opening in the city, pushing the estimated number of hotel rooms in central Cape Town to just over 11,000. These include the luxury 188-room AC Hotel by Marriott at the Yacht Club, the 252-room Radisson Red and the 87-room Signature Lux — all near the V&A Waterfront.
There’s also the 214-room Radisson Blu Hotel & Residence in the CBD and Tsogo Sun’s SunSquare and StayEasy hotel complex at the intersection of Buitengracht, Strand and Bree streets (504 rooms in total). Gorgeous George, a trendy, 32-room boutique hotel, opens on St George’s Mall in central Cape Town in March.
Xander Nijnens, executive vice-president of JLL’s hotels & hospitality group, says there was only a marginal drop in total room nights sold in Cape Town last year, underscoring the fact that increased supply was primarily to blame for lower occupancies and revenues. "Considering that as many as 1,200 new rooms were added over the past 18 months, the market has actually held up OK," he says.
But the concern is the sizeable number of new hotel rooms still to come on stream — 1,500-2,000, by Nijnens’ estimate. That’s bound to place further pressure on already softer hotel occupancies and revenues.
Nijnens says the problem is that strong growth in the hotel market in 2016 and 2017 prompted more investors to enter the city. "Back then, the expectation was that the high growth rate would continue. No-one foresaw that the market would turn two to three years down the line, just as new projects reached completion."
Nevertheless, the hotel industry across the globe is notoriously cyclical, with boom years typically followed by periods of low growth, because of the way new supply often comes onto the market in large chunks.
"The reality is that hotels are a long-term play. Most investors take a seven-to 10-year view, so they should be able to trade through any down-cycle," says Nijnens.
It seems Cape Town’s bevy of new luxury hotels are best positioned to survive the downturn, given strong brand recognition. "Demand remains solid for five-star hotels in good locations within live, work and play nodes, and in key transport hubs," says Nijnens. "But older, mid-market products in secondary locations will take pain."
What it means
Luxury hotels are well positioned to survive the downturn, given strong brand recognition
Meanwhile, average occupancies in Sandton, Joburg — SA’s second-largest hotel node after Cape Town, with an estimated room offering of 8,100 — remained fairly flat last year, at about 63%. Only one new hotel (Signature Lux) opened in the area in 2018.
Despite the poor outlook for SA’s economy and lingering political uncertainty in the run-up to the elections in May, consulting firm PwC expects hotel revenues for the country as a whole to grow 4.8% this year, to R18bn. That’s slightly up from last year’s estimate of 3.3% (4.6% in 2017), but noticeably down from the 12.2% revenue increase recorded during 2016, according to PwC’s latest annual outlook for the hotel market in various African countries.
Pietro Calicchio, hospitality industry leader at PwC Southern Africa, writes that the moderation in revenue growth since 2017 was caused by slower growth in both international tourist arrivals and average room rates. This was due partly to a stronger rand, which made SA more expensive for foreign visitors. Cape Town, being the dominant tourist destination in SA, was further hit by the province’s water crisis.
But Calicchio expects a moderate recovery in room rates over the next three years, with total SA revenues likely to reach R21.8bn by 2022. Factors that should support PwC’s growth forecasts include a stronger global economy, an improving domestic economy and the possibility of a further relaxation of visa requirements for international visitors.