SA Hospitality Outlook: 2012-2016

Turnaround in growth and revenue on the cards for South Africa’s hospitality sector.

Despite the recent economic uncertainty, South Africa’s hospitality industry for 2012 to 2016 is expected to improve with the demand for rooms anticipated to grow faster than supply and the overall occupancy rate to show a strong increase in growth, according to a report issued by Professional Services Firm PwC.

“Continued economic growth, rising tourism and slower growth in the number of available rooms will lead to a recovery in hotel occupancy rates,” says PwC Leader of Hospitality and Gaming Nikki Forster.

PwC’s 2nd edition of the South African hospitality outlook: 2012 – 2016 projects that by the year 2016, occupancy across all accommodation sectors will average 53.9%.

The study focuses on the following major industry segments: hotels, guest houses and farms, caravans and camping sites, bush lodges and other accommodation. It analyses the key trends observed and challenges facing these industry sectors as well as considering their future prospects.

Historical data were derived from PwC’s analysis of Smith Travel Research and Statistics South Africa combined with other information on industry trends. Forecasting models were then developed based on the historical performance for each category, including economic performance for South Africa and the rest of the world, and estimates of domestic and international overnight travel in South Africa. Unusual events, such as the 2010 FIFA World Cup as well as competition, pricing trends, and the expected reaction of proprietors to changing occupancy rates were taken into account.

In 2008, South Africa was affected by the financial crisis. As a result growth was slowed sharply during the latter part of the year, with occupancy rates plunging, falling from 71.8% in 2007 to 53% in 2011, an 18.8-percentage-point decline. The report forecasts that the average hotel occupancy rate will improve in 2012 and increase by 9.1 percentage points to 62.1% in 2016.

Forster says: “Growth in travel and tourism will fuel growth in the accommodation industry in the next five years. The total number of travellers in South Africa is expected to rise to 16.85 million by 2016, a 4.1% compound annual increase from 2011.

“After 2012, the improving economic climate will lead to steady gains in both foreign and domestic visitors in South Africa.”

The number of travellers to South Africa increased 14.8% in 2010 in the wake of the FIFA World Cup. “We had expected that in the absence of the tournament in 2011, the number of travellers would decline. However, this was not the case. The number of travellers continued to increase, rising by 4.3% to 13.77 million,” says Forster.

Although the number of visitors from Europe is down, the increase in tourists from other African countries and the Asia-Pacific region are a boost to the industry and returns in revenue.

However, somewhat slower growth is anticipated for domestic travel. The number of domestic travellers will increase by a projected 3.3% compounded annually to 6.4 million in 2016.

“We expect real Gross Domestic Product (GDP) growth in South Africa to moderate to 2.8% in 2012 from 3.1% in 2011. We then look for somewhat faster increases, but do not expect a return to the large gains achieved in the mid 2000s when the economy was less developed. We project real GDP to expand at a 3.3% compound annual rate during the next five years,” she says.

The overall number of available rooms decreased 0.2% in 2011 due to a decline in the number of rooms at guest houses and in other accommodation categories. Forster says that another 0.2% decline is expected in 2012 due to a slight decrease in the number of hotels rooms and other accommodation categories.

Beginning in 2012, guest houses are expected be to the fastest-growing category, averaging 4.2% compounded annually, according to the study. “Hotels, caravan and camping sites, and bush lodges can expect minor declines in 2012 followed by modest increases in subsequent years in response to rising occupancy rates,” says Forster.

Occupancy rates

Not much new construction activity is being planned in the industry. However, some hotels are being upgraded. Forster says that the most significant effect of the 2010 FIFA World Cup was on average room rates, which rose 11.7% in 2010 and then fell 9.4% in 2011. The decline in the average room rates led to a 7% decrease in overall hotel room revenue to R9.6 billion in 2011.

The report forecasts occupancy rates to turn around for hotels, increase for guest houses and rebound for caravan and camping sites, bush lodges and other accommodation.

Given the increased number of foreign visitors to South Africa in 2011 and the projected growth in tourists, four-star hotels are anticipated to benefit more from the increase in tourism than three-star hotels and project revenues to grow at a 9% compound annual rate to R5.2 billion in 2016 from R3.4 billion in 2011.

The fast-pace of growth in the five-star sector is also expected to be seen in occupancy, which is forecast to increase from 51.4% in 2011 to 70.5% in 2016.

The study projects occupancy rates to edge downward from 2013 for guest houses, although they are expected to remain higher than they were during 2007- 2010. Occupancy rates for caravan and camping sites, bush lodges and other accommodation are expected to be relatively steady over the 2012-2016 periods.

Average room rates

There is a large disparity in average room rates between hotels, guest houses, caravan and camping sites and bush lodges. “Each component tends to occupy a niche and targets different visitors,” explains Forster.

The study shows that hotels appeal to top business travellers and the high-end vacation market. On the other hand, guest houses and guest farms target consumers looking for comfortable accommodation and local flavour. Caravan and camping sites, bush lodges and other accommodation market to people looking for inexpensive accommodation, while game lodges appeal to visitors interested in outdoor activities.

The report shows that caravan and camping sites, bush lodges and other accommodation will continue to be the fastest-growing category, averaging 7.5% compounded annually, but this growth will be at a slower rate than the double-digit annual gains seen over the past five years.

Average rates for hotels will rise at a 4.6% compound annual rate, while guest houses will be the slowest-growing category with a projected 0.3% compound annual increase.

Total room revenue

The report shows that hotels will continue to generate the majority of accommodation revenue during the next five years. Growth is projected to average 8.7% compounded annually, comparable to the overall compound annual increase for all accommodation of 8.8%. Hotel room revenue is forecast to expand to R14.6 billion in 2016, up 8.7% compounded annually from 2011.

Caravan and camping sites, bush lodges and other accommodation will be the fastest growing category with a projected 11.1% compound annual increase, raising its share of the market from 18.9% in 2011 to 21% in 2016. Guest houses and guest farms are predicted to be the slowest-growing category of the overall accommodation market with a 4.4% compound annual increase, dropping its share of total spending to 7.6% in 2016 from 9.3% in 2011.

“The major players in the industry are continuing with their capital refurbishment programmes to keep their products current and to maintain their competitive edge,” says Forster.