Hotel and resorts group Southern Sun has drawn a line under its pandemic recovery. The group is not only back on its feet, it is generating more profit than at any point in its history. What’s more, it has put two years of above-trend growth between itself and the disruption of Covid.
“We’re now making more profit than the group has ever made, largely as a result of acquisitions made more than 10 years ago that bulked up our portfolio and are now trading really well,” says CEO Marcel von Aulock. The group completed its recovery by the end of last year, and then grew a further 20% on top of that. It wasn’t so much a turnaround story, says Von Aulock. It was a recovery from the impact of the pandemic.
“For us to do 20% growth, it’s not just one market that booms. We need everything to work. And that’s what we saw this year. It was everywhere. Every region showed growth.”
That includes markets such as Sandton and Durban, which had lagged the group’s star performer, Cape Town, for most of the recovery period.
Cape Town’s dominance in Southern Sun’s portfolio is now so pronounced that it accounts for about a third of the group’s room inventory but generates close to half its profits. Room rates have surged — up about 50% in the past five years, and doubling in some properties — propelling margins well above what the rest of the country can produce. “Cape Town is probably triple the size for us, business-wise, than it was pre-Covid.”
Cape Town’s high base is starting to act as a brake on reported growth rates, even as the city continues to perform. Durban and Sandton, by contrast, are growing faster in percentage terms off lower bases. Durban’s improvement, Von Aulock says, owes something to the city actually functioning. “They’ve been fixing stuff, just quietly getting on with it. The beachfront looks spectacular. It is spotlessly clean.” Gauteng has benefited from improved conferencing, notably the G20 events, and improved transient demand in South Africa.
On pricing, Von Aulock pushes back against the notion that South Africa has become an expensive destination, though prices have shot up in Cape Town. A renovated four-star hotel room in Sandton can still be had for less than R2,000 a night (about €100) — something he says does not exist in comparable European secondary cities. Cape Town is more expensive, and at peak periods approaches European corporate hotel rates of €200-€300 a night, but the average across the business is lower than that. “We’re just expensive to get to,” he says. “Once you’re here, we’re a very cheap destination.”
For us to do 20% growth, it’s not just one market that booms. We need everything to work
— Marcel von Aulock
Southern Sun carries no debt. It paid out close to R700m to shareholders in the past year, combining a dividend of 25c a share — double the prior year’s payout — with about R360m in share buybacks. “We pay a third of our profits out,” Von Aulock says, adding that earnings growth of about 80% drove the dividend increase of 20%, with the balance retained or returned via buybacks.
What is telling is where the group is preparing to build. Two flagship capital projects have building submissions in progress, though Von Aulock has not yet pressed the button on either.
The first is a new 330-room five-star hotel in Cape Town’s foreshore precinct, on land Southern Sun already owns adjacent to The Cullinan hotel. It’s a proposed joint venture with Growthpoint Properties, which owns the surrounding node, and could unlock a broader precinct upgrade, including improved pedestrian access and public amenities.
The second is the total reinvention of the Beverly Hills Hotel in Umhlanga, the space where it all started for hotel legend Sol Kerzner.
The building will basically be stripped down to raw concrete. The 60-year-old hotel will be expanded from 90 rooms to 177, the gardens and pools redesigned in full resort style and the whole property reconceived from the ground up. It will cost about R1bn over several years. Plans have been drawn up and building submissions are in. But global geopolitical uncertainty, rising oil prices and inflation mean Von Aulock is waiting for the right time to get going. “Once you start those big build projects, you can’t stop,” he says.
The group has close to R1.5bn at its disposal and will refurbish about 1,000 rooms a year of its total of about 17,000 rooms.
Occupancies in South Africa sit at about 64%, still below the pre-global financial crisis peaks of 71%-72%, Von Aulock remembers from the early 2000s. He is not sure those peaks will be revisited; the market is structurally different, with more supply and a different demand profile. He would not open hotels anywhere in South Africa other than in Cape Town and Umhlanga. New stock in both those markets is warranted, he says.
With no debt, Von Aulock recognises there may be further buying opportunities, to take advantage of when “the next wobble” comes along, as Southern Sun did when it gradually took control of Hospitality Property Fund over several years. “Somebody’s going to make a mistake, and then you buy.”
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