Betting on SA’s grand hotel recovery

Reports of the demise of South Africa’s hotel sector, it turns out, were greatly exaggerated.

As if to punctuate the big bounceback, Club Med — the French group that has been touting its “holidays in the sun” all-inclusive resorts since 1950 — is preparing to unveil plans for its first South African resort, which will be built in KwaZulu-Natal (KZN).

Due to be built for about R2bn, it’s an emphatic sign that investors are now seeing dollar signs in local travel, where once they saw only shrivelling prospects and a hostile government unwilling to do anything to make it easier for people to visit the country.

The Club Med project isn’t new. In 2016 the Collins Group, a fourth-generation family-owned company in South Africa, began drawing up plans with Club Med.

They found the village of Tinley Manor, 45 minutes north of Durban and 30 minutes from King Shaka International Airport. The warm waters of perhaps South Africa’s most mismanaged coastal province were able to trump the icy blast of Cape Town.

It’s ambitious — 350 guest rooms and 50 stand-alone villas are apparently on the cards, alongside gourmet restaurants, a Club Med spa, a conference centre, sports facilities and a children’s club. Evidently, the banks that lent them the money believe they’ll get a return on this investment.

It’s a big gamble, because the travails of the tourism sector are so closely tied to the fate of the wider economy. The Reserve Bank expects GDP growth to scrape to 0.3% this year, and 1% next year, while rising inflation means Club Med is hardly shooting fish in a barrel.

Marc Wachsberger, founder of The Capital Hotels & Apartments, tells the FM: “The investment climate in South Africa is still for the dogs” when it comes to hotels, with load-shedding, high interest rates and banks skittish about lending money for new projects.

Certainly, during Covid, South Africa’s tourism sector was thrashed, with hundreds of small operators going belly-up. Travel and tourism’s contribution to GDP more than halved from $27.5bn in 2019 (6.4% of GDP) to $13.2bn in 2021, according to data website Statista.

It shouldn’t have been that way. The rand has plunged 46% over a decade, from about R10 to the dollar in 2013 to R18.80 today. In theory foreign tourists should be flooding the arrivals halls, given how cheap a destination South Africa is. 

But that hasn’t happened.  Foreigners were scared off by an overly bureaucratic approach to visas, the prospect of sitting in darkness after arrival  and horror stories of crime.

Tourism minister Patricia de Lille tells the FM, however, that the tourism sector is “well on its way to recovery”.

She points to the recent statistics, which showed 4-million arrivals between January and June 2023. Given that there were 5.8-million visitors during the whole of 2022 (itself a 152% increase from 2021), it suggests the country is ahead of the game.

It’s certainly a positive step — even if the truth is that there were 15-million foreign arrivals in 2019, 10-million of them tourists, according to Stats SA.

“We are seeing visitors flocking back to South Africa, especially from the African continent,” she says. Three-quarters of the foreign visitors are from other African countries — something De Lille says is “testament to the marketing efforts we have implemented to attract tourists from this region”.

She acknowledges that the currency weakness should have helped, but says the picture is complicated by the fact that the US, Europe and the UK were hit with some of the worst inflation hikes in decades last year.

“We cannot conclusively say that this time around the weak rand worked or did not work in the favour of these markets. [But] as can be seen from the latest tourist arrivals stats ... we are still a value for money destination,” she says.

Investors will be hoping so, because it’s been a dismal decade for punters in the sector.

Over the past decade Sun International, which owns Sun City and 14 other resorts, has lost 65% of its value on the JSE. City Lodge, which had to go cap-in-hand to investors for more money just to stay alive in August 2020, has lost 96% of its value.

But the nascent recovery has been evident on the JSE too — and those investors who’d consulted wise soothsayers, and invested accordingly, would have made a fortune. 

If you’d bought R100,000 worth of shares in City Lodge in November 2020, it would have more than doubled to R207,000 today. You’d have been even wealthier if you’d ploughed R100,000 into Sun International at its low in May 2020, as it would now be worth R446,000. And those who invested in Southern Sun in its old incarnation as Tsogo Sun Hotels in March 2020, would have R343,000.

So what is the trajectory from here? In an SBG Securities report on Sun International a few months ago, the analysts said that “resorts and hotels show encouraging performance, with strong demand and improving margins”.

Locals are lekker

If you’re wondering how that can be, the answer is that in the absence of hordes of foreign visitors, local tourists stepped up.

In an SBG Securities report, analysts Ya’eesh Patel and Tinashe Hofisi point out that domestic tourism reached new highs last year after two years of lockdown: 34-million trips marked a 20% increase on 2019, with tourism spend nudging the R100bn mark.

Independent hospitality expert Gillian Saunders tells the FM that South Africans plugged the gap. “[South Africans] who usually go to Thailand and Mauritius actually found they quite enjoy our country. And I think we always had an underrepresented black emerging class,” she says.

Yes, the weak rand played its role in keeping people at home.

Southern Sun CEO Marcel von Aulock says this has been helpful, but he says higher living costs have put pressure on local travellers. “South Africans are battling, but they are still travelling,” he tells the FM.

De Lille lauds this fact, describing domestic tourism as “the heartbeat that sustains our hospitality sector, supports local businesses and generates employment”.

Last year, she says, domestic trips trumped 2019 by 19.5%, reaching revenue of R99.2bn — a trajectory that has continued this year.

Still, for hotel operators, the foreign tourists represent the cream on the dessert.

Sun International COO Graham Wood says while the cost of air travel from the US and Europe has become vastly more expensive, “once people get here the value for money aspect of South Africa is extremely attractive”.

SBG Securities suggests that at current arrival levels — 294,000 more people arriving per month in the six months to June than in the same period last year — foreign travel could reach pre-Covid levels in the first quarter of 2024.

The good news for Club Med is that the hotels are reaping the benefits.

Valued at R29.4bn last year, the hotels sector in the first three months of 2023 is just 7% below 2019 levels, according to SBG. Income for the entire hospitality sector was up 46.77% in the three months to January this year on the same period last year.

Wood says this suggests that those hotels that have made it through Covid, and kept a lid on costs, are likely to survive. “If the capital structures of the hotels have been taken care of post-Covid, they’ll be OK,” he says.

Unsurprisingly, Cape Town is in the vanguard of recovery, beating the national average and other cities by a country mile, according to numbers from CoStar, a global provider of real estate data, analytics and news.

Cape Town’s hotel occupancy rates hit 74% in March, against a national average of 65.5%. The city’s revenue per available room clocked in at R1,526, again outperforming the rest of the country, which took R987 per room.

Who dares invest?

With shoots of green peeking through, some notable new establishments have opened their doors.

Some new additions — such as Cape Town’s Hotel Sky and Radisson Blu, in Umhlanga — were supposed to open their doors before Covid. But other expansion plans are newer. The Radisson Hotel Group, for example, is opening in Hoedspruit and Middelburg.

Wood says Sun International is optimistic. It plans to add another 64 rooms at its Grand Hotel in GrandWest in Cape Town, and launched Lefika Villas — 48 three-bed villas and 10 four-bed villas — in October.

Sun City, the flashy, glitzy one-time “den of sin” in North West opened by Sol Kerzner in 1979, will also be getting another refresh in the next two years, after a R1bn overhaul in 2017.

Says Wood: “We invest a lot of cash and resources into maintaining the resort in the pristine condition that it is. We have the vision to continue to improve profitability, invest in our current assets and look to enhance our facilities where it makes commercial sense.”

It’s corporate jargon, but it shows Sun International has opened the taps in a big way.

Its rivals don’t plan to be caught napping. City Lodge is revamping its Road Lodge Richards Bay and the Lodge Hotel at the V&A Waterfront. CEO Andrew Widegger tells the FM that 12 of the group’s hotels are due for upgrades this year and next.

For existing businesses such as City Lodge and Sun International, it makes sense to invest. But for new investors, you can understand the hesitancy, given the fragile economy.

Cape Town’s Harbour Arch, for example — situated near the Waterfront and being built by the Amdec Group, based on Joburg’s successful Melrose Arch — cannot say with any certainty how many hotel rooms will be housed within the multibillion-rand precinct.

Wood, for one, doubts many new hotels will be built in the near future. “The fundamentals in the South African economy have to improve to drive demand,” he says.

Some areas are an easier sell than others. “Cape Town is a winner, especially on rates, but they still have a business drop-off in the city centre,” says Saunders. “And Sandton feels excruciating.”

Sandton, the upmarket business hub of Joburg, is struggling to bounce back. The Michelangelo hotel, once the big daddy of Joburg hotels, remains closed. (In Rosebank, The Hyatt also remains shut, a depressing symbol of Joburg’s struggling economy.)

Von Aulock describes Sandton as Southern Sun’s weakest market — though he concedes that the closer you get to the Sandton City mall, the better the hotel fares.

Not everyone agrees. Wachsberger tells the FM that The Capital has “a big focus on conferencing” in Sandton. “It’s tech heavy, world class, with backup generators, so it’s become a great place to meet. And our apartment hotels are attracting all the Africa travellers shopping in Sandton,” he says.

As for Durban, Von Aulock says it had an early recovery after Covid on the back of local travel and still has a “very solid local market”, despite KZN having perhaps the most delinquent provincial government in the country.

“Durban has the most terrible PR, sometimes fairly and sometimes not ... We find disruption on the N3 highway and truck violence far more of a problem than negative news around the infrastructure. People are coming to visit friends and family and it’s a big conference market,” he says.

But if Durban’s market now is mostly local, Club Med may change the picture.

Wood thinks the resort will work. “It will give another reason for people to travel and hopefully it will expose the KZN north coast to the international leisure markets,” he says.

On the whole, though, he’s cautious about large-scale resorts. 

“The success of these resorts depends on large volumes of domestic and international leisure travellers. South Africa is a long-haul international destination and we need to substantially increase the number of inbound visitors to support the growth and development of the resort and leisure hotel industry,” says Wood.

Shooting ourselves in the foot

So how can the hotel sector be put on a sturdier footing?

Wood believes the industry must go back to first principles: build capacity, and reverse the brain drain of middle-management who left South Africa to work in the Middle East and the cruise industry. “We need to encourage hospitality in tourism as a career, and a [foundational] subject in our schools,” he says.

For Tourism Business Council CEO Tshifhiwa Tshivhengwa, it’s about making South Africa the preferred destination for foreign tourists, regaining market share in European markets and recruiting from India and China.

He says there’s a need to market seasons differently, to ensure tourist traffic all year round.

“Each destination is fighting for the traveller,” he says. “We need a robust SA Tourism that puts campaigns in place, we need to reposition ourselves because everyone else is doing that. The question is: are we doing that fast enough? Do we need to do that faster than what we’re doing? We need to tell our story, and make sure we are top of mind.”

De Lille tells the FM that dealing with the “fragmented marketing” is top of her agenda. “We are working to implement a better co-ordinated marketing strategy for South Africa and surpass our pre-Covid arrivals numbers to more than 10-million arrivals by March 2024.”

Of course, it’s not just enough to put South Africa top of mind; it’s about overcoming negative perceptions too — and ensuring a quality experience once visitors arrive.

On this, South Africa does itself no favours.

“The biggest risk to our hotel operations is load-shedding,” says Sandra Kneubuhler, Radisson’s director of sales in South Africa. “The diesel costs of running generators for long periods is extremely expensive and significantly affects guest experiences and profit margins. While we would love to move our hotels to renewable energy, there are infrastructure and capex limitations.”

Wood argues, however, that the government must do more to invest in the sector: roads must be repaired, crime needs to be sorted out and infrastructure needs to be maintained. Equally, game reserves need to be looked after and visitor information centres need to be improved.

The Capital’s Wachsberger adds to the list: “We need basic stability first, such as power and water.”

De Lille, however, says the government has tried to mitigate the impact of load-shedding. To do this, her department launched a “Green Incentive Tourism Programme” to provide funding to tourism operators to retrofit their establishments with energy- and water-efficient technologies to mitigate load-shedding, and save 65%-80% of their power bills.

So far, 130 applications have been approved under that programme, worth R76.1m, with 41 having started installing the new technology.

But if that programme is run with the same sort of mean-spirited bureaucracy as the “incentive” offered to tourism operators during Covid — which was based only on empowerment credentials, with thousands routinely turned down — it’ll be as good as useless.

Equally, De Lille admits security needs to be improved to make tourists feel safe, which involves “strengthening law enforcement, and providing reliable information and assistance”.

This extends beyond her ambit, however.

Though she relaunched the National Tourism Safety Forum at the end of May, she’s at the mercy of a mismanaged and corrupt police force. Still, she says 59 “hotspots” have been identified, and 2,200 “tourism monitors” will be deployed to the streets — and she’s adamant that this will be attended to.

Wachsberger throws in another spanner: “We have a huge amount of bookings of people in apartment hotels and we’ve seen problems and delays where people couldn’t get their visas in time and we have to keep rolling the room over — which is terrible for us and the industry.”

Here, De Lille says there’s been progress. She points out that from January, Kenyans have no longer needed visas for stays of up to 90 days — and in the six months since, the number of visitors from Kenya rose 118%.

“This points to the positive impact that policies and regulations can have when various government entities collaborate in terms of bilateral agreements,” she says.

On e-visas, De Lille says the government started with 14 countries whose citizens could apply for an e-visa. This year, 20 countries have been added to the list.

If anything, this makes the point: if such a simple tweak can result in a huge boost to tourism numbers, why hasn’t it happened long ago?

SBG Securities argues, however, that a shortage of domestic flights could hold up the return of foreign tourists. While there are 45 international airlines flying to the country each day, only six fly locally. “This could deter international tourists and impede the recovery to pre-pandemic levels,” Patel and Hofisi write.

De Lille says the aviation sector is also being attended to.

“Though aviation has not fully returned to pre-Covid levels, several new airlines have launched new routes post-pandemic,” she says.

“Direct flights to South Africa that resumed this year include the direct flight from China, and [a] direct flight from Brazil.” Other new routes include direct flights to Algiers, Hong Kong and Jeddah in Saudi Arabia.

This at least will take some pressure off — even if it won’t deal with all South Africa’s obstacles.

Getting the basics right

Saunders sums up the wider problem: “We have a reputation issue now. Whether we’re supporting Russia, or letting people out of prison. Coupled with that is crime and safety. And there’s load-shedding.”

Given the fact that many of South Africa’s experiences are on people’s bucket lists across the world, it’s unhelpful. “We have this incredible set of unique selling points that fit the time, but we shoot ourselves in the foot. We’re doing OK, but just,” she says.

De Lille acknowledges there “certainly is room for improvement”. And she says the country is trying to “convert” those who’ve heard about South Africa, but are reluctant to come.

She says the “quick wins” include bolstering the “quality and diversity of tourism products”, promoting “sustainable and responsible tourism practices that respect the environment, social equity and cultural diversity”, and punting South Africa’s event-hosting capabilities and wildlife. 

The hotels sector, however, is already world class, and still growing.

De Lille says there are 21 hotels in the pipeline, which will create 2,768 new rooms. (South Africa is eighth on the list for new hotel developments, in a list headed by Egypt, Morocco and Nigeria).

“International brands do struggle to find traction in the South African market due to the strength of local brands. It might be one of the reasons Marriott International acquired the Protea Hotel, to gain traction in the South African market,” she says.

Overall, she says, South African hotels have “proved to be very resilient”, but she admits that a lack of critical infrastructure — such as access to roads and airports — and regulatory approvals mean it has struggled to push investment into underdeveloped areas with high tourism potential.

Still, she says, there have been successes — such as the Kruger Shalati high-end tourist accommodation train at Skukuza in the Kruger National Park, and the SleepOver Motel, which launched just before Covid and now has nine establishments.

Ultimately, the fate of South Africa’s tourism (and hotels) sectors rests on whether vital issues in the government’s domain are fixed. If crime continues to rage, and blackouts are the order of the day, overseas tourists won’t come. And local tourists won’t travel. But, if the country can wrestle itself back onto something resembling the right path, the value that can be created for everyone is equally immense.

* With Natasha Marrian

Tourism away from the bright lights

A trifecta of factors has pushed South Africans into increased local travel — and often-forgotten towns are reaping the benefits. From Limpopo’s Thohoyandou and Polokwane in the north through eMalahleni and Middelburg in Mpumalanga, to Newcastle in KwaZulu-Natal, hotel groups are expanding their reach.

In part, the increase in domestic travel to smaller nodes is a hangover from Covid.

Alan Campbell, marketing manager of hotel group ANEW, tells the FM that domestic travel is still riding the wave from the pandemic, when travel options were limited and lockdown-weary locals began exploring secondary towns.

This has seen ANEW invest beyond the big cities, expanding to five of South Africa’s nine provinces, with its hotels now in Rustenburg, eMalahleni, Pietermaritzburg, Kokstad and Newcastle, among others.

“Hinterland” towns such as Polokwane and Kimberley are also doing well, says Southern Sun CEO Marcel von Aulock. 

The weak rand, too, has played a role: South Africans who would previously have gone to destinations such as Mauritius are keeping things local.

Other domestic constraints have also changed the dynamic. David Frost, CEO of tourism body Satsa, tells the FM a dearth of domestic air capacity has seen locals shift to self-drive getaways closer to home, boosting an increase in travel to destinations that offer “immersive experiences”.

The Radisson Hotel Group is building hotels in Middelburg and Hoedspruit — the latter being its first “safari-inspired” hotel, says country director of sales Sandra Kneubuhler. It is recognition, she adds, of critical mass in South Africa and the benefits of a broad geographic spread.

Still, there is hesitancy about building fancy hotels in small secondary towns. Daniel Trappler, Radisson’s senior director for development in Africa, says the group will invest in places only if there are “real local demand generators”. Middelburg, for example, needs quality conferencing venues to service the international industrial conferencing sector, while Hoedspruit benefits from demand for leisure facilities in the vicinity.

Conferences are a big driver of the surge in some smaller towns.

Says Campbell: “The government is still the largest [buyer] of conferencing in the country. A lot of work happens outside the primary nodes, and there’s a lot of business to be had — someone has to look after them.”

Swimsuit crowd outspends the business suits

The business travellers who were once the big spenders for hotels have been usurped by leisure travellers, say industry players.

Officials from the Global Hotel Alliance (GHA), speaking at its conference in Cape Town this year, said that nowadays a busy traveller might make five or six leisure jaunts a year, but only one or two business trips. This is the reverse of a decade ago.

The GHA’s members, including 35 hotel groups in 100 countries, make $8bn in revenue each year. But the association is increasingly using its loyalty programme — which has 24-million members who spend $2bn a year and get back $100m in rewards — to target leisure travellers.

“By doing that, we’re keeping those customers within our ecosystem,” says CEO Christopher Hartley. Hartley says before Covid, a typical loyalty programme focused on the business customer, but that changed as companies tightened their purse strings.

“Leisure travellers, unlike 20 or 30 years ago, are no longer low-end cheap tourists, and often fly first class or business class,” says Hartley. “Leisure travellers actually have buying power [and are now] spending a lot more money than a typical business traveller — two to three times more.”

Kempinski Hotels CEO Bernold Schroeder says his company has had its best financial year yet, largely thanks to people travelling for leisure.

“Corporate rates are relatively low, but the independent traveller really pays. Our best-selling products today are suites.”

Spending patterns have changed too. He says people will pay $1,000 a night to spend a weekend at the Kempinski Istanbul, but they fly on low-cost carrier easyJet. Equally, young Silicon Valley professionals might fly first class, as they travel often, but are happy to stay at a midscale hotel.

We’re seeing [volume] numbers now that are similar to 2019 ... You can safely say now there has been a full recovery in the travel sector

—  Chris Hartley, GHA

Hartley says international travel has staged a major recovery this year. “We’re seeing [volume] numbers now that are similar to 2019 … You can safely say there has been a full recovery in the travel sector,” he says.

Sun International, which has 15 hotels in its portfolio, last year became the first local group to join the GHA, whose member hotels now get 24-million customers a year.

Sun COO Graham Wood says the resurgence in hotel stays has been partly due to conferences, which provided 25% more revenue last year than in 2019.

Tim Cordon, COO for the Middle East & Africa at the Radisson Hotel Group, says remote work means “an increase in the demand for flexible stays, which often comes with shorter booking lead times”.

Cordon says there’s been an increase in “experiential tourism”, where people “meaningfully engage” with a city’s history, culture and food.

There’s big money here too: a report by Research and Markets shows that the global market for tours and activities is set to grow 7.7% a year on average between 2020 and 2027.

Cordon says foreign bookings at Radisson hotels in South Africa are rising as the weak rand makes the country cheaper. “Families who have not been able to get everyone together for quite some time are now taking some much-needed time to do longer trips together,” he says.

So what gives a hotel an edge?

First, sustainable hotels (that treat water, energy and waste efficiently) are all the rage. Second, “wellness” is cited as the single factor that guests want from a trip — which suggests that spa offerings, healthier menus and such activities as yoga need to be prioritised.